VAT clarification

Fpmusic · Dec 12, 2010

Hey there, I hope this is in the right section.

I am just a start up and have been trading for about 1 month.

I wanted to have something cleared up with VAT.

I will not be turning over more than £70,000 which I think is roughly the amount for a company to have to be VAT registered.

But, if I register the business, does this mean that I can claim back VAT expenditure but I do not need to pay VAT for anything I sell because I am not turning over above the threshold?

I hope this makes sense.

Thanks.

wonderbee · Dec 14, 2010

I want to also now this, as my company is not Vat registered, only a small micro business, no way near 70k mark, but get charged huge amounts for VAT on purchasing stock and other services, £400 or so weekly on VAT.
Is there any way I can claim this back or will I have to most certainly register with VAT, even though we are trading under 70k??

Please advise???
Thanks.
Regards

Rhodes100 · Dec 14, 2010

If you voluntarily register for Vat you will be able to recover vat on your purchases but will have to charge vat on your sales. So basically either your prices would increase by 20% or your margins decrease.

The only scenario where this is worthwhile doing is if you exclusively supply to other businesses as they can reclaim the vat, or if your slaes are not chargeable to vat, I.e you supply books or childrens clothes.

elaine@cheapaccounting · Dec 14, 2010

wonderbee said:
I want to also now this, as my company is not Vat registered, only a small micro business, no way near 70k mark, but get charged huge amounts for VAT on purchasing stock and other services, £400 or so weekly on VAT.
Is there any way I can claim this back or will I have to most certainly register with VAT, even though we are trading under 70k??

Please advise???
Thanks.
Regards

Bit confused on this ....

£400 / week vat = £2285 in goods / services with vat at 17.5%

So say these relate to 48 weeks of costs / year = costs are £109,680

Now assuming you make a profit then your sales must be more than £70k

What did I miss? :|:|

MyAccountantOnline · Dec 14, 2010

Fpmusic said:
I will not be turning over more than £70,000 which I think is roughly the amount for a company to have to be VAT registered.

But, if I register the business, does this mean that I can claim back VAT expenditure but I do not need to pay VAT for anything I sell because I am not turning over above the threshold?

You can apply for a voluntary VAT registration before your turnover reaches the VAT threshold but once VAT registered you do have to charge VAT on your sales (depending on what you sell).

If you are selling to VAT registered businesses it is nearly always worthwhile to make a voluntary registration.

If you are selling to private individuals/non-VAT registered businesses it is generally best to avoid VAT registration if possible.

Drpepper · Dec 14, 2010

Rhodes100 said:
If you voluntarily register for Vat you will be able to recover vat on your purchases but will have to charge vat on your sales. So basically either your prices would increase by 20% or your margins decrease.

The only scenario where this is worthwhile doing is if you exclusively supply to other businesses as they can reclaim the vat, or if your slaes are not chargeable to vat, I.e you supply books or childrens clothes.

Your price wouldn't increase by 20% as you will be claiming the VAT back on the cost price.

i.e working on 20% vat:-
Non VAT reg, retail price £20
Non VAT reg, cost price £10 plus vat = £12, £8 profit

VAT reg, retail price £20
Cost price now £10
VAT element £3.34
Profit £6.66

So you would need to increase your price by about 6.5% rather than 20% to maintain the same margin in this case.

See Web Solutions · Dec 14, 2010

Drpepper said:
Your price wouldn't increase by 20% as you will be claiming the VAT back on the cost price.

i.e working on 20% vat:-
Non VAT reg, retail price £20
Non VAT reg, cost price £10 plus vat = £12, £8 profit

VAT reg, retail price £20
Cost price now £10
VAT element £3.34
Profit £6.66

So you would need to increase your price by about 6.5% rather than 20% to maintain the same margin in this case.

I don't know what that is all about

If you register for VAT and your business makes a profit and only sells standard rated good (no exempt or zero rated) then you will be WORSE off by being VAT registered.

Drpepper · Dec 14, 2010

See Web Solutions said:
I don't know what that is all about

If you register for VAT and your business makes a profit and only sells standard rated good (no exempt or zero rated) then you will be WORSE off by being VAT registered.

Just dispelling the popular misunderstanding that if you are VAT registered you have to increase you prices by 17.5% (example I gave showing VAT at 20%).

elaine@cheapaccounting · Dec 14, 2010

See Web Solutions said:
I don't know what that is all about

If you register for VAT and your business makes a profit and only sells standard rated good (no exempt or zero rated) then you will be WORSE off by being VAT registered.

it depends on if you add the vat to the price and charge to vat reg customers who then claim it back

or if you absorb the vat into your existing price

E.g. sales price of £100 becomes £100 plus vat or it becomes (at new rate rate of 20%) £83.33 plus vat

If customers are vat registered then £100 plus vat will be fine as it doesn't cost then any more.

Drpepper · Dec 14, 2010

elainec100@cheapaccounting said:
it depends on if you add the vat to the price and charge to vat reg customers who then claim it back

or if you absorb the vat into your existing price

E.g. sales price of £100 becomes £100 plus vat or it becomes (at new rate rate of 20%) £83.33 plus vat

If customers are vat registered then £100 plus vat will be fine as it doesn't cost then any more.

Agree, if all sales are B2B then you would be daft not to register for VAT on day one.

yackers1 · Dec 14, 2010

If you register for VAT then you do have to charge output VAT on your outputs. In order not to increase the prices to customers you may 'suck up the output VAT', i.e. keep the selling price the same and suffer a decrease in margins or pass on the VAT amount ot the customers. If your primary customer base is VAT registered people this should not be too much of an issue, however if it si non Vat registered people then there may be some consequences.

If you're sales are zero rated supplies then the cost to the customer won't change, so there will be no impliations whether the custoemr is VAT registered or not, and you can also enjoy reclaiming all input VAT.

LicensedToTrade · Dec 14, 2010

elainec100@cheapaccounting said:
Bit confused on this ....

£400 / week vat = £2285 in goods / services with vat at 17.5%

So say these relate to 48 weeks of costs / year = costs are £109,680

Now assuming you make a profit then your sales must be more than £70k

What did I miss? :|:|

I'm still interested in hearing a response to this one

Fpmusic · Dec 14, 2010

Thank you for everyone's help.

Doing the maths for it, it wouldn't be sensible to register for VAT as what I need to get manufactured costs £599 and £104.83 on VAT.

300 items would be manufactured and sold at £4. I would have to charge VAT on top of that and pass it on to the supplier which is 70pence per item so £210 on vat which is almost double what I would have claimed back when buying the stock.

I thought it was more, I register for VAT, I could claim back on what I buy but because I wasn't turning over more than 70k a year then I didn't have to charge VAT on selling and therefore results in me saving £104.83 every time I manufacture this, which would be on a monthly basis.

But it obviously sounded too good to be true!

Unless, I have got it completely wrong and slipped up somewhere that is!

Drpepper · Dec 14, 2010

Are you selling your product to VAT registered businesses? If you are then you are better of registering as they will also reclaim the VAT so it's pretty much a non-issue for them.

elaine@cheapaccounting · Dec 14, 2010

You calcs seem correct but it is not about what you pay over or claim back. If you pass the vat onto the end customer then it makes no difference. If the £4.70 becomes non competitive then you have an issue.

But your assumption that you can claim vat back without charging it is wrong, as you now know.

paulears · Dec 14, 2010

Don't forget that many of the consumable items you buy to run your business have a VAT content - as does fuel, and of course any equipment and tools you buy. Buy a computer for business and if you are NOT registered, then you effectively paid more for it, new tyres, and all the other incidental items all have VAT content. My trading pattern is biased to certain times of the year, so twice a year my VAT due is either very very small or a refund, and at other times it is very big. If I'm going to purchase new equipment during the year, I often do it to coincide with the quarter when my sales are high and purchases few - to even things out.

Fpmusic · Dec 14, 2010

I never thought about it from that point of view!

Time to get onto the HM website and fill out a VAT form for registration!

GGGSurrey · Dec 15, 2010

Unless I've missed something, I can't see there's anything in between that results in going from:

Fpmusic said:
Hey there, I hope this is in the right section.

I am just a start up and have been trading for about 1 month.

I wanted to have something cleared up with VAT.

I will not be turning over more than £70,000 which I think is roughly the amount for a company to have to be VAT registered.

But, if I register the business, does this mean that I can claim back VAT expenditure but I do not need to pay VAT for anything I sell because I am not turning over above the threshold?

I hope this makes sense.

Thanks.

to

Fpmusic said:
I never thought about it from that point of view!

Time to get onto the HM website and fill out a VAT form for registration!

You've said that you are selling standard rated goods so unless you are selling to other VAT registered businesses (that can reclaim the VAT) you are better off not registering.

Fpmusic · Dec 15, 2010

Right well the last post is a bit confusing.

This is my chain of thought. I will VAT register the business and because I have a high expenditure I will be able to claim back VAT on all of these spends and I will just have to add 20% to the cost of my products. I will only be buying from VAT registered businesses so it would make sense to be able to claim back all of this money.

Now, I fill in a VAT 1 form right?

But are there any forms for claiming back/declaring your expenditure and income in regards to VAT?

paulears · Dec 15, 2010

First rule is get an accountant - virtually all will guarantee to save you more than they cost for embyonic businesses - they'll look after the end of year accounts and they know plenty of ways to minimise tax liability.

I was in this position myself - investing every penny I already had and made in stock to hire out. For the first few years I spent lots of money - and you'll discover that much of the VAT you couldn't claim, is backdatable - which may generate a nice refund in your first return - I know I was surprised at this. The accountant can advise what and for how long back you can claim. Proper advice is valuable - because almost certainly they will also tell you about other business expenses that you may not have included.

Fpmusic · Dec 15, 2010

Very true.

I have only been set up for a small period of time. So I actually don't have an idea what I'm doing for a legal stand point. I have two books for in's and out's and I have two folders for respective invoices/receipts.

But when it comes to letting HM know, I have no idea. I think I just fill out the SA103S form once a year.

The business is a side thing and we we wouldn't turnover more than 5k a year.

This is why, paying for an accountant and other things is a huge expenditure when the expenditure we have is so small!

GGGSurrey · Dec 15, 2010

Fpmusic said:
Right well the last post is a bit confusing.

This is my chain of thought. I will VAT register the business and because I have a high expenditure I will be able to claim back VAT on all of these spends and I will just have to add 20% to the cost of my products. I will only be buying from VAT registered businesses so it would make sense to be able to claim back all of this money.

Now, I fill in a VAT 1 form right?

But are there any forms for claiming back/declaring your expenditure and income in regards to VAT?

Don't register for VAT unless you are legally required to! If you can add 20% to the cost of your product without selling less, then just add 20% and keep it as extra profit!

Someone back me up here!

PS
The above is not correct if
a) you plan on making a loss
or
b) you are selling to businesses who can reclaim VAT
or
c) you are selling zero rated stuff like some types of clothes, land, some food, etc.

PPS
Even if you don't believe me, don't register for VAT without meeting with an accountant to discuss.

elaine@cheapaccounting · Dec 15, 2010

If your turnover is £5k a year, so profit much less then I would really question the admin of registering for vat on this.

Sledge hammer cracking a nut here for the admin v time / cost involved in vat reg - especially if this is part time.

GGGSurrey · Dec 15, 2010

elainec100@cheapaccounting said:
Sledge hammer cracking a nut here for the admin v time / cost involved in vat reg - especially if this is part time.

plus the main point that you'll be worse off doing so

paulears · Dec 15, 2010

If your turnover is that low - I take back everything I said. Just not worth the bother. Assuming income and expenditure are half and half, then the VAT content is so low as to not be worth worrying about.

GGGSurrey · Dec 15, 2010

paulears said:
Don't forget that many of the consumable items you buy to run your business have a VAT content - as does fuel, and of course any equipment and tools you buy. Buy a computer for business and if you are NOT registered, then you effectively paid more for it, new tyres, and all the other incidental items all have VAT content. My trading pattern is biased to certain times of the year, so twice a year my VAT due is either very very small or a refund, and at other times it is very big. If I'm going to purchase new equipment during the year, I often do it to coincide with the quarter when my sales are high and purchases few - to even things out.

but you'd agree that unless you are making a loss (or you are selling to businesses who can reclaim the VAT) you are worse off being registered for VAT?

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