Registered and Non-Registered VAT Supplier

[TayloredGames]

Hi, I'm new to the forum, been lurking for a few months but this is my first post.

I have got my head around most VAT questions except this one. Everything makes sense except that it appears that HMRC are getting VAT twice in the instance I am working on.

I am buying hoodies and t-shirts with the shop logo on them to sell as an add-on for my customers. I am VAT registered, but my clothing supplier isn't. I am assuming my supplier pays VAT on her stock before embroidering and printing the various parts and selling on to me. When I then sell these on (apart from the children's ones of course), I have to put VAT on the same items that have already had VAT paid on them.

As an example:

Let's say my supplier pays £12 for an item including £2 VAT to her supplier. Her operating margin is £2 so she sells to me for £14 each, no VAT as she isn't VAT registered, so nice and simple for her.

As I am VAT-registered, I have to add VAT on the items I sell as I am VAT registered, so as a minimum to recoup my costs, I have to then sell said item for £16.80 (£14 + £2.80 VAT @20%) but to make a nominal gross profit of £1, I would then have to sell for £18 (£14 + £1 for me + £3 VAT). This is where the taxman receives the VAT twice, HMRC get £2 VAT from my supplier's own supplier and then receives another £3 VAT from me receiving in total £5 VAT and therefore nearly 40% on the final price of the item.

Obviously, these are fairly arbitrary figures, but am I right in thinking that I cannot offset the £2 VAT my supplier has already paid against the £3 VAT I am charging? If I can, I would be able to reduce my prices to my customers, but if not, this makes it difficult for me to support a supplier that I very much would like to use as opposed to another one that IS VAT registered.

Thanks in advance.

 

[billmccallum1957]

If your supplier was vat registered, you would be paying £10 + £2 + VAT = £14.40

Add your costs & £1 margin and your sale price becomes £15.80 + VAT = £18.96

So your price is lower because she absorbs the vat cost.

What your missing in your maths is that her supplier will be reclaiming VAT on their costs, so HMRC wont get all the money collected.

 

[Highland Spring]

This is why it is called Value Added Tax as HMRC just get the extra value each business adds on the products way to the end user.

 

[TayloredGames]

If your supplier was vat registered, you would be paying £10 + £2 + VAT = £14.40

Add your costs & £1 margin and your sale price becomes £15.80 + VAT = £18.96

So your price is lower because she absorbs the vat cost.

What your missing in your maths is that her supplier will be reclaiming VAT on their costs, so HMRC wont get all the money collected.

That doesn't make sense though, I thought it did at first sight but going through it again, I'm still lost. But if my supplier was VAT-registered, she sells to me excluding VAT as we are both VAT registered in the same 'way as she has bought her stock VAT free.

Therefore, I would be paying my supplier, £12, not £14.40. Add on my £1, making it £13 + VAT meaning final sale price would be £15.60, a whole £2.20 cheaper.

This is why it is called Value Added Tax as HMRC just get the extra value each business adds on the products way to the end user.

I get that, but when a non-VAT registered supplier is inserted into the supply chain, it appears to me that HMRC are getting the value twice. Using the same example I just did, let's say both my supplier and I all paid the VAT then offset it.

My supplier pays £12 to her supplier who then pays £2 to HMRC.

My supplier then charges me £14.40, offsetting £2 she has already paid to her supplier in VAT, she pays £0.40 in VAT - the "Added Value" she adds on and receives her £2.

Finally, if I then sell for £15.60, I would offset the £2.40 extra I paid in VAT to my supplier and pay an additional £0.20 to HMRC for the added value I have brought to the end user. So when all VAT registered, each link in the chain receives their slice of "gross profit" and HMRC receive the same £2.60 total whether they receive the whole £2.60 from me as each supplier has sold VAT-free or whether they receive it in little bits from each link.

However, in my original example, with a non-VAT registered link in the chain, HMRC receive their initial £2 from the first supplier, but, they then receive that £2 AGAIN when I finally sell to the end user as I am unable to offset the VAT HMRC have already received.

 

[Newchodge]

There are 2 end users in VAT terms if you use a non-VAT supplier. Your supplier is an end user so pays VAT on what they buy. They break the VAT chain and don't charge you VAT. You then charge VAT to the next end user, who also breaks the chain if they are not VAT registered.

 

[LiveNetworks Ltd]

Couple of options that avoid the need for excess caffeine and a headache.

1) Buy the tops directly from the wholesale supplier, have her address used as the shipping and get her to do the personalisation for you. That way you can reclaim the vat on the tops. (PM me, I can put you in touch with the major ones)

2) Consider ordering from a vat registered supplier for everything.

 

[TayloredGames]

Couple of options that avoid the need for excess caffeine and a headache.

1) Buy the tops directly from the wholesale supplier, have her address used as the shipping and get her to do the personalisation for you. That way you can reclaim the vat on the tops. (PM me, I can put you in touch with the major ones)

2) Consider ordering from a vat registered supplier for everything.

Ooh, thanks LiveNetworks, I like the idea of Number 1 there, I am asking our supplier about that one now. Number 2 is the way I was looking but I was hoping there would be a different way so that I could continue to support other small businesses.

Thanks everyone for all the answers, you've pretty much confirmed my thinking, slightly annoying though in that with a break in the chain HMRC appear to be getting extra tax.