Confused about VAT in retail

[Lottie B]

Hi, I manage a shop where we purchase from both VAT registered and non registered businesses. I’ve got a bit confused about how it works and wondered if someone could confirm for me.

ie when buying from a vat registered company I know how to work out profit.

but if I buy something from a non-VAT registered business (that is vatable ie face cream) then will I have to charge a far higher retail price in order to make my profit? ie I buy an item for £17.50 (quoted RRP of £25) - would I need to charge £31.50 in order to maintain a 33% margin? (Obviously a value far higher than the RRP and so therefore not a good idea?)

many thanks
Lottie

 

[Scalloway]

If your company is VAT registered when you work out profit margins you should use the cost price net of VAT then it makes no difference whether the seller is registered or not.

 

[Lottie B]

And also if I did charge the RRP - how much would I lose?! Thank you!

 

[Lottie B]

If your company is VAT registered when you work out profit margins you should use the cost price net of VAT then it makes no difference whether the seller is registered or not.

Thanks for replying. I think this is what confuses me - how can I do this net of VAT?

 

[Lottie B]

Thanks for replying. I think this is what confuses me - how can I do this net of VAT?

If the supplier isn’t VaT registered then I can’t claim vat back, but I charge vat on my retail price - which means my retail price has to be far higher in order to maintain a 33% profit on all my sales?

 

[STDFR33]

Pay from a non vat registered company for £17.50 or but from a VAT registered company for £17.50 plus VAT, the profit is the same.

 

[Frank the Insurance guy]

Hi @Lottie B ,

To have a 33% profit on non-vat goods bought for £17.50, you would need to sell it for £28.00 inc VAT.

Calculations:
- Sale Price - £28.00 (inc VAT)
- VAT - £4.67
- Sale Price net of VAT (£28.00-£4.67) = £23.33
- Profit (£23.33 - £17.50) = £5.83 (33% of £17.50)

 

[DontAsk]

Hi @Lottie B ,

To have a 33% profit on non-vat goods bought for £17.50, you would need to sell it for £28.00 inc VAT.

Calculations:
- Sale Price - £28.00 (inc VAT)
- VAT - £4.67
- Sale Price net of VAT (£28.00-£4.67) = £23.33
- Profit (£23.33 - £17.50) = £5.83 (33% of £17.50)

The OP asked for margin, not profit. If you don't know the difference you should not be offering advice

 

[DontAsk]

I buy an item for £17.50 (quoted RRP of £25) - would I need to charge £31.50 in order to maintain a 33% margin?

Yes. Buy with no VAT at £17.50 and sell at £31.50 inc. VAT will make you a 33% margin.

 

[Frank the Insurance guy]

The OP asked for margin, not profit. If you don't know the difference you should not be offering advice

Sorry..I'll go flog myself as punishment.....

 

[Mr D]

If buying from non VAT registered business is such a problem then either don't buy from those business types or else increase your pricing on their items.

I would suggest trying to find better priced goods too - low margins can be a pain.

 

[numbersrule]

Yes. Buy with no VAT at £17.50 and sell at £31.50 inc. VAT will make you a 33% margin.

I believe it is also true to say that buy with VAT at £17.50 x 1.2 = £21.00 and sell at £31.50 inc VAT will also make you a 33% margin because the £3.50 input VAT would be claimed back by the VAT registered business.
So, as STDFR33 pointed out earlier, the profit, or margin is the same irrespective of the VAT because all VAT transactions are neutral in relation to profit / margin. VAT is simply HMRCs method for businesses to act as tax collectors.

 

[Argentum Tax]

So, as STDFR33 pointed out earlier, the profit, or margin is the same irrespective of the VAT because all VAT transactions are neutral in relation to profit / margin.

Not necessarily always true, but I won't complicate this thread by explaining.

 

[Spur Support Services]

If you are a VAT registered business, then you have to charge VAT on all sales of taxable products based on the nature of those products and the place of supply rules, irrespective of whether the wholesale costs had VAT applied or not. You are allowed to claim back VAT on your supplies to prevent double taxation from a VAT perspective.

The VAT that you can recover from HMRC on your costs, is limited to the VAT that your suppliers have confirmed that they have paid over to HMRC (and Import VAT on UK border declarations)
A supplier who is not registered for VAT, has confirmed on his invoice that he has not paid any VAT to HMRC (by omission) and therefore there is no VAT to reclaim on those particular costs. Care should be taken to ask for VAT invoices in case some of your suppliers only issue them on request.

On a commercial view point, if you charge a price above the RRP, then you are likely to reduce your sales volume. If your product is subject to 20% VAT with a RRP of £25 then the price net of VAT is £20.83. If you are aiming at a gross margin of 33%, then you need to find a supplier who will sell at £13.95 per unit (net of VAT). Consider negotiating a special deal with a preferred supplier, ordering in larger quantities or looking further up the supply chain.
The margin may also be eroded further by direct costs, such as delivery, payment collection, sales platform fees etc. before also considering other business running costs, including perhaps accountancy, tax compliance and business coaching

I hope this helps

All the best
Rebecca

 

[swankypants69]

The problem that you are really facing here isn’t VAT

It’s that there simply isn’t a big enough gap or margin between what the small non vat registered business wants to sell to you at, and what they recommend you retail at. They don’t have a problem or complication of VAT

We see this all the time with small artisan style suppliers

They come up with a product, it costs them £1.50 to make. So they decide to retail at £3.00 at markets and fairs and on Facebook. They think great they are making 50% POR

They then want to wholesale it to you for £2.50, and you as the retailer then either have to stick to their retail price and make a poor margin, or charge more than they retail at

If they thought it through from the start, they would go

£1.50 cost
£4.00 retail
£2.50 wholesale
etc

These examples haven’t taken VAT into account, but you get my point

 

[DontAsk]

I work on retail being 4x - 5x manufactured cost. Leaves plenty of room for wholesalers and retailers and anything I sell direct to consumers has a very good margin.

If two suppliers are selling the same item, one VAT registered, one not, there's no guarantee as to how the prices relate. The non registered seller could be charging in the same as the VAT inclusive price from the other seller and making a higher margin, or they could be undercutting. The OP doesn't state whether the product is available from other suppliers, maybe VAT registered, or at what price.

 

[paulears]

The VAT in actuality works ok, for me the grief is the unknown costs you have to guess. I buy products from China and sell them on my own website and ebay. Specialist products, in my case radios, marine electronics and that kind of thing. When I find interesting products, you get the price, including the delivery charges and test the water with a few. I’ll usually limit test purchases to a couple. What annoys me is the randomness of the extras that third parties add, fedex, tnt, ups, dhl, parcel force and the Royal Mail all add their processing charges. I’m happy with this because they pay the vat on your behalf, which I understand, but it sometimes doesn’t get charged at all, other times it will be randomly applied. FedEx seem to have three systems that consignments fall into. One involves twenty quid, another 11.5, and another 10. Worst case was one radio that cost me 115 getting 20 added, and another with a 300 value with 10 added. Sixty quid VAT and ten pounds handling, works nicely for working out the potential margin, but on the 115 item the VAT of 15 gets distorted by the extra twenty quid handling. The VAT doesn’t bother me because I’m VAT registered but I just don’t like unknown extras. Obviously on larger consignments, the fixed fee is less of an issue, but with margins typically at 11-20% you get lots of first test products at random amounts.

it averages out but getting an accurate margin figure only sometimes two weeks after something arrives is irritating.