Start-up VAT impact on profit

[maxfox44]

Hi Guys

Sorry if this question has already been asked, but my searching around this site, didn't quite answer it.

Let's say that I have a supplier of widgets and they offer me a 25% discount of list price.

Widget RRP/List £100 + VAT so £120.
Cost into my non-registered business is £100 less 25% + VAT = £90.

I want to sell them out at £100, but as non VAT registered and to recover the cost into my business actually sell these at £120 to make a reasonable profit. Otherwise I would be paying the VAT and not making it back on the sale. I do realise that I'm not recovering the VAT in the true accounting sense of the term. I have not output VAT. However, much of my sales of widgets are likely to be B2B and so my customers will either be put off buying or get angry when the realise they can't sort the VAT.

Maybe I'm answering my own question by typing this out, but does it then make sense to be VAT registered from day 1 and eliminate VAT and in actually reduce my supply costs by 20%? Otherwise my retail price of £120 no VAT will look expensive to business, will of course be the same to retail B2C customers and if I don't add the "VAT" to the sales price, I can't make a margin as the discount is similar to the rate of VAT.

Any help would be appreciated.

 

[andygambles]

If your main supplies are B2B then in the majority of cases it makes sense to be VAT registered.

 

[SBlundell]

Maybe I'm answering my own question by typing this out

Yes it does - as you state most of your sales are B2B anyway (but only if your customers are also VAT registered).

Not VAT registered: Purchase cost £90 (incl VAT), sales price £100 (no VAT) = profit £10
VAT registered: Purchase cost £75, sales price £100 (+ VAT) = profit £25

Don't forget being VAT registered will likely also save you money on all of your other (overhead) costs too......

 

[Walkol]

Can only echo what the others have said.

Also it may be worth having a wee look at the FRS which can not only make things simpler but also may make you a few extra quid.

 

[Pish_Pash]

I think your decision isn't just a profit related question, but an impact to your overall business. If your customers are mainly B2B, I'd say it would be better to be VAT registered from day 1.

I started out trying to defer VAT until I crossed the threshold...which as it happens the threshold was breached about 6 months after I started - man, what a nightmare, if I had my time over again, I'd just go VAT registered from day one ...sure you'll lose a little in trousered profit, but you'll gain a lot in credibility, happier customers (i.e. if they are mainly B2B) & a lot of time saved trying to pick the bones with HMRC about claiming back stock 'still on hand'.

 

[HFE Signs]

As above, generally people choose not to be VAT registered to give them an edge on the domestic (or non vat registered) market, however if your turnover exceeds £82k you would be required to register for VAT anyway.

 

[maxfox44]

Thanks for the all the replies above. I think I'm trying too hard to keep initial costs down and keeping things simple, rather than looking at the bigger picture. I can hardly act like a decent business and deal B2B without VAT. So I think it's a day one job and an expense worth incurring.

 

[Pish_Pash]

Thanks for the all the replies above. I think I'm trying too hard to keep initial costs down and keeping things simple, rather than looking at the bigger picture. I can hardly act like a decent business and deal B2B without VAT. So I think it's a day one job and an expense worth incurring.

That was my mindset... at the time most of my customers were consumers (vs. B2B), so the allure of a few extra pounds in my fledgling company's coffers was strong.... but in your shoes - since you're saying most of your customer will be business - it really makes a lot more sense to be VAT registered from day 1.