Should i register for VAT?

[Ella Business]

I have an online shop selling skincare products. I buy from manufacturers and sell on to my customers.

Would i benefit from registering for VAT even-though right now i am under the threshold?

Thanks
Ella

 

[AllUpHere]

Only you have the numbers needed to answer that question.

 

[Mr D]

I have an online shop selling skincare products. I buy from manufacturers and sell on to my customers.

Would i benefit from registering for VAT even-though right now i am under the threshold?

Thanks
Ella

Its something you ideally need to discuss with your accountant - for many of us the VAT registration means we claim back what we have paid out and pay to HMRC what we collect. Overall HMRC benefits and you increase your prices while not increasing profit. Can you cope with increasing your prices by 20% in order to collect the extra for HMRC or would you be paying the customer payments out of your profits? That's what you have to consider.

Some businesses its a good idea to register voluntarily. Plenty of others where its a bad idea from what people say.

 

[AllUpHere]

And please understand that if you register you won't need to add 20% to your current prices to be in exactly the same position (financially).

 

[Mr D]

And please understand that if you register you won't need to add 20% to your current prices to be in exactly the same position (financially).

True. Its just the simplest method of illustrating the change.

 

[paulears]

If you are selling to non-VAT registered customers, as in most of the public, then your prices to them will be 20% higher than if you stay unregistered. Of course your supplies will carry VAT that you can offset - the problem is that if you buy £100 worth of supplies (ex VAT) then if you are not registered, the cost to you is £120. If you sell them for £220 you made £100.

If you are registered, you pay £100 (as the £20 VAT is reclaimable), but then sell them for £220, you actually sold them for £183, giving £36 to HMRC - your profit actually being less - £83.

See the problem? Registering voluntarily when your consumers at the end sale price are not VAT registered costs you money and potentially makes you uncompetitive.

 

[AllUpHere]

True. Its just the simplest method of illustrating the change.

No it's not, it's an inaccurate and misleading way of describing it.

 

[Mr D]

No it's not, it's an inaccurate and misleading way of describing it.

Oh I am sorry, tell us what percentage vat you see on invoices you get.

 

[AllUpHere]

Oh I am sorry, tell us what percentage vat you see on invoices you get.

Your misunderstanding of my point, demonstrates my point perfectly.

 

[Mr D]

Your misunderstanding of my point, demonstrates my point perfectly.

Glad to hear it.
But you are not going to correct misunderstanding. Just for some reason want to try scoring points for your own ego.

 

[STDFR33]

Glad to hear it.
But you are not going to correct misunderstanding. Just for some reason want to try scoring points for your own ego.

Unfortunately, I think @AllUpHere is of the misunderstanding that you can do simple calculations.

As a working example.

You are currently not VAT registered and buy something for £50 + VAT. You sell it for £100. You have made £100 profit.

You become VAT registered and still want £40 profit.

In order to make £40 profit, the price to your customer would be £108.00 (£90 + VAT).

£100 to £108 is not a 20% increase.

You have collected £18 of VAT from your customer, reclaimed £10 from your purchases and need to hand over £8 to HMRC - incidentally the same as the increase to your customer.

 

[Mr D]

Unfortunately, I think @AllUpHere is of the misunderstanding that you can do simple calculations.

As a working example.

You are currently not VAT registered and buy something for £50 + VAT. You sell it for £100. You have made £100 profit.

You become VAT registered and still want £40 profit.

In order to make £40 profit, the price to your customer would be £108.00 (£90 + VAT).

£100 to £108 is not a 20% increase.

You have collected £18 of VAT from your customer, reclaimed £10 from your purchases and need to hand over £8 to HMRC - incidentally the same as the increase to your customer.

I was under the impression that most people were familiar with invoices that show VAT rate on them. From VAT registered companies.

 

[paulears]

The maths really is NOT difficult and we've shown examples of how dealing with domestic customers means you are more expensive - not by a lot, but enough to make you perhaps uncompetitive. Domestic customers also EXPECT prices to be what they pay. I've never had one who didn't mind a sudden increase of 20% on what was quoted. If Mrs Smith wants my services, I quote £X including VAT, but if Smith Electronics asks for a price they get £X PLUS VAT if they're VAT registered. B2B between two registered businesses means VAT is unimportant. That really is what it's about.

Run a few of your typical in to out transactions across registered and unregistered formats and see which generates the best margin for you.

 

[AllUpHere]

Glad to hear it.
But you are not going to correct misunderstanding. Just for some reason want to try scoring points for your own ego.

Oh come on, you spend your entire life on a business forum and you don't know how this works? Your example leads people to misunderstand the issue, as you are pretending to. I dont need to explain, as the relevant information is already in this thread.

 

[Mr D]

Oh come on, you spend your entire life on a business forum and you don't know how this works? Your example leads people to misunderstand the issue, as you are pretending to. I dont need to explain, as the relevant information is already in this thread.

Ah one of those posters.

 

[gpietersz]

If your customers are all not VAT registered (e.g. consumers) you will be worse off registering.

If your customers are all VAT registered (or outside the EU ) then you will be better off registering.

If your customers are a mix of both then you need to do the maths, including estimating the effect on sales of changes to prices paid after the effect of VAT (more for non-VAT registered domestic customers, less for others as VAT registered can reclaim input VAT).

 

[5leeper]

Agree with gpietersz
I went over the VAT threashold (not by much) so had to be VAT registered
It was a right pain in th bum as 80% of customers were not VAT registered and this additional cost put lots of people off.
So i have learned a lot, de-registered and now keep it under. If i struggle to keep it under (which we are alsmost at) then i will split the business and continue to be under. Once both reach threshold i may lump them together as i will be way over, or again split it...totally depends if we start working the VAT registed business more.

 

[paulears]

Not sure if splitting the business actually works - two Ltd companies I suppose might, if they are clearly trading it different areas, but I'm sure we had a topic where splitting the business to avoid VAT, was discussed and discounted at a legitimate activity? I'm sure one of the experts will confirm/deny this.

 

[gpietersz]

If i struggle to keep it under (which we are alsmost at) then i will split the business and continue to be under

Get professional advice on that. There are complicated rules about doing things like that and you could get into trouble - I am sure someone here can explain further.

 

[STDFR33]

Agree with gpietersz
I went over the VAT threashold (not by much) so had to be VAT registered
It was a right pain in th bum as 80% of customers were not VAT registered and this additional cost put lots of people off.
So i have learned a lot, de-registered and now keep it under. If i struggle to keep it under (which we are alsmost at) then i will split the business and continue to be under. Once both reach threshold i may lump them together as i will be way over, or again split it...totally depends if we start working the VAT registed business more.

What do you mean by split thr business? What would your reason be for doing so?

 

[Mr D]

Agree with gpietersz
I went over the VAT threashold (not by much) so had to be VAT registered
It was a right pain in th bum as 80% of customers were not VAT registered and this additional cost put lots of people off.
So i have learned a lot, de-registered and now keep it under. If i struggle to keep it under (which we are alsmost at) then i will split the business and continue to be under. Once both reach threshold i may lump them together as i will be way over, or again split it...totally depends if we start working the VAT registed business more.

Its not easy to split business and make it look to HMRC like its not an attempt to avoid VAT registration.
Can be done but appears to take some effort and planning.

The worst place to be is just over the threshold - no benefit while some admin and cost.
Power past that point and the extra profit and maybe reduced per unit costs due to growth can work out.

 

[5leeper]

Agree and its something that will be planned.
Someone who supplies me and now a very good friend has just completed this as while it was a pain to sort out, he can now be more competative etc

Ultimaltey i can just take time off but want to and most deffinately the worse place to be is just over, bit of a learning curve that was!

Its not easy to split business and make it look to HMRC like its not an attempt to avoid VAT registration.
Can be done but appears to take some effort and planning.

The worst place to be is just over the threshold - no benefit while some admin and cost.
Power past that point and the extra profit and maybe reduced per unit costs due to growth can work out.

 

[Ella Business]

If you are selling to non-VAT registered customers, as in most of the public, then your prices to them will be 20% higher than if you stay unregistered. Of course your supplies will carry VAT that you can offset - the problem is that if you buy £100 worth of supplies (ex VAT) then if you are not registered, the cost to you is £120. If you sell them for £220 you made £100.

If you are registered, you pay £100 (as the £20 VAT is reclaimable), but then sell them for £220, you actually sold them for £183, giving £36 to HMRC - your profit actually being less - £83.

See the problem? Registering voluntarily when your consumers at the end sale price are not VAT registered costs you money and potentially makes you uncompetitive.

Thank you so much for your explanation.

I buy from manufacturers well in advance and have of course minimum quantity orders so currently and for the foreseeable future my purchases will surpass my sales therefore i think i should most of the time be in a “repayable” status?

This means my profit will reduce however as the business grows this should pick up as i can buy higher volume.

Trouble with any business like mine is cashflow and i thought registering for VAT would help as I will most of the time get VAT refundable rather then payable.

Am i thinking this all wrong?

Also, am I able to claim back VAT for the last years transactions at all if i say i register this month?

Thanks again to all for your valuable time and responses.

 

[Mr D]

Thank you so much for your explanation.

I buy from manufacturers well in advance and have of course minimum quantity orders so currently and for the foreseeable future my purchases will surpass my sales therefore i think i should most of the time be in a “repayable” status?

This means my profit will reduce however as the business grows this should pick up as i can buy higher volume.

Trouble with any business like mine is cashflow and i thought registering for VAT would help as I will most of the time get VAT refundable rather then payable.

Am i thinking this all wrong?

Also, am I able to claim back VAT for the last years transactions at all if i say i register this month?

Thanks again to all for your valuable time and responses.

Then you will end up holding a lot of stock.
For even a growing business most of the time you will be selling higher than your purchase of goods and services - common when seeking to make a profit and not having unlimited cash reserves.

You take the vat amount you will be charging buyers and deduct vat amount you have paid out when purchasing relevant goods and services - the difference is what you pay to HMRC or what you reclaim.
Your normal vat return will be to pay HMRC. It is possible to buy so much that you claim money back, perhaps when stocking and outfitting a shop for example, or on first return when claiming for previous purchases too but for most vat registered businesses it will be uncommon to rare.

 

[Ella Business]

Then you will end up holding a lot of stock.
For even a growing business most of the time you will be selling higher than your purchase of goods and services - common when seeking to make a profit and not having unlimited cash reserves.

You take the vat amount you will be charging buyers and deduct vat amount you have paid out when purchasing relevant goods and services - the difference is what you pay to HMRC or what you reclaim.
Your normal vat return will be to pay HMRC. It is possible to buy so much that you claim money back, perhaps when stocking and outfitting a shop for example, or on first return when claiming for previous purchases too but for most vat registered businesses it will be uncommon to rare.

Thank you, it makes sense what you are saying.

 

[Chris Ashdown]

Are you selling to regular customers or just mostly one off buyers

Are your prices inline with your competitors at present

Do you have something in your marketing that enables your goods to be perceived better than the rest if you increase the price

Would a xx percentage rise effect your sales badly

Only you can know what effect the increase in price will have on sales

Rolls Royce can probably increase their selling price by 10% and nobody would say a word, whilst a lot of food and confectionary makers are reducing the size of their goods rather than increase there prices