Understanding VAT please

[dafcjim]

Hi there,

My business is doing very well this trading year and I think I may have to register for vat next trading year with growth, but I'm very concerned. I see problems ahead and I'm not oblivious.

What's the best way to look at this for a newbie?

Obviously to stay competitive against my close rivals offering the exact same product I'm going to have to keep my prices the same, or I won't get the custom.

So I then lose the 20% from profit as these products are sold at RRP.

But as I'm buying alot of stock from suppliers then I will be reclaiming this back.

So next year if I make 200k sales, I lose 40k vat, reclaim 20k through purchases (1/2) and my bill is 20k vat.

Then I get stung by corporation tax 25% next accounting year!.

This then along with rise of electricity, rates, rent, costs in general practically puts me at a loss...even though this year its good, growth could kill it.

I'm right in saying businesses with low profit margins will not survive if exceeding the threshold?

What do you think the profit margin percentage needs to be from goods or services sold to survive?

Thanks.
Jay

 

[WaveJumper]

There's so many strands to your thread, however your competition are selling at a price which makes sense to their own business if you are trying to undercut them on price you really need to take a hard look at your business plan to see (as you allude too) if you really have a business going forward. You need to look at every level of expenditure etc to see if its possible to streamline, ultimately yes you may have to sell at a higher price to have a viable business, the question then you have to ask yourself is why are customers going to buy from you.

There's been many threads on here where people have started a company selling goods undercutting the comp because they are not VAT registered thinking they have a viable business until they hit the 85k. There are of course a whole load of avenues here for you, absorb the cost, put your prices up by say 10% 0r 15% absorbing some of the increase in your profits. (again you really need to look at your business plan) Don't forget although you will be collecting VAT for the GOV you are also claiming back VAT once registered on everything you purchase. Of course you could just stay under the 85k limit but this means your business is probably not going to grow as perhaps you wish.

In short go back to your business plan, take a real hard look at the numbers, even getting someone to look over it for you, But yes I can see a lot business's both large and small going to the wall this year as increased energy cost plus supply off goods escalate out of their control.

 

[pentel]

Might be worth looking at the flat rate VAT scheme

 

[Mark T Jones]

I belive there is a standard equation to find the VAT differential - one if fhe accountants on here can tell you

As above a flat rate scheme may work

To some extent yes, your prices will rise

From your post, corporation tax is unlikely to be an issue (the 19% rate still applies for profits up to £50k)

Remember, your competitors will be facing exactly the same cost pressures as you are

More for others setting out, but this is where projections are your friend - if your business can't sustain VAT registration, then it will remain a job or a sideline

 

[japancool]

I would recommend starting off by pricing your products as if you were already VAT registered.

 

[AlanJ1]

I would recommend starting off by pricing your products as if you were already VAT registered.

I would agree with this 100%. Any business who wants to grow should know this will be coming round the corner rather than it being a shock when it does.

 

[BobzYourUncle]

Looks like you will be over the flat rate scheme turnover of £150k unless you shutdown a few weeks per annum for holidays. Put your prices up to include VAT.. and grow your business. You need healthy profits.. going under the VAT threshold may mean you not having surplus money for breakdowns, wear and tear, hire more staff etc.. if energy prices and stock prices and wages aren't affecting your business in this current climate. This is the perfect opportunity for you to grow. Because I'm sure some of your competitors are suffering. I'm thinking you are in the food business.

 

[pentel]

Looks like you will be over the flat rate scheme turnover of £150k

Provided you are below £150,000 you can join the flat rate scheme. You can stay on the scheme until your turnover reached £230,000

VAT Flat Rate Scheme

Flat Rate VAT scheme - eligibility, thresholds, flat rates of VAT and joining or leaving the scheme.

www.gov.uk

 

[DontAsk]

So next year if I make 200k sales, I lose 40k vat, reclaim 20k through purchases (1/2) and my bill is 20k vat.

Yet again, a misunderstanding of the maths.

If you make 200k in sales, at the same prices as before, but now including VAT then you have 1/6 or just over 33k in output VAT, not 40k. Think about it

If you can reclaim 20k input VAT on purchases then your VATable purchases are 120k. Is that correct? I suspect not given your misunderstanding over output VAT.

If it's correct, then you are down 13k.