Please can someone help me with dreaded VAT?

[Billysdiet]

HI everyone, I know this question has been asked and answered a lot but nothing quite fits my situation. Can someone please help? This is my issue, I sell diet foods and am VAT registered. Most of my products are VAT free as food items. Which is why I have muddled through most of the time but I need to launch a new VATable product that is basically only to be sold at cost price but I am confused as to the cost!
This is what I have got so far:
Ebay selling price = £5.00
ebay fees £0.50
paypal fees £0.32
postage cost £0.84
item cost £2.50
Total £0.84 profit divided by £5.00 = 17% profit.

However this does not include VAT. I will pay another 0.17 on the postage for VAT and technically the customer will pay 20% of the selling price in VAT as well. So VAT on £5.00 is 85p which would mean I would make a loss. So do I take the postage VAT off as well. Then it would be 68p deduction not 85p and I would be in profit again.
Then I have the issue that often my VAT bill is very low as I don't charge a lot. Last quarter was a £400 bill. But I took £1100.00 in VAT off my customers. So really about 50% of my VAT cost to customers is actually needing to be paid to the VAT man.
I had thought that I just took VAT completely out of the costings but made sure that the profit covered the possible max VAT charge but my husband says that is wrong. I am so confused!
Is there a VAT for dummies book?
Can anyone help? Please?
Billy.

 

[Scalloway]

Do you use Royal Mail? 1st and 2nd class postage does not have VAT charged on it so you can't claim back anything on that. However other types of postage and couriers will have VAT charged so you must check your receipts to see if there is a VAT charge.

VAT on postage charged to a customer follows the charge for the item being sold. Postage for zero rated items is zero rated, if the item dispatched is standard rated you must charge VAT on the postage as well.

For working out prices if you are VAT registered I would always use net figures. However the VAT inclusive price is the one that matters for non VAT registered customers, particularly private individuals.

 

[mtools]

i've logged into OBA and tried a few options and not sure how you're getting 84p? Closest I can get is 85p. If you're VAT registered your best bet is to give free p&p to your customer (and if so increase your price as it is non VAT deductible) then use the code CRL which you'll get charged VAT on, but you can claim it back. costs depend on quantity, but for one item you're looking at the following for large letters (at least on my price structure):

RM24
0-100g - 89p (of which 15p is VAT)
101-250g - £1.25 (of which 21p is VAT)
251-500g - (£1.58 of which 26p is VAT)

RM48
0-100g - 72p (of which 12p is VAT)
101-250g - £1.01 (of which 17p is VAT)
251-500g - (£1.28 of which 21p is VAT)

 

[Billysdiet]

HI. Thanks for the responses. Looking back a few of my figures were incorrect. The issue of trying find the right price and I got confused. I used OBA which is why the postage was VATable. I do offer free postage on ebay. The costing was what is taken off the ebay selling price. I have logged on to OBA and RM 24 large letter at weight of 240g costs 0.84p (2p surcharge included) plus 17p VAT.
So after a nights sleep I have the following, hopefully more structured, questions. All based on profit rather than cash flow.
1 - If a wholesale price includes VAT do I use the VAT inclusive price as the purchase price to work out my profit.
2 - If I am including VAT on the wholesale price do I also include the VAT at 20% of the selling price to work out my profit.
3 - Do I include the VAT on the postage price to work out my profit.
It seems like I am adding VAT too many times. On purchase price, on postage and on sales price charged to the customers. I had though just to use no VAT in the calculations at all but them to make sure my overall profit is at least 20% so the VAT charged to the customer is at least covered. Especially as I don 't have a huge VAT bill due to mostly selling food stuffs. If I make the calculations using 20% VAT on selling price it will make a huge difference on the overall selling price.
Does this make more sense? Sorry it was a bit of a rant yesterday but its so stressful and I just don't get it.

Billy.

 

[Scalloway]

It does'nt make any difference if you caculate with all costs net of recoverable VAT or VAT inclusive. You need to treat the selling price the same way. Either deduct costs net of VAT from selling price net of VAT or gross costs from gross price.

 

[Ola1]

I don't think you are getting much from this thread simply because you don't have sufficient knowledge or experience of Book keeping to properly implement the answers.

Suggest you get down to a book shop and ask for a book on basic book keeping. the VAT man is probably the active part of HMRC,

 

[Jeff FV]

You've had some good answers from accountants and do read what they say. I am not an accountant (and have had to ask for, and received, some great advice from @Scalloway and others on this forum) - sometimes it can be useful to see things through the lens of a non-accountant, so here goes:

I would find out the cost to you of the item without VAT. Onto this add postage costs without VAT and also and on your PayPal and eBay fees (which, iirc, are not vat-able?) Call this A.

Then find the total cost that your buyer is going to pay you - e.g. the price of the item plus postage. Divide this number by 1.2 - this will give you the amount of money from the sale that you keep after paying the VAT man. Call this B.

Your profit is B - A. If its a positive number, great, you make money, if its a negative number, Boo!, you lose money on a sale.

HTH

J

 

[Billysdiet]

Thanks again to everyone who has taken the time to help me. Your comments are right about my knowledge, I have an accountant for this very reason. I am fine with most financial options but VAT just will not work in my head (or on paper). I have a blank with it that I just cant seem to get around. My accountant and my husband have both tried but I am still stuck. Well at least I was until Jeff's answer. I can't say it has clicked now but I can make up a cheat sheet that I can fill in now and my calculations with Jeff's method and my answers matched my accountants. Perfect. Thanks so much!

 

[Marie Stein]

I'm a VAT consultant and I've just seen your posts. Unfortunately I'm stuck for time today/tomorrow to give your issues the time I need to write a reply, but I will do so as soon I'm able. I know it's a complicated subject, but I'll do my best to help you work it out.

 

[Raw Rob]

I think you're over-complicating it. When working out your profit, just ignore VAT. Use all prices excluding VAT. Then just add 20% to get the price you sell at.

(VAT doesn't affect profit, all the VAT you charge is paid to HMRC, less any VAT you have paid out on your purchases.)

 

[Marie Stein]

Hi Billy, I agree with Raw Bob - I think you're overcomplicating it because you're comparing VAT exclusive and VAT inclusive figures.

But it is a bit of a messy problem because it looks to me as though the way that your VAT returns are calculated means that the figures you've used to calculate your sales price for your new item. So I can't give you a definitive answer, only point out the main issues.

Let's first consider the new item itself:

You say that your figures don't include VAT, but it looks to me as though you've calculated VAT on a VAT inclusive basis. This is what I mean:
If the selling price of £5 is VAT inclusive, then the VAT on the sale is calculated as 20/120 x £5; or 1/6 x £5, i.e. 83p (or 83.33 if you're being precise.)
If the selling price is VAT exclusive, the VAT on the sale is 20%; i.e. £1.

So if you sell the item for £5 including VAT, the net sales price is £4.17 which is the same as your VAT exclusive costs.

I think one of the problems from the VAT on the postage costs. Are you charging postage IN ADDITION to the £5 or does the £5 include VAT? You say that "I will pay another 0.17 on the postage for VAT and technically the customer will pay 20% of the selling price in VAT as well". You've included 84p for postage in your costs, which I assume is based on a £1 VAT inclusive postage/delivery cost that you will have to pay to get the item delivered to the customer. So this is what I think:

If you sell the item for £5 including VAT and delivery, then you calculate your VAT value on £5, so the VAT on the selling price is 83.33p as explained above. There is no additional VAT on the postage because the customer isn't paying extra for delivery.

You only have to pay another 17p VAT if you charge an additional £1 for the delivery, in which case the customer would be paying £6 for the delivered item, which means a total VAT liability of £1.

Does this make sense?

However I think there's an added twist to this because of your VAT return calculations.

Whoever is preparing your VAT return may be using teh VAT flat rate scheme, where by you save a bit of money because your VAT is calculated by reference to a single percentage (usually 4% for food retailers), but you don't claim any VAT on your purchases. Here's the HMRC link to information abou tthe scheme: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5. Alternatively they may be using a retail scheme, which is a bit more complicated but would explain why your VAT bill is lower than you'd expect.

This means that you'd pay only £5 x 4% VAT on the sale of your new item; i.e. 20p, but you can't recover VAT on any of the costs. So you'd need to recalculate the cost based on the VAT inclusive values of the new item plus related costs.

Because there are a number of issues here, it's not possible for me to give an exact reply to your query. But the first thing I'd need to know is how your VAT returns are calculated.

Have you discussed this with your accountant? I'd be happy to help through my consultancy services but if your accountant is preparing your VAT return, he/she should be able to help you with these figures.

There are a lot of guides to VAT around (including my own short "Begionners' Guide" which you can download from free from my website www.vatexchange.co.uk. But VAT is a complicated subject and you'd probably not find the answer you need in a book. I'd really recommend that you take advice if you're still uncertain.

Sorry I can't give a definitive answer, but I hope this helps explain the confusion for you.
Marie