Are VAT costs corporate tax deductible?

[ArabianNights]

Hi everyone,

I just set up a new company and I have applied for VAT voluntary registration and I am waiting. It works out better for me in terms of profit margins to be VAT registered, in order to reclaim the VAT, as the VAT eats into profit margins if I am not registered mainly when comparing retail prices with competitors - not being able to reclaim the VAT means I cannot be competitive.

My suppliers are all VAT registered businesses and they will charge me VAT on stocks that I will purchase from them. I know that I cannot charge VAT to my customer for the same products that I sell to them (b2c, online retail). I know that stock which is held for resell, is an allowable expense that is deductible, but is this calculated with or without the VAT that I was charged by my suppliers for the stock? This is assuming that I am not VAT registered. I know that when I am VAT registered, I go through the reclaim VAT process and charge my customers the VAT. But if I am not registered for VAT, what figure do I enter on the tax returns? The figure including or excluding the VAT that I was charged by the suppliers?

Thanks

 

[japancool]

I just set up a new company and I have applied for VAT voluntary registration and I am waiting. It works out better for me in terms of profit margins to be VAT registered, in order to reclaim the VAT, as the VAT eats into profit margins if I am not registered mainly when comparing retail prices with competitors - not being able to reclaim the VAT means I cannot be competitive

Sorry, but this is a misunderstanding of how VAT works.

Not being VAT registered should mean that you make MORE profit, not less, assuming you are buying and selling standard VAT goods.

When you are not VAT registered, you don't reclaim the VAT but you don't charge VAT either.

Example:

Not registered:
You buy at £100+VAT = £120. You sell at £200, profit = £80.

Registered:
You buy at £100+VAT = £120. You reclaim £20. Your effective buying price is £100. You sell at £200 inc VAT. You pay the VAT to the government, which is £33.33, so you retain £166.67. Your profit is £66.67.

The figure including or excluding the VAT that I was charged by the suppliers?

Inc VAT.

 

[DontAsk]

If you are VAT registered you MUST charge VAT to your customers.

 

[ecommerce84]

Generally if you’re selling B2C, standard rate (currently 20%) goods, you are better off holding fire on registering until necessary as @japancool shows above.

It may be that your competitors are buying in bulk and getting cheaper prices, or could well be in a ‘race to the bottom’ and selling goods cheaper than they probably should be.

 

[ArabianNights]

Sorry, but this is a misunderstanding of how VAT works.

Not being VAT registered should mean that you make MORE profit, not less, assuming you are buying and selling standard VAT goods.

When you are not VAT registered, you don't reclaim the VAT but you don't charge VAT either.

Example:

Not registered:
You buy at £100+VAT = £120. You sell at £200, profit = £80.

Registered:
You buy at £100+VAT = £120. You reclaim £20. Your effective buying price is £100. You sell at £200 inc VAT. You pay the VAT to the government, which is £33.33, so you retain £166.67. Your profit is £66.67.



Inc VAT.

Thanks for that. I understand how it works. My concern is this:

I buy a product for £100, but including VAT it is £20. If I am not registered then I cannot claim that £20 back. My competitors are selling the item to customers at say £100 including VAT. If I sell the item to my customers, I have to factor in the VAT that I paid as a cost. So to beat my competitors, I should charge less - at let’s say £99.00. I have made a loss of £21.00. So how is NOT registering for VAT giving me a profit?

 

[ArabianNights]

Generally if you’re selling B2C, standard rate (currently 20%) goods, you are better off holding fire on registering until necessary as @japancool shows above.

It may be that your competitors are buying in bulk and getting cheaper prices, or could well be in a ‘race to the bottom’ and selling goods cheaper than they probably should be.

I think you get the idea here. I am in a very profitable industry, but a very competitive one too and one that is also affect a lot by counterfeit products (branded perfumes) so this is the issue that I am dealing with. I think I need to focus on my competitive advantage and push that more, to justify slightly more expensive products than competitors. I too will be buying in bulk and I have at least 3-4 suppliers who sell in bulk, and all of them are more or less the same in terms of wholesale pricing. It baffles me as to how my potential competitors are able to sell these items at prices that are the same, if not lower than they are at wholesale prices. My suppliers supply the large outlets too - so it’s baffling. I think this could be an issue of counterfeit items being passed off as genuine.

 

[japancool]

Thanks for that. I understand how it works. My concern is this:

I buy a product for £100, but including VAT it is £20. If I am not registered then I cannot claim that £20 back. My competitors are selling the item to customers at say £100 including VAT. If I sell the item to my customers, I have to factor in the VAT that I paid as a cost. So to beat my competitors, I should charge less - at let’s say £99.00. I have made a loss of £21.00. So how is NOT registering for VAT giving me a profit?

If you were VAT registered, you sell at £99 inc VAT. But you have to pay £16.50 of that to the government, so you've only made £82.50. You've bought at £100+VAT, so your cost is £100. You've STILL made a loss, this time of £17.50.

Your losses may be smaller if you're VAT registered, but you're still making a loss.

Either find a way to buy cheaper, or get out of this market.

 

[ArabianNights]

If you were VAT registered, you sell at £99 inc VAT. But you have to pay £16.50 of that to the government, so you've only made £82.50. You've bought at £100+VAT, so your cost is £100. You've STILL made a loss, this time of £17.50.

Your losses may be smaller if you're VAT registered, but you're still making a loss.

Either find a way to buy cheaper, or get out of this market.

Thanks for that. I think I’d rather make £82.50 by being registered, rather than a loss of £21.00 and not being registered. If I am registered for VAT, I would reclaim that 20% I paid to suppliers, from HMRC. I would be collecting it from my customer to then pay it to HMRC. So I am not paying the government any cut from my profit - I’ll just be passing onto them their VAT money, which I will then reclaim. So I’ll get that 20% back. It won’t affect my profits in anyway.

 

[japancool]

Thanks for that. I think I’d rather make £82.50 by being registered, rather than a loss of £21.00 and not being registered.

You haven't made £82.50. You've made a loss of £16.50.