VAT Advice Please needed, accounting...Ebay Dropshipping

[Dropshipping2021]

I have an ebay Dropshipping business and could hit the UK VAT threshold in a few weeks time. I'm trying to work out whether registering for VAT may actually prove unviable and therefore may downsize the business to avoid hitting the threshold. Its quite a high turnover business but as with many dropshipping businesses, my bottom line is quite low.

Could someone familiar with ebay and accounting help me as to what I would pay VAT on, so I can get an idea whether it is worth expanding to over the VAT limit or downsizing to prevent hitting the threshold?

A current example from a product just sold, just saying I hit the VAT threshold:

Product sold for 19.99

Now ebay Immediately deduct the selling fee for the product so Net proceeds 16.90 coming to my account are this. This is cause Ebay fee is 2.57 (+ 0.52 VAT)

Product cost is 13.99 (inclusive of 2.33 VAT).

Am I to record VAT on the initial sale price?
Which would be 19.99x0.2= 4. I know I can claim 2.33+0.52=2.85. Leaving me a VAT burden of 1.15 on this product. This would leave me a profit of 16.9-(13.99+1.15)= 1.76

Or is VAT registered on my net proceeds after ebay costs?

Which would be 16.90x0.2=3.38 VAT I can claim back...2.85. VAT burden is now 0.53.

16.9-(13.99+0.53)= 2.38

Can someone help?

Which one is correct? Or any other advice?



Thanks in advance

 

[Mr D]

Buyer pays vat once you register. So if you charge buyer 19.99 then that is what is used for vat calculation.

Your calculations are out. Vat is an added tax, the amount you want plus the tax on top becomes your selling price.
So what the buyer pays is not 20 percent of the total, it is 1/6th of the total. Your price plus 20 percent.
So if you want 20 pounds then you charge the buyer 20 pounds plus 20 percent vat, 24 total.
The vat of 4 pounds is 1/6 of what the buyer pays.

However when working out how much vat to hand over to HMRC you deduct the vat you have paid out as a business. So your purchase price will have vat, perhaps your marketing has vat and so on.

You may collect say 10 grand in vat but due to vat paid out of 6 grand just then pay HMRC 4 grand.

Vat is paid by the buyer, it's not on your profits and eBay fees are a cost of your business out of your share of the money. Not out of the government share.

 

[WaveJumper]

Welcome to the UKBF. Have you thought about how your prices compare to the competition if you now need to sell your product for example £19.99 plus vat is now going to retail at £23,99?

Or as I have seen so often on here absorbing the VAT in your sales price of £19.99 which would leave you with £16.66 you are buying at £11.66 so by the time eBay have taken their share you are not making an awful lot.

I’ll leave the accountants on here to comment on the rest of your calculations

 

[Dropshipping2021]

Wouldn't that mean my first calculation is correct? Surely?

19.99 (Inc vat) means 4 is VAT on product sold. I received 16.90 after ebay costs. And pay 13.99 for goods.

Ebay VAT on selling costs is 0.52, Cost of product VAT is 2.33, so total is 2.85. The VAT burden is therefore 1.15.

My profit is 2.91 (if I didn't have to pay VAT). Or 2.91-1.15= 1.76 if I do have to pay VAT.

Is this not correct?


Ebay charge VAT surely that I can claim against costs.

 

[Dropshipping2021]

Welcome to the UKBF. Have you thought about how your prices compare to the competition if you now need to sell your product for example £19.99 plus vat is now going to retail at £23,99?

Or as I have seen so often on here absorbing the VAT in your sales price of £19.99 which would leave you with £16.66 you are buying at £11.66 so by the time eBay have taken their share you are not making an awful lot.

I’ll leave the accountants on here to comment on the rest of your calculations

Why 16.66 not 16? 20% of 19.99 is fractionally under £4. Hence £16 surely?

Thanks for your response. It doesn't leave me with much at all your right if my above calculations are right and hence I might just slow down the business to avoid reaching the threshold.

I'm already towards the higher end of the market in terms of prices already hence I would likely have to absorb it all (hence I used 19.99, inclusive of VAT) to remain competitive. Although I see many competitors no doubt turning over many more times what I turnover who will not have registered for VAT.

 

[Mr D]

Why 16.66 not 16? 20% of 19.99 is fractionally under £4. Hence £16 surely?

Thanks for your response. It doesn't leave me with much at all your right if my above calculations are right and hence I might just slow down the business to avoid reaching the threshold.

I'm already towards the higher end of the market in terms of prices already hence I would likely have to absorb it all (hence I used 19.99, inclusive of VAT) to remain competitive. Although I see many competitors no doubt turning over many more times what I turnover who will not have registered for VAT.

No. You are making the mistake of seeing the VAT as a tax, its not. Its an added tax.
£16.66 plus VAT equals £19.99.
The VAT paid by the buyer on total cost of £19.99 would be £3.33. 1/6th.
Your 5/6ths plus added 20%. So you get £16.66 and HMRC element would be £3.33.
Out of that £16.66 comes all your costs excluding VAT.

If competitors are turning over lots more than you and not registered for VAT then perhaps notify HMRC. Presuming of course they are required to register....

 

[Frank the Insurance guy]

VAT is your price PLUS 20%, so £16 + 20% is £19.20, (not £19.99). £16.66 + 20% is £19.99.

 

[WaveJumper]

You buy in at
13.99
02.33 This is the vat to be claimed back from HMRC
11.66

You sell
19.99
03.33 This is the vat to be paid to HMRC
16.66

Exp
3.09
0.52 This is the vat to be claimed back from HMRC
2.57

So you claiming back 2.85 (2.33 +0.52) against what you have collected and have to pay the vat man 3.33 so your vat bill to HMRC is 0.48

The profit on your item is going to be
16.66
11.66
05.00
0.2.57

0.2.43 minus your 0.48 leaving you a profit of £1.95

 

[WaveJumper]

http://www.vatcalculator.co.uk

Always worth using the above

 

[Dropshipping2021]

No. You are making the mistake of seeing the VAT as a tax, its not. Its an added tax.
£16.66 plus VAT equals £19.99.
The VAT paid by the buyer on total cost of £19.99 would be £3.33. 1/6th.
Your 5/6ths plus added 20%. So you get £16.66 and HMRC element would be £3.33.
Out of that £16.66 comes all your costs excluding VAT.

If competitors are turning over lots more than you and not registered for VAT then perhaps notify HMRC. Presuming of course they are required to register....

Thanks for this.

I know it directly affects me but its not really in my nature to report someone. Although I don't know given the amount of loopholes in the system whether anything illegal is taking place.

Whilst I'm a UK citizen I'm currently abroad on a extended holiday ironically in a country where people locate for this precise reason-to become a tax resident.

And I've met someone in practically the same line of business...having the unusual business of Dropshipping from the UK to UK, and having never stepped foot in the UK, turning over 7 figures!! Can't see HMRC ever knowing, let alone ever finding him if they do.

And definitely I could run this business from here and become a tax resident.. but I believe VAT would still be due since all products are located and supplied within the UK.

The bottom line of the business is that I'm earning before tax and NI at the moment £1000-1300 per month, which im sure you'll agree isn't a huge amount. Hence I was considering expansion.

Thanks so much for your response, sorry for babble.

 

[japancool]

Which would be 19.99x0.2= 4.

No. The VAT on 19.99 is 19.99/6 = 3.33.

The VAT ebay charges you on the selling fee comes off the amount you owe HMRC.

 

[japancool]

Why 16.66 not 16? 20% of 19.99 is fractionally under £4. Hence £16 surely?

Because you calculate VAT by adding 20% to the non-VAT inclusive price, not by taking 20% of the VAT inclusive price.

16.66+20% = 19.99

 

[WaveJumper]

Thanks for this.

I know it directly affects me but its not really in my nature to report someone. Although I don't know given the amount of loopholes in the system whether anything illegal is taking place.

Whilst I'm a UK citizen I'm currently abroad on a extended holiday ironically in a country where people locate for this precise reason-to become a tax resident.

And I've met someone in practically the same line of business...having the unusual business of Dropshipping from the UK to UK, and having never stepped foot in the UK, turning over 7 figures!! Can't see HMRC ever knowing, let alone ever finding him if they do.

And definitely I could run this business from here and become a tax resident.. but I believe VAT would still be due since all products are located and supplied within the UK.

The bottom line of the business is that I'm earning before tax and NI at the moment £1000-1300 per month, which im sure you'll agree isn't a huge amount. Hence I was considering expansion.

Thanks so much for your response, sorry for babble.

Are you sure that you are actually making a profit what about postage costs do you not have to pay to have your stock delivered to you, do you have a handle on all your expenses?

 

[ecommerce84]

Taking 20% of the VAT inclusive price is a very easy mistake to make for someone new to VAT calculations but as mentioned above it’s 20% of the ex VAT price.

The easiest way to work it out is as follows:

To find an ‘ex VAT’ price from an ‘inc VAT’ just divide the ‘inc VAT’ price by 1.2

To find an ‘inc VAT’ price from an ‘ex VAT’ price just multiply the ‘ex VAT’ price by 1.2.

To use your numbers as an example:
£19.99 / 1.2 = £16.66
£16.66 x 1.2 = £19.99

And to find what the VAT element of an ‘ex VAT’ price would be, just divide by 5
And to find out what the VAT element of an ‘inc VAT’ price is, just divide by 6

Example again:
£19.99 / 6 = £3.33
£16.66 / 5 = £3.33

 

[Dropshipping2021]

Are you sure that you are actually making a profit what about postage costs do you not have to pay to have your stock delivered to you, do you have a handle on all your expenses?

Postage costs included by the Supplier.

Yeah I do my accounts, now on quickbooks (finally!) its not a great profit at all I know. But its also quite an easy business to run....now, laid the ground work being laid a few years ago.

I value a work life balance...no wife no kids...

Ebay are the biggest benefactors though nonetheless...

Costs are largely the products.....other costs are the listing software, a couple of subscriptions needed to help Identify, and my phone bill.....

I gave the example above but there are indeed some products that have a bigger profit margin. Not many but some...

After some review I'm considering the flat rate scheme although running the numbers I'd need to increase my turnover to about 150k to make it worthwhile I feel, with a similar margin..even with the 1% discount, 6.5% kills it a little on retail goods.

Really appreciate your response

 

[kulture]

Some businesses, on the cusp of crossing the VAT threshold, find it cheaper and better to take a two week (or one month) holiday to remain below the threshold.

 

[Dropshipping2021]

Some businesses, on the cusp of crossing the VAT threshold, find it cheaper and better to take a two week (or one month) holiday to remain below the threshold.

I'm still considering this. It is ofcourse easier. I'm just running the maths to see what is worthwhile...

I have an abundance of suppliers tbh and I'd be confident of hitting £150k+ for next 12 months.. I've intentionally been slowing it down to avoid vat registration. Although the issue remains that ebay don't like dropshippers so limit my listing.

But the flat rate scheme does appeal due to simplicity.....literally so simple despite the added expense.


Thanks for your reply

 

[Mollybutt1]

Hi, I am aware this thread was created a while ago. However, I was just wondering what you ended up doing? I am in a very similar boat and am unsure which option is more beneficial for me

Thanks
Molly

 

[MyAccountantOnline]

Hi, I am aware this thread was created a while ago. However, I was just wondering what you ended up doing? I am in a very similar boat and am unsure which option is more beneficial for me

Thanks
Molly

@Mollybutt1 have a look here it should help -

Check what registering for VAT may mean for your business

Use this tool to estimate what registering for VAT might mean for your business.

www.gov.uk