Profits and tax question

[morphe]

Hi all,

I have just started my business, 6 months ago, I calculated at the start I would turnover 50k.
My figures are showing that I will turn over 120k+

I have no idea about business and wet behind the ears.

I have 1 question that comes to mind.

If I turnover £120k and my outgoings are £118k (their not) inc everything.

Would I pay tax on 2k and thats it?

Or do I pay tax on the 120k

Told you I know little, I havent started paying myself a wage as yet as I have to keep buying stock to keep up with demand of products.

Cheers
David

 

[JamesSco]

In essence yes, but some expenses are not tax deductible. For example, if you took dividends then these would go out after tax. So your company would pay tax on this.

 

[Bob]

Have you registered for VAT as you appear to be likely to be in excess of the registration threshold of £79K?

 

[morphe]

no bob, i thought when i get nearer to the 79k i would do it then, or do i need to act before?
is there any benefits in being vat registered?
for example i buy something for £1 and pay £1.20 inc vat, do i claim the 20p back?

 

[JamesSco]

no bob, i thought when i get nearer to the 79k i would do it then, or do i need to act before?
is there any benefits in being vat registered?
for example i buy something for £1 and pay £1.20 inc vat, do i claim the 20p back?

Thats correct, you will be able to claim this back. However, if you sold that same item for £3.00, you would have to pay 60p to the revenue in VAT.

 

[Hash and Bash]

Are you a sole trader or is your business a Limited Company?

If you are a sole trader you do not take 'wages' as such - you take drawings.
You would pay income tax on your taxable profits.
Depending on your level of profit you may also have to pay Class 4 National Insurance in addition to the weekly Class 2 NI.

 

[morphe]

thanks James, is that why some of my competitors can sell that little bit cheaper?
so being vat registered does have an upside.
so, buying i claim the vat back and selling i pay vat like everyone else.
A lot of my trade is Amazon who is 15% vat, based in Luxembourg.

 

[morphe]

hash, i am a limited company, i wanted to start off doing my business properly so there would be no comebacks.
i am a 1 man band at the moment.

 

[Hash and Bash]

hash, i am a limited company, i wanted to start off doing my business properly so there would be no comebacks.
i am a 1 man band at the moment.

Good, That sounds like a sensible idea.
In that case you should just be paying corporation tax on your company's taxable profits.
You could pay yourself a small wage sufficient to gain National Insurance credits if you so desired.

 

[JamesSco]

If you are trading online then you will be better off not being VAT registered. But regardless, when you reach 79k you will need to register in anycase

To use the example above as a sale:

Non VAT registered
Your Price: £1.20
Sale Price: £3.00
Amazon Fees: £0.525 (Amazon fees are 17.25% for non VAT registered sellers)
Total Profit: £1.275

VAT registered
Your Price: £1.00 (It's only £1.00 this time because you can claim back the 20p from HMRC)
Sale Price: £3.00
Amazon Fees: £0.45
VAT Due: £0.60
Total Profit: £0.95

 

[morphe]

thanks james, i have been calculating at 15%, wondered why my figures never matched with theirs.
so, am i better of registering another company before i hit the 79k.
this then i can turnover 158k with 2 seperate companies.

 

[morphe]

by the way, i work in a full time job as well, this business is just something extra lol
my current gross earnings in my full time job is £18,500

 

[Hash and Bash]

thanks james, i have been calculating at 15%, wondered why my figures never matched with theirs.
so, am i better of registering another company before i hit the 79k.
this then i can turnover 158k with 2 seperate companies.

You can't avoid the vat issue by creating a separate company - this is known as 'artificial separation' and is a no-no as far as HMRC is concerned.

 

[JamesSco]

by the way, i work in a full time job as well, this business is just something extra lol
my current gross earnings in my full time job is £18,500

You could do it this way but I would recommend against. But this would need to be considered as a completely separate business selling completely different products.

You would need to clearly show that it is a separate business. This means separate Amazon accounts (which need to be applied for as multiple accounts is not allowed).

Not to mention a nightmare to manage as both would need separate accounts. I would say go for the VAT registration, in the long run you will be better off. Your competitors will be able to sell cheaper as they are larger and have better buying power and can get products cheaper.

 

[morphe]

thanks both, found some really useful information from you.
I could drop below the 79k by dropping low profit margin products, i have a few of them.

What would you call a good profit, Ill give you an example.

Item price: £3.37
Sale Price £8.49
Amazon pay me £4.09
profit 72p
not sure how i calculate profit on the item price, it looks like around 21%

example 2

item price £2.53
Sale Price £6.50
Amazon pay me £3.39
profit 86p
34% profit

So am i better off ditching items that dont make much profit?

 

[JamesSco]

Firstly. your figures above are not working out. Assuming you have a pro member subscription, in the first example, Amazon should pay you £7 odd. How come you only getting £4.09?

Secondly, there is no right or wrong when calculating profit margins. You could have one product which has a margin of 50% but it may take a while to get together, in which case its justified. But you may only make 2-3% on another product where the product just needs to be placed in a mailing bag and takes seconds.

Finally, believe i have found your Amazon account. One bit of advice I can provide RE your feedback, some of it can be removed. On the 01/02/14 you received a rating regarding chalk, this is a product review and Amazon will remove it if you ask them too.

 

[morphe]

The reason the payment is different is that some products are high volume sellers and I chose the FBA option, where amazon charge, picking fees, handling fees etc...and take their cut which leaves me with a smaller profit, I just thought profit was profit and started selling.

some items, low volume I make probably about 70% proift.

The VAT AND NO VAT info is interesting.

I will take a look at the chalk.

Is it worth me doing my own books and then hand to an accountant when the time arises to pay HMRC.

Can you recommend any software to use?

 

[JamesSco]

Ahh - I see, never thought about FBA. This is not something I have ever done due to the high costs involved. Are you factoring in the cost of shipping the items to the fulfillment centre as well as the time it takes to do this within your profit margins.

Once you are VAT registered, look into obtaining a Royal Mail OBA account. This will allow you to print your own PPI labels and at a vastly reduced cost. There are large discounts if you are sending out over 1000 orders. You will find that many of the higher volume sellers are able to offer vastly better prices due to the fact that they are able to send them cheaper.

In respect of the books, again this is up to you. I first started out as a sole trader and had and got an accountant as soon as the Ltd company was formed so I have never used any software ect. When I was a sole trader I used Excel

 

[morphe]

Based on your working out, if I go into VAT territory I will be make a loss on 1 of my items which is high volume using your calculations above.
This one
ASIN: B007PSP5GY

Im already with OBA on a VAT free account, so for instance I pay 58p for a large letter weighing 100g


VAT registered
Your Price: £2.81 (It's only £1.00 this time because you can claim back the 20p from HMRC)
Sale Price: £8.49
Amazon Fees: £4.40
VAT Due: £1.70
Total Profit: loss -£0.42

That's correct isnt' it?

 

[JamesSco]

What codes do you use for OBA?

There is an OBA account which offers greater discounts but it attracts VAT. This is for companies sending out over 1k items per year which appears to suit you. This would offer large letters at 56p, does not sound like much but if you send out lots it all adds up.

The biggest saving for this account would be the packets. There is no small or medium packets on this service. Therefore you could send out the ASIN listed above for around £1.80. Right now, I believe this would cost you £4.40 on the existing OBA service. Instant saving of £2.60 straight off!!

 

[morphe]

BPL VAT free code

based on 2nd class posting

letter upto 100g 33p

large letter 100g 58p
large letter 100-250g 82p
large letter 501-75og £1.53

Small parcel upto 1kg £2.25
small parcel 1-2kg £4.60

Only 2 of the items i sell fall into the £4.60 price banding