Being competitive when not VAT registered

[encouk]

Hi,

I'am currently in the process of setting up a business selling IT Equipment/Hardware. I know this market is flooded and stupidly competitive and i have no chance against the likes of the big companies but that's not my purpose for starting, it's all i know and i know the technicalities about what i'am selling and during testing the market phase my way of going about things seemed to work so I'm going for it!

My question is, im not VAT registered and i will be doing both B2B and B2C. How am i supposed to be competitive when selling to VAT registered businesses? For them buying from me would be 20% more expensive than buying from a VAT registered supplier as they could claim the VAT back. My customers will more than likely not be selling them on.

Am i understanding VAT right? If so any advice on the best thing to do would be greatly appreciated.

Thanks
Louis

 

[Anna Chandley]

Lets say you buy a piece of hardware for £100 plus VAT and you want to make a profit of £50 on the sale.

Non VAT registered

Cost of hardware £120
Profit £50
Selling price £170

Net cost to VAT registered customers £170
Net cost to non VAT registered customers £170

VAT Registered

Net cost of hardware £100
Profit £50
Net sales price £150
VAT on sale £30
Total sales price £180

Net cost to VAT registered customers £150
Net cost to non VAT registered customers £180

 

[Newchodge]

You need to assess where your main customers are.

If you are selling mainly to consumers and small non-Vat registered businesses you have a 20% price advantage over the big players, so not being VAT registered is a plus point.

If your main customers are VAT registered businesses then, as you say, the fract they cannot reclaim VAT (as they haven't paid any) may be seen as a negative, however it may not, as you do not increase your prices by 20%. You must make sure that these customers know there is no VAT, as a lot of B2B proces are quoted withotu VAT and VAT then added. You don't want to give your customers a shock when they realise they cannot reclaim.

 

[Mr D]

You can register voluntarily to collect VAT. Look very hard at what you want to do before registering.

As to whether doing so early will help or hinder your business.

 

[Gecko001]

When starting a business, I think you should start as you intend to continue. For example when most people start a business, their overheads tend to be low because they might be working from home, or they do not have any employees, etc and they price their services/goods to make what they think will be a reasonable profit at the time. Then when overheads start to build up they discover that they have to increase their prices just to stand still resulting in lost sales and profits dropping through the floor. They could have averted the problem by charging enough when they started. In other words they did not think long-term when they started.

Similarly with registering for VAT. If you think your turnover will someday go past the VAT threshold, then I would register for VAT from day one.

 

[Mr D]

When starting a business, I think you should start as you intend to continue. For example when most people start a business, their overheads tend to be low because they might be working from home, they do not have any employees, etc and they price their services/goods to make what they think will be a reasonable profit at the time. Then when overheads start to build up they discover that they have to increase their prices just to stand still resulting in lost sales and profits dropping through the floor. The could have averted to problem by charging enough when they started.

Similarly with registering for VAT. If you think your turnover will someday go past the VAT threshold, then I would register for VAT from day one.

I'd amend that last slightly and at least price as though registering for VAT from day one.
If the business cannot make money with an extra 20% added onto the price (meaning higher profits) before becoming VAT registered then it has other problems that need sorting out.

 

[LCowles]

If the business cannot make money with an extra 20% added onto the price (meaning higher profits) before becoming VAT registered then it has other problems that need sorting out.

What would you say is the elasticity then. 20% seems a non-trivial change in cost. It's 20p for every £1, the more you cost in £1, surely the greater the aggregate effect?

I sell services including bespoke works which start at £1000. Below that it's literally not worth me talking to someone, they might promise to put you in contact with more people, but you end up hearding cats failing to meet frankly ludicrous expectations for the work required and price-point. Is it really that reasonable to expect someone to be able to shell out 20%+ at this price point? (£1.2k per £1k, it makes a £5k product cost £6k)

 

[Toby Willows]

What would you say is the elasticity then. 20% seems a non-trivial change in cost. It's 20p for every £1, the more you cost in £1, surely the greater the aggregate effect?

I sell services including bespoke works which start at £1000. Below that it's literally not worth me talking to someone, they might promise to put you in contact with more people, but you end up hearding cats failing to meet frankly ludicrous expectations for the work required and price-point. Is it really that reasonable to expect someone to be able to shell out 20%+ at this price point? (£1.2k per £1k, it makes a £5k product cost £6k)

The op is selling hardware so the difference in his prices won’t be plus 20% if he’s vat registered.

 

[LCowles]

The op is selling hardware so the difference in his prices won’t be plus 20% if he’s vat registered.

Is there a special rate for Hardware? or are you talking about the abstract once you've claimed back VAT cost (which isn't instant BTW, it still impacts cash-flow, and by the VAT rate for the purchaser)

 

[Toby Willows]

Is there a special rate for Hardware? or are you talking about the abstract once you've claimed back VAT cost (which isn't instant BTW, it still impacts cash-flow, and by the VAT rate for the purchaser)

It’ll make no difference to his cash flow whether vat registered or not.

 

[paulears]

I'm registered and my Ebay business has dried up totally because 20% DOES matter. I'm uncompetitive being 20% more expensive than the hobby sellers of the same product. These people work on tiny margins too, which does kill business. I sympathise, but I love thew statements often bandied about that say if you can't still make money with the extra 20%, then there are problems other than the VAT. It would be lovely to have a big margin, but on my old lines, the quantity was key to profitability. Margin was tight - very tight sometimes, and being £3 more expensive on a £25 item, let alone 20%, can stop sales dead.

 

[Toby Willows]

I'm registered and my Ebay business has dried up totally because 20% DOES matter. I'm uncompetitive being 20% more expensive than the hobby sellers of the same product. These people work on tiny margins too, which does kill business. I sympathise, but I love thew statements often bandied about that say if you can't still make money with the extra 20%, then there are problems other than the VAT. It would be lovely to have a big margin, but on my old lines, the quantity was key to profitability. Margin was tight - very tight sometimes, and being £3 more expensive on a £25 item, let alone 20%, can stop sales dead.

Again being vat registered (in retailing) doesn’t increase your prices by 20% if you are buying from a vat registered supplier.

 

[Mr D]

Is there a special rate for Hardware? or are you talking about the abstract once you've claimed back VAT cost (which isn't instant BTW, it still impacts cash-flow, and by the VAT rate for the purchaser)

The OP is paying money out in VAT on purchases & services whether VAT registered or not.
By being VAT registered they either pay a reduced amount to HMRC (flat rate scheme) or claim back what they have paid out against what they have collected in VAT.
I

 

[LCowles]

Again being vat registered (in retailing) doesn’t increase your prices by 20% if you are buying from a vat registered supplier.

Are you suggesting you're not being charged the 20%, or that you're claiming it back instantly when purchasing? Perhaps you're using a line of credit and claiming it back before the initial amount is repaid? What are you saying negates the issue of cash-flow.

 

[LCowles]

The OP is paying money out in VAT on purchases & services whether VAT registered or not.
By being VAT registered they either pay a reduced amount to HMRC (flat rate scheme) or claim back what they have paid out against what they have collected in VAT.
I

So they still pay it out... It's not a non-issue, it's just an issue with a mid-long term resolution.

 

[Toby Willows]

.Are you suggesting you're not being charged the 20%, or that you're claiming it back instantly when purchasing? Perhaps you're using a line of credit and claiming it back before the initial amount is repaid? What are you saying negates the issue of cash-flow.

If you buy a widget that includes vat for £100 it cost the vat registered business £100 at point of purchase and it also cost the non-vat business £100 as well, so cash flow unaffected. When you pay the vat you‘ve collected you deduct the amount of vat you have paid and send the remainder to hmrc, again cash flow unaffected.

 

[Mr D]

I'm registered and my Ebay business has dried up totally because 20% DOES matter. I'm uncompetitive being 20% more expensive than the hobby sellers of the same product. These people work on tiny margins too, which does kill business. I sympathise, but I love thew statements often bandied about that say if you can't still make money with the extra 20%, then there are problems other than the VAT. It would be lovely to have a big margin, but on my old lines, the quantity was key to profitability. Margin was tight - very tight sometimes, and being £3 more expensive on a £25 item, let alone 20%, can stop sales dead.

I've factored it in since I started. If you must be the cheapest seller on the internet in order to sell then you have a different problem than someone who simply adds VAT element to pricing from the start.
I've competitors spending millions of pounds a month on stock. I don't bother trying to be cheaper than them, not being the cheapest on the internet still means I sell out of stuff.

Those who must be cheaper than anyone else in order to sell will have a different approach to selling. And a limit on growth if they want to remain below the current VAT limit.
Perhaps put out of business entirely if the government cuts the VAT limit.

 

[LCowles]

I've factored it in since I started. If you must be the cheapest seller on the internet in order to sell then you have a different problem than someone who simply adds VAT element to pricing from the start.
I've competitors spending millions of pounds a month on stock. I don't bother trying to be cheaper than them, not being the cheapest on the internet still means I sell out of stuff.

Those who must be cheaper than anyone else in order to sell will have a different approach to selling. And a limit on growth if they want to remain below the current VAT limit.
Perhaps put out of business entirely if the government cuts the VAT limit.

Do you mind letting us know what you sell? Generic advice because it works for you without context isn't that helpful, it can come across as more gloating.

I'm also in the position that I'm not the cheapest, nor the most expensive. I suppose my business being largely a lifestyle business impacts my pricing decisions, and perhaps not being the cheapest isn't honest if I cut out all the scammers that think they do what I do, or do a terrible job.

I'm not selling something that only I can or do sell though, and that means there is a maximum price.

 

[Mr D]

Do you mind letting us know what you sell? Generic advice because it works for you without context isn't that helpful, it can come across as more gloating.

I'm also in the position that I'm not the cheapest, nor the most expensive. I suppose my business being largely a lifestyle business impacts my pricing decisions, and perhaps not being the cheapest isn't honest if I cut out all the scammers that think they do what I do, or do a terrible job.

I'm not selling something that only I can or do sell though, and that means there is a maximum price.

Lots of things. Some more occasional than others.
Currently looking at buying some student stuff, next week I'm visiting a place doing some car stuff. Little later next month I'm looking at some Halloween stuff.
Many times have found multiple sellers selling the same item cheaper. Some of those sellers I know are multiple site businesses. To compete on price with someone doing a thousand, ten thousand, million times the sales is idiotic.
But can compete on presentation, service, even location.

The people who cannot factor VAT in within their pricing to start with will have great difficulty pricing VAT in later. Should they switch off for a few weeks / months every year to keep below limit or should they reduce stock for sale in order to keep below limit?

 

[paulears]

Being VAT registered does increase your prices, or reduce your margins every time you sell to consumers. It's also a leverage tactic many unscrupulous businesses use to get things under the counter - as in we'll pay you cash, and then you don't have to charge VAT - which we never do. I'm sure some pay me with bar takings or some other unrecorded source. In these cases, I take the VAT hit and issue a VAT invoice that they don't want, that comes to what they paid me in cash, and the Government gets the VAT, and I effectively just gave a big discount. To consumers, it's the total amount that counts - to businesses doing it properly - VAT means nothing, which is the norm - with just the net figure being the critical one. It even comes into it buying on amazon - I try to buy from vat registered sources, even if it's a bit dearer, because the VAT content brings the net price down.

 

[Mr D]

Being VAT registered does increase your prices, or reduce your margins every time you sell to consumers. It's also a leverage tactic many unscrupulous businesses use to get things under the counter - as in we'll pay you cash, and then you don't have to charge VAT - which we never do. I'm sure some pay me with bar takings or some other unrecorded source. In these cases, I take the VAT hit and issue a VAT invoice that they don't want, that comes to what they paid me in cash, and the Government gets the VAT, and I effectively just gave a big discount. To consumers, it's the total amount that counts - to businesses doing it properly - VAT means nothing, which is the norm - with just the net figure being the critical one. It even comes into it buying on amazon - I try to buy from vat registered sources, even if it's a bit dearer, because the VAT content brings the net price down.

Helps a lot on amazon (or indeed other sites) if the company that claims to be VAT registered actually is.
Some companies later claim they cannot issue a VAT invoice as they are not VAT registered. Then they get shirty when the product is returned for a full refund.