Confused about Markup and VAT!

[James[D]]

Hi,

Im hoping you can help me understand markup more clearly!

Hypothetically if the markup is quoted as 170% - so x2.7 the wholesale price, does this include or exclude VAT?


Does it work like this for example;

I buy an item from a supplier for £100.00 (excl. VAT)
I then sell the item to my customers for £270.00 (inc. VAT) in my store.

Of this £270.00 I then pay 17.5% of it (£47.25) to the tax man. Leaving me with £222.75.



Or does it work like this:

I buy an item from a supplier for £100.00 (excl. VAT)
I then sell the item to my customers for; £270.00 + 17.5% = £317.25 (inc. VAT) in my store. I then give £47.25 to the tax man leaving me with £270.00.


Many Thanks :|

 

[sysops]

This crops up quite a lot - by far the simplest solution is to just ignore VAT for the purposes of calculating margin and markup (provided you are VAT registered).

 

[James[D]]

This crops up quite a lot - by far the simplest solution is to just ignore VAT for the purposes of calculating margin and markup (provided you are VAT registered).

Thanks for the fast reply. Im not actually calculating the markup, as Ive been told what it typically is. Im just trying to understand the concept better. Which one of my scenarios is correct - the first or second?

 

[sysops]

Thanks for the fast reply. Im not actually calculating the markup, as Ive been told what it typically is. Im just trying to understand the concept better. Which one of my scenarios is correct - the first or second?

Again, all you have to do is ignore VAT.

So if they say markup is 170%, that means you buy something at £10, sell it at £27.

The buy price would be subject to VAT, and provided you are VAT registered so would the sell price.

 

[James[D]]

But if you are VAT registered, cant you claim the VAT back from the buy price?

 

[sysops]

But if you are VAT registered, cant you claim the VAT back from the buy price?

The buy price will always be quoted without VAT.

Seriously, I don't understand why people find this so hard. Just ignore VAT in your calculation.

 

[James[D]]

The buy price would be subject to VAT

The buy price will always be quoted without VAT.

That is why I am confused!

Using your example then; I go to a supplier and buy an item for £10.00 (excl. VAT), I then sell it in my store to the customers for £27.00 or would it be £27.00 + 17.5% = £31.73?

 

[sysops]

That is why I am confused!

Why? The buy price will always be quoted without VAT, but will always be subject to VAT. How is that confusing?

Using your example then; I go to a supplier and buy an item for £10.00 (excl. VAT), I then sell it in my store to the customers for £27.00 or would it be £27.00 + 17.5% = £31.73?

£27.00 + 17.5% = £31.73

 

[James[D]]

Thanks that is clearer now. So its exactly as I said in my second example in my first post then just factor of 10 less.

Just to clarify, when you say subject to VAT does that mean I have to buy the item for £10.00 + 17.5% = £11.75, then claim the VAT back at a later stage? (If VAT registered).

 

[Bikerdave]

James

Your scenarios cannot be judged correct or not without knowing the VAT status of you and your supplier and of course you cant ignore VAT for calculating purposes you just need to be aware of the effect it has.

VAT only applies to businesses that are VAT registered.

Buying prices from a VAT Registered supplier will normally be quoted without VAT but it is by no means definite and should not be assumed.


Example 1 Neither Supplier nor You are VAT registered.
You buy something for £1 and sell it for £2. Markup is 100% and Profit is £1. You do not pay or claim anything from HMRC.

Example 2 Both Supplier and You are VAT registered.
If you are both VAT registered. then you buy for £1 + VAT (£1.18 -17.5p rounded up) and sell for £2 + VAT (2.35). On your VAT return you have Input Tax of 18p and output tax of 35p so you pay HMRC the 17p difference. Your Markup and Profit are still the same as if there was no VAT in Example 1 above.

However your selling price may be your decision and you may decide to sell at £2 inc VAT, in which case the selling price is £1.70 + VAT. Your profit is now 70p and Markup is 70%. Your input tax is still 18p but your output tax is now 30p and you will pay HMRC the difference of 12p.

Example 3 Supplier is VAT registered and You are not
You buy at £1 + VAT ie £1.18 and you sell at £2.00. You are not VAT registered so you cannot claim or charge VAT so your Profit is 82p and Markup 82%. You do not pay or claim anything from HMRC.

Example 4 Supplier is not VAT registered but the You are.
You buy at £1 and sell for either £2 including VAT or £2 + VAT (2.35p) your choice.

If you sell at £2.35 then your profit is £1 and Markup 100%. There is no Input tax as the supplier is not VAT registered but you have charged 35p VAT (Output Tax) so you pay HMRC 35p.

If you sell at £2 inc VAT then the Profit is 70p and Markup 70% and you pay HMRC 30p.


In the examples above, the Margin I have shown is a result of the decision to sell at £2.

However in reality your actual Markup will largely depend on you and possibly the supplier if they publish an RRP. You will have to decide on what the Markup has to be and will depend on several factors such your overheads, your desired profit margin, your competitors prices etc.

You may decide to have a different markup for different lines or different models but the VAT rules will apply in the same way for every item you buy and sell.

I hope that explains how VAT and Markup interact but are actually separate from each other. Don't forget that you could have more than one supplier one VAT registered and one not, so a clear understanding of how VAT works will help when thinking about markups and profit.


David

 

[James[D]]

Perfect explanation Dave, thanks a lot!

 

[podwin]

Sorry to open up such an old thread, but I am having a disagreement with my bookkeeper.

The way I markup product purchased from a supplier is like this:

Product cost £100 (ex Vat)
Markup 50% = £150
Add fixed cost of £5 = £155
Add 15% fee (e.g. Amazon) (155/(1-0.15) = £182
Add VAT for final retail price (x 1.2) = £218

The bookkeeper says the product cost should include VAT and therefore the calculation should start with the product cost of £120.

When I said that would mean the product has VAT added to it twice in this calculation, they said it should.

Well I am baffled at this, can someone explain why they would think this, unless I'm wrong??

I have always worked by the quote at the beginning of this thread "This crops up quite a lot - by far the simplest solution is to just ignore VAT for the purposes of calculating margin and markup (provided you are VAT registered)."

Thanks

 

[numbersrule]

I agree. Ignore the VAT provided you are VAT Registered.

What are you needing to include in fixed costs that isn't already allowed for in the mark up?

I would have thought a 50% mark up should be healthy enough to not have to over egg it?

 

[HFE Signs]

Always apply your mark up before the vat

 

[japancool]

The bookkeeper says the product cost should include VAT and therefore the calculation should start with the product cost of £120.

If it wasn't for the fixed cost, it wouldn't make a difference to the final price, but because it does, it makes a difference of around £1. Fire your bookeeper.

 

[podwin]

I agree. Ignore the VAT provided you are VAT Registered.

What are you needing to include in fixed costs that isn't already allowed for in the mark up?

I would have thought a 50% mark up should be healthy enough to not have to over egg it?

Thanks for your reply. On the low cost items which I sell through Amazon, I add the fulfillment cost which can be more than the cost of the item, so definitely needs adding.

 

[podwin]

Always apply your mark up before the vat

Thanks, always have done, good to know I'm not going mad.

 

[MikeJ]

Are you VAT registered?

edit - sorry, just noticed the last line on your first post

 

[podwin]

Yes.