New member VAT help

[Pink_Floyd]

Hi All,

I have found myself at a loose end and with the opportunity to become a dealer for a product I currently use. The distributor has agreed for me to become a dealer in principle. However having never run a business I am kind of lost.

As I understand it you do not need to register for VAT unless you hit the £67,000 threshold, is this correct?

The distributor is (at the moment) treating me as a private individual and giving me a discount on the retail price ex VAT and then adding back the VAT

e.g Product = £20 retail

Product = £17 less 15 % VAT

Product with discount £17 less 55% = £7.65

Cost to me £7.65 + £3.00 VAT = £10.65

So in theory I am paying the VAT. So can I then legally just sell to people at retail prices without paying VAT to the Inland Revenue? As I will have already paid it surely?

If I choose to register for VAT I am assuming he can sell to me at VAT free prices and then I charge VAT as part of my price structure and pay the Inland revenue, is this correct?

Any help that anyone can give would be great. Even some links to basic leaflets that would allow me to ensure I am not breaking any laws etc.

Thanks!

 

[David Griffiths]

That's a lot of questions! I don't usually jump in by saying this, but it would probably be a good idea to speak to an accountant at an early stage. That way you'll get pointed in the right direction on all sorts of things, including VAT, record keeping and business structure.

As I understand it you do not need to register for VAT unless you hit the £67,000 threshold, is this correct?

Yes, that's correct. But you can choose to register below that level. Put simply, if you are selling to VAT registered businesses you would probably gain by registering. Selling to the general public you would probably lose, so you wouldn't do it.

The distributor is (at the moment) treating me as a private individual and giving me a discount on the retail price ex VAT and then adding back the VAT

e.g Product = £20 retail
Product = £17 less 15 % VAT
Product with discount £17 less 55% = £7.65
Cost to me £7.65 + £3.00 VAT = £10.65

That's wrong. They should just be charging 15% VAT on the net selling price of £7.65.

So in theory I am paying the VAT. So can I then legally just sell to people at retail prices without paying VAT to the Inland Revenue? As I will have already paid it surely?

You can sell at whatever price you like. If you aren't VAT registered, you don't charge VAT. If you are registered you do. (You don't necessarily show VAT, but allow for it in selling prices, and work out the VAT content later - that's relevant if you sell to the general public.

If I choose to register for VAT I am assuming he can sell to me at VAT free prices and then I charge VAT as part of my price structure and pay the Inland revenue, is this correct?

No. They continue to charge VAT. This is known as input tax as far as you are concerned and you can deduct it from the VAT that you charge, which is known as output tax.


Lots of leaflets on the VAT web site. Start here

 

[Pink_Floyd]

Thanks for the input David. The VAT charged by them was my mistake, it would be on the net selling price of £7.65

 

[philludg]

Just a quick one about VAT, what possible reason would someone have to volunteer to became VAT registered. If you include the vat that you pay for you item as cost, then work your prices out from that there is no need, even if all your suppliers charge vat, you will always have to pay an amount to the VAT man at the end of the quater, money that would normally stay in the business.
The VAT threshold should be £150,000 because it kills small businesses.

 

[GRDCredit]

Hi All,

the opportunity to become a dealer for a product I currently use.

I love this line! What's the product Are you sure it's legal!


Geoff

 

[David Griffiths]

Just a quick one about VAT, what possible reason would someone have to volunteer to became VAT registered.

Because if you are dealing with VAT registered customers you will be better off. Simple really.

If you include the vat that you pay for you item as cost, then work your prices out from that there is no need, even if all your suppliers charge vat, you will always have to pay an amount to the VAT man at the end of the quater, money that would normally stay in the business.

But if your customers are vat registered you are working costs from a higher base and will be more expensive. If you are VAT registered and dealing with registered customers the VAT that you are paying is additional cash coming into the business just because you are registered. It's not money that would normally stay in the business.

The VAT threshold should be £150,000 because it kills small businesses.

Personally I think that it should be lower than it is now, because the higher the threshold the greater the impact on businesses who are just over it.

 

[philludg]

But if your customers are vat registered you are working costs from a higher base and will be more expensive. If you are VAT registered and dealing with registered customers the VAT that you are paying is additional cash coming into the business just because you are registered. It's not money that would normally stay in the business.

No it's not.

Buy at £10 + vat £11.5 cost

Sell at £10 +VAT= £11.50 x2=£23

Vat Reg £10X 2.30= £23
Same selling price, only difference is, if you are VAT registered, you will have to pay out every quarter.

Personally I think that it should be lower than it is now, because the higher the threshold the greater the impact on businesses who are just over it.

Ask the small business man, since I have been VAT registered, most of my(what used to be income)goes to the VAT man.

 

[Jaydee]

No it's not.

Buy at £10 + vat £11.5 cost

Sell at £10 +VAT= £11.50 x2=£23

Vat Reg £10X 2.30= £23
Same selling price, only difference is, if you are VAT registered, you will have to pay out every quarter.

That's why David put "if you are dealing with [VAT] registered customers".

If you are selling to me, and I am VAT registered, the first way costs me £23, the second way costs me £20 (because although you have charged me £23, I can reclaim the £3 of VAT).

So, assuming that I am happy to buy your product at a cost of £23 as I was doing so before you became VAT registered, your scenarios actually become:

Option 1

You are not registered, you buy for £11.50, sell for £23, make a profit of £11.50.

Option 2

You are VAT registered, you buy for £11.50, sell for £23 plus VAT = £26.45, then you pay over (£3.45-£1.50)=£1.95 to HMRC.

Now you have a profit of £26.45 - £11.50 - £1.95 = £13 (instead of £11.50).

So, if you are selling to VAT registered customers, you usually make more profit by being registered.

 

[David Griffiths]

No it's not.

Buy at £10 + vat £11.5 cost

Sell at £10 +VAT= £11.50 x2=£23

And your VAT registered customer pays £23.

Vat Reg £10X 2.30= £23

And your VAT registered customer has a cost of £20 because the VAT will be recoverable. Who is he going to buy off - somebody that costs £20 or somebody that costs £23?

Same selling price, only difference is, if you are VAT registered, you will have to pay out every quarter.

Pay out the money that you collected from your customer. Sure you make £1.50 more in the first case, but only by charging your customer £3 more. If that's sustainable why not charge £23 plus VAT?

The registration threshold is a separate matter. At the present level and ignoring input tax, anybody crossing it goes back £9,000 at a stroke. Anybody crossing £150k threshold goes back £20+k at a stroke. In either case anybody just over the threshold is severely disadvantaged in competition with somebody just below. The lower the threshold the smaller this effect.

 

[philludg]

Thanks for that, but I would think that most of retail that is VAT registered lose out, all I know is, now that I'm VAT registered I have to pay money out to the VAT man, and not making as much money, I,m well over the threshold by the way.

 

[philludg]

Sorry David, posted just after you, yes I can see your point, but when your customers are the general public we surely lose out?

 

[David Griffiths]

Sorry David, posted just after you, yes I can see your point, but when your customers are the general public we surely lose out?

That's why my original post referred to dealing with VAT registered traders.

If you deal with the general public, you're correct - you don't register voluntarily.

 

[Marie Stein]

Thanks for that, but I would think that most of retail that is VAT registered lose out, all I know is, now that I'm VAT registered I have to pay money out to the VAT man, and not making as much money, I,m well over the threshold by the way.

Hi philludg

The point about VAT is that by registering you are paying VAT on the profit that you make over your purchases and expenses, hence the term "value added tax".

I get loads of queries from people about VAT registration issues and whether or not they should have registered and the simple point is that the actual cost to small businesses of being registered is relatively more than to large businesses.

The previous posters have all put some good advice down but as a VAT consultant, I always recommend that new businesses work with accountants as it is difficult to give a wide range of general advice on these issues. I can point you in the right direction (and confirm some specific points about pricing etc) but there are a whole load of issues that an accountant will be able to consider, not just as it affects VAT but other tax and accounting issues.

For example I dont know if anyone has mentioned the schemes to help small business, in particular the flat rate scheme - which could reduce your VAT bill and administration considerably - or the cash accounting scheme.

The other point that went through my mind was whether you actually take ownership of the goods that you are selling. In a lot of situations involving "individual" sellers, eg makeup, tupperware, the sellers are just agents of teh vendor and as a result their income in the form of commission is below the registration limit so they don't have to register. From what you've said you do buy and sell the goods and don't act as agent but it's worth thinking about.

Good luck with it all!
Marie
VAT Exchange Limited

 

[philludg]

The other point that went through my mind was whether you actually take ownership of the goods that you are selling. In a lot of situations involving "individual" sellers, eg makeup, tupperware, the sellers are just agents of teh vendor and as a result their income in the form of commission is below the registration limit so they don't have to register. From what you've said you do buy and sell the goods and don't act as agent but it's worth thinking about.

I have a couple of Art Galleries, one of which is VAT registered, I buy art in along with other items, but I also deal with artists who are not VAT registered, and work on a commission bases, one of my competitors has all his art work on sor and so works on a commission, I know he turns over more than the VAT threshold but is not registered, I was surprised when I found out, but not sure how he does it any idea's.

 

[Marie Stein]

I have a couple of Art Galleries, one of which is VAT registered, I buy art in along with other items, but I also deal with artists who are not VAT registered, and work on a commission bases, one of my competitors has all his art work on sor and so works on a commission, I know he turns over more than the VAT threshold but is not registered, I was surprised when I found out, but not sure how he does it any idea's.

There's often some confusion about teh use of certain terms like "agency" or "sale or return" for VAT and what counts towards the VAT registration limit. The everyday term would suggest to me that an agent is someone who brings together 2 parties who want to buy or sell, but who doesn't himself take ownership of the goods concerned.

But that's not always how the term is used. For example, sometimes an agent is someone who buys and sells in his own name because the vendor and/or the purchaser wants to remain anonymous from the other party. In this case he would normally have to treat the sales price of the item as turnover for VAT registration purposes.

"Sale or return" implies to me that the "agent" does actually take ownership of the goods, albeit only momentarily, so in that case he would also have to include the value of the sale of the goods as turnover for VAT registration purposes.

The difficulty is that the terms are used in different ways and in 25 years of VAT, I've seen so many variations of these terms that the only way I can be sure of the correct VAT position is ALWAYS to read the contracts between the parties concerned. And even then HMRC might take a different view.

And then you have to consider caselaw - several important cases on the meaning of "agent" have gone before teh VAT tribunals and the courts over teh years, so the subject is not a simple one!

As for your friend, he may well be a simple "agent" in the everyday sense of the word, whose income is only from his commission albeit that the sales of teh pictures would take him over the registration limit if he took title to them. Of course he could also be liable to register himself and be avoiding it, in which case he could end up with a nasty VAT bill plus penalties in the future.

It's like everything in VAT, you have to find out exactly what is happening before you can verify the VAT liability.

Right that's enough VAT for a Sunday afternoon!
Marie
VAT Exchange Limited