Should I be VAT registered?

[NickM]

I am starting an online retail store, I am selling computer components, one question I have is, is it worth becoming VAT registered now or in the future? What benefits does it have? To me it seems like VAT registered and non VAT registered companies make the same profits? Any help would be great thanks.

 

[Mayor]

I would not be VAT registered if I didn't have to be. Unpaid tax collector for HMRC who gets kicked in the doodahs if you get it wrong.

 

[NickM]

A lot of distributors require a VAT number so I am in two minds over it :?

 

[Michael Davies]

Depends how much money you are turning over.

If your turnover is above £79,000 then it is compulsory to be VAT registered.

If below you can apply to be registered only if it's worth your while.

For instance you can apply for a flat rate scheme and pay a fixed rate VAT of say 13% and you charge 20%. So you are indeed being paid for being a collector of taxes.
Therefore you will make more money.


Obviously the work and records will need to be kept and required vat returns to be completed quarterly or yearly.


Hope this helps

 

[makeusvisible]

If you are selling to the public, you are going to be 20% more expensive the day you go VAT registered. I would have thought you should avoid it until you absolutely have to....

That said....I'm not an accountant, so you probably need some pro advice.

 

[bb2000]

I have just set up and had the same issues with suppliers wanting vat details (especially my German suppliers!).
I decided not to go vat reg after speaking with my accountant as the paperwork and costs would lower my profit due to extra paperwork/account fees plus my prices would be several £ more if I was vat reg'd for the same margins

(b.t.w my prices wouldn't rise by 20% when vat reg'd
I buy something for £10 + vat = £12, not being vat reg'd means the £12 is my cost so If I sell for £20 that's £8 profit. If I was vat reg'd my cost would be £10 as I would claim the vat back and If i was to sell for £20 inc vat, £4 of that would be vat and my profit would be £6! That's a big difference!)

 

[Anna Chandley]

(b.t.w my prices wouldn't rise by 20% when vat reg'd
I buy something for £10 + vat = £12, not being vat reg'd means the £12 is my cost so If I sell for £20 that's £8 profit. If I was vat reg'd my cost would be £10 as I would claim the vat back and If i was to sell for £20 inc vat, £4 of that would be vat and my profit would be £6! That's a big difference!)

If the sales price were £20 including VAT then the VAT would be £3.33 not £4 giving you a profit of £6.67.

You should divide the VAT inclusive price by 6 to arrive at the VAT figure. (for standard rated VAT)

Anna

 

[Beachcomber]

While accountancy is not my speciality - for those businesses not wanting to go VAT registered but need this info for suppliers abroad, I'd say look into a pseudo TURN number.

When you import goods and vat is charged there needs to be an account that this vat is applied to. If a business is not vat registered a pseudo TURN number will allow HMRC to apply the charged amount somewhere and give suppliers the relevant number to use for their accounts.

It's like a vat registered number for those who are not vat registered.

Worked for me!

 

[Socio South West]

Where being VAT will make the big difference is if you are wanting to sell to VAT registered businesses, who by definition will probably be larger customers.

Looking at the buy for £10+VAT/Sell for £20 inc VAT analogy again, the unit price to a VAT registered business with you not VAT reg will be £20, and they can reclaim none of that.

If you are VAT registered, they can reclaim the VAT element of the £20, so the cost to them is £16.67

Thus you can see if they are buying tens, hundreds or even thousands, the advantage to them to deal with a VAT registered business can become considerable.

You therefore must look at your intended customer base, and decide if VAT registration and the additional admin that it brings will be a benefit to you in terms of your target customers.

You don't have to register immediately, and when you do decide to register, I believe you can still backdate a reclaim for VAT on some inputs for a few months before - but an accountant will advise better on that.

 

[WHARTY]

If you are selling to the public, you are going to be 20% more expensive the day you go VAT registered. I would have thought you should avoid it until you absolutely have to....

That said....I'm not an accountant, so you probably need some pro advice.

Not really. Look at it the other way. His prices stay the same and his margins are reduced by 20%. You're assuming he will put his prices up the day he is VAT registered.

 

[WHARTY]

If the sales price were £20 including VAT then the VAT would be £3.33 not £4 giving you a profit of £6.67.

You should divide the VAT inclusive price by 6 to arrive at the VAT figure. (for standard rated VAT)

Anna

That's a nice simple way of working out the VAT! I always worked out the long way. £20/120*20=£3.33. Will have to remember that!

Dumb question but why divide by 6? What would you divide it by if VAT was 24% for example?

 

[arcon5]

Not really. Look at it the other way. His prices stay the same and his margins are reduced by 20%. Your're assuming he will put his prices up the day he is VAT registered.

His margins aren't reduced by 20% as input tax is reclaimed.

Usually op its worthwhile voluntarily registering if you sell predominantly to vat reg business' or zero rated items... If selling to the public std rate goods your often loosing a few %.... Unless your making significant losses and have a lot of vatable overheads.

Example:
Not vat registered
Buy goods at £5 net £6 gross; sell at £10; make £4 net profit

Vat registered
Buy goods at £5 net; sell at £10 gross. Output vat is £1.66. Net therefore 8.34; makes £3.34 net profit

Vat registered has lost 16.5% of the net profit. But when you look at reclaiming vat on things like utilities etc the loss is much less.. But often the overall effect is less profit than vat registered.

 

[David Griffiths]

For instance you can apply for a flat rate scheme and pay a fixed rate VAT of say 13% and you charge 20%. So you are indeed being paid for being a collector of taxes.
Therefore you will make more money.

Overlooking the point that charging 20% involves putting up prices to the end user or losing the VAT from current prices.

It also overlooks the point that on the standard scheme you recover VAT on expenses, but on the flat rate you don't. The flat rate scheme does not automatically save tax. It does sometimes, but not always.

 

[WHARTY]

His margins aren't reduced by 20% as input tax is reclaimed.

Usually op its worthwhile voluntarily registering if you sell predominantly to vat reg business' or zero rated items... If selling to the public std rate goods your often loosing a few %.... Unless your making significant losses and have a lot of vatable overheads.

Example:
Not vat registered
Buy goods at £5 net £6 gross; sell at £10; make £4 net profit

Vat registered
Buy goods at £5 net; sell at £10 gross. Output vat is £1.66. Net therefore 8.34; makes £3.34 net profit

Vat registered has lost 16.5% of the net profit. But when you look at reclaiming vat on things like utilities etc the loss is much less.. But often the overall effect is less profit than vat registered.

Lol. Of course. Feel stupid at that oversight.

 

[David Griffiths]

That's a nice simple way of working out the VAT! I always worked out the long way. £20/120*20=£3.33. Will have to remember that!

Dumb question but why divide by 6? What would you divide it by if VAT was 24% for example?

The Vat fraction at the current rate is 20/120 which conveniently simplfies down to 1/6

For 24% rate, the fraction is 24/124 and the best that you can do with that is 6/31

 

[arcon5]

m

If below you can apply to be registered only if it's worth your while.

For instance you can apply for a flat rate scheme and pay a fixed rate VAT of say 13% and you charge 20%. So you are indeed being paid for being a collector of taxes.
Therefore you will make more money.

Not are it works like that.

Flat rate schemes is often adopted by the service sector where input tax is pretty much nil and they have reached the registration threshold.
Flat rate scheme means you cannot reclaim input tax but charge output tax. In this case charge vat of 13%. If you starting invoicing customers showing vat of 20% then I suspect this could constitute a serious offence - especially if the customer is vat registered and tries to reclaim 20% as per the invoice when only 13% has been paid to hmrc.

So following on from my above examples, the flat rate scheme would look like:

Buy in at £6 gross. Sell at £10 gross, net being £8.85, vat £1.15. Thus profit £2.85.
The least profitable option of them all.

 

[StevensOnln1]

If you starting invoicing customers showing vat of 20% then I suspect this could constitute a serious offence - especially if the customer is vat registered and tries to reclaim 20% as per the invoice when only 13% has been paid to hmrc.

VAT must be shown at 20% on invoices issued by flat rate sellers and can be reclaimed in full by a VAT registered buyer. The seller pays VAT at their flat rate % on the whole invoice total, including the 20% VAT they've charged.

Sent from my GT-N5120 using UK Business Forums

 

[snakeeyes121]

Not are it works like that.

Flat rate schemes is often adopted by the service sector where input tax is pretty much nil and they have reached the registration threshold.
Flat rate scheme means you cannot reclaim input tax but charge output tax. In this case charge vat of 13%. If you starting invoicing customers showing vat of 20% then I suspect this could constitute a serious offence - especially if the customer is vat registered and tries to reclaim 20% as per the invoice when only 13% has been paid to hmrc.

So following on from my above examples, the flat rate scheme would look like:

Buy in at £6 gross. Sell at £10 gross, net being £8.85, vat £1.15. Thus profit £2.85.
The least profitable option of them all.

Being in the flat rate scheme has no bearing on the vat you charge to customers, you still invoice / sell at 20% your customers are still able to reclaim at 20%.

The only thing that's different is you can't claim back the vat you spend, bar of course some capital expenditure over a certain amount.

You charge vat at 20%, it's just that your accounting is simpler, you don't need to account for vat on every sale, you don't need to do the vat accounting, bar working out your flat rate percent of your turnover.