Registering for VAT

[Adamcatterall]

Hi Guys, Just after a little advise.

I run a business importing and distributing my own branded motocross bikes (www.motox1-atv.co.uk), It has recently come to my attention that due to not being vat registered I can not offer a viable trade price to my trade clients who wish to buy in bulk, This is causing me to lose out on allot of sales because the client can't claim back any VAT on his purchases from me.

I would just like some info on the benefits of becoming Vat Registered really, From what I have researched already it seems to me that once registered I would have to increase my retail sales by 20% in order to make up for the loss in VAT I would have to pay to hmrc, However I would also be gaining the Import VAT I can claim back on my shipping purchase (on average around £1500) therefore reducing my unit price bike.

I feel that if I became Vat registered I could appeal to more trade buyers and therefore sell my products faster creating a better cash flow but just wanted to make sure I wasn't missing anything out on my calculations, for example:

None VAT registered (currently operating): 'unable to offer trade price':

Example:
.product cost: £500
.Retail price: £900
profit: £400

VAT Registered: 'now able to offer Trade price'
example:
.product cost now: £425 (import vat claimed back, cheaper unit price)
.retail price now: £900+vat £180 (£1080)
.profit: £1080 - £180 vat - £425 cost price = £475

.trade price: £525 +vat £105 = £630 (trade buyer now able to claim back £105, beneficial unlike before)
profit selling to trade: £630 - vat £105 - £425 cost price = £100

Would this be correct or is something missing? it seems to me that registering for Vat would benefit me more?

Any advise greatly appreciated! thanks in advance, Adam
MotoX1

***
- I do not meet the £83,000 turnover required to register for Vat incase this would make a difference to my situation, i am aware i can voluntary apply however.
- I'm unsure on what scheme would be best to carry out the vat returns if i did register
- how does the tax reclaim work, is this annually or can i get a return on all purchase vat as and when i purchase
- i believe i would have to pay vat on products sold every 3 months, is this correct?
-would i pay the full 20% back to hmrc on sales or is it a percentage ?

thanks again

 

[Scalloway]

- I do not meet the £83,000 turnover required to register for Vat incase this would make a difference to my situation, i am aware i can voluntary apply however.

Registering voluntarily may be to your advantage. You just need to do the sums

- I'm unsure on what scheme would be best to carry out the vat returns if i did register

You just need to do the sums

- how does the tax reclaim work, is this annually or can i get a return on all purchase vat as and when i purchase
- i believe i would have to pay vat on products sold every 3 months, is this correct?
-would i pay the full 20% back to hmrc on sales or is it a percentage ?

You do a VAT return quarterly. You add up all the VAT you have taken on sales and deduct all the VAT you have incurred on expenses. The difference is paid to HMRC.

 

[JamieM]

Hi Adam,

You are only better off if you VAT register because you have increased the retail price. To compare your retail sales profit you should use the £1080 price for both registered and not registered.

So your profit is actually £580 on retail sales if you don't register.

You need to consider if the increase in retail price will negatively impact your sales. Then you need to weigh up the split between your retail sales and trade sales. If the majority of your sales are trade sales then it makes sense to register voluntarily for VAT. If the majority are retail sales then it makes sense not to.

At the moment you can't offer a trade price because your RRP is £900 and only gives your trade customers 16% margin (using £630 trade price). But if you increase to £1080 (and stay unregistered) they can make 30% margin. Maybe still not enough but worth thinking about.

As an aside I'm not sure where you got the £425 ex VAT cost. If you pay £500 including VAT then ex VAT cost is £416.67.

 

[Adamcatterall]

Hi Adam,

You are only better off if you VAT register because you have increased the retail price. To compare your retail sales profit you should use the £1080 price for both registered and not registered.

So your profit is actually £580 on retail sales if you don't register.

You need to consider if the increase in retail price will negatively impact your sales. Then you need to weigh up the split between your retail sales and trade sales. If the majority of your sales are trade sales then it makes sense to register voluntarily for VAT. If the majority are retail sales then it makes sense not to.

At the moment you can't offer a trade price because your RRP is £900 and only gives your trade customers 16% margin. But if you increase to £1080 (and stay unregistered) they can make 30% margin. Maybe still not enough but worth thinking about.

As an aside I'm not sure where you got the £425 ex VAT cost. If you pay £500 including VAT then ex VAT cost is £416.67.

Hi, Thanks for all your info.

Yes that was my initial concern, i don't really want to increase my prices by the 20% because i would lose my competitive advantage and I don't think the products in question would move quickly at that price. I am looking to move my sales more towards the trade route, although profits are not as great I believe I can sell them much quicker this way and create a better cash flow for myself going down this route.

It may be worth trying like you say to increase my prices and offer trade the bigger profit margin that way so thats something i can defiantly consider.

regarding the £425, I don't pay any vat on the bike purchase because my supplier doesnt sell them with vat, The only cost i believe i could claim back on is the import vat which on average is around £1500 (for the example I divided this by my current stock purchase of 20pcs and took it of the cost price demonstrated) =£425

Thanks and regards

 

[Mr D]

Supplier is not selling enough to be vat registered??? Or you importing them?

 

[Adamcatterall]

Supplier is not selling enough to be vat registered??? Or you importing them?

Sorry yes thats right I'm importing from china

 

[Mr D]

Ah get you now, import vat.

 

[Adamcatterall]

Is my calculation correct as to how I work out my VAT return, From what I have researched it seems I can only claim back on the import VAT which usually works out at about £1200 for the shipments I carry out. I believe I only have to pay the difference of VAT back to the hmrc? with this in mind, If for example I was importing 20 bikes would I divide this by the total VAT claimed back (£1200) ....

£1200 divided by 20/pcs = £60
retail price: £900
VAT charged £120 (20% of £900)
£120 - £60 = £60
£60 owed back to hmrc from purchase

Thanks in advance, just trying to work out if this would be beneficial to myself becoming VAT Registered

 

[Noah]

£1200 divided by 20/pcs = £60
retail price: £900
VAT charged £120 (20% of £900)
£120 - £60 = £60
£60 owed back to hmrc from purchase

I think you need to separate your efforts to calculate margin, from the requirement to account for, report, and pay VAT. In a nutshell, you owe VAT on sales you have actually made, and you can deduct (from what is owed) VAT on purchases in the same period - VAT returns to HMRC are not calculated on a per-item basis, which is what you are trying to calculate your margin on.

An explanation of some VAT terminology - other explanations are available.

I believe I only have to pay the difference of VAT back to the hmrc?

True for purchases on valid VAT invoices from VAT-registered companies; if importing there are other rules that apply.

VAT charged £120 (20% of £900)

) £120 is not 20% of £900
) £120 is not the VAT portion of a £900 invoice
) Calculate price net VAT (= net price) by dividing the invoice price (i.e. the price inclusive of VAT = gross price) by (1 + VAT %age) - i.e. today (saint's preserve us) divide by 1.2 . VAT amount is then gross price - net price
) For shortcut with current VAT at 20% (saint's preserve us), multiply invoice gross price by 0.16667 (rounded) to calculate VAT value directly.
) So the VAT portion of a £900 invoice (assuming that's gross) is £150

I hope this helps you; it might have helped me.

 

[Adamcatterall]

I think you need to separate your efforts to calculate margin, from the requirement to account for, report, and pay VAT. In a nutshell, you owe VAT on sales you have actually made, and you can deduct (from what is owed) VAT on purchases in the same period - VAT returns to HMRC are not calculated on a per-item basis, which is what you are trying to calculate your margin on.

An explanation of some VAT terminology - other explanations are available.


True for purchases on valid VAT invoices from VAT-registered companies; if importing there are other rules that apply.


) £120 is not 20% of £900
) £120 is not the VAT portion of a £900 invoice
) Calculate price net VAT (= net price) by dividing the invoice price (i.e. the price inclusive of VAT = gross price) by (1 + VAT %age) - i.e. today (saint's preserve us) divide by 1.2 . VAT amount is then gross price - net price
) For shortcut with current VAT at 20% (saint's preserve us), multiply invoice gross price by 0.16667 (rounded) to calculate VAT value directly.
) So the VAT portion of a £900 invoice (assuming that's gross) is £150

I hope this helps you; it might have helped me.

Yes my mistake "£180 of course

Thanks allot for the help, really appreciate it