VAT Calculations

[NewTime]

Evening. I am at the closing stages of my business plan and I have become very confused on how to work the VAT out. I know for many of you it's super-easy, but I am really not getting which way to calculate it. We are currently wanting to open a discount pound shop. I just can't work out what the profit on the product would be (yes I know it will be barely anything)

Here is a relevant example.

Product 1 Wholesale Price is 0.75 (excluding VAT)

Product 1 sale price is £1 (including VAT)

I have worked tried to work it how so many different ways. Basically excluding VAT from both getting a 5p profit. Added VAT to both and got a 10p profit. I also used a calculator that had it at 8p.

But I also know you reclaim the VAT on the product too.

Any help would be great!

 

[johndon68]

I assume you are VAT Registered?

For the item you sell at £1 including VAT, the breakdown would be a net amount of £0.83 and VAT of £0.17

John

 

[NewTime]

I assume you are VAT Registered?

For the item you sell at £1 including VAT, the breakdown would be a net amount of £0.83 and VAT of £0.17

John

Hi. I am planning to be VAT registered, yes. I was assuming the VAT would have been 20p (20%) and not 0.17? Why do I have that wrong?

Thanks

 

[johndon68]

Hi. I am planning to be VAT registered, yes. I was assuming the VAT would have been 20p (20%) and not 0.17? Why do I have that wrong?

Because VAT is 20% of the net price, not 20% of the gross (inc. VAT) price. For VAT to be 20p, the net would have to be 1.00 giving a gross price (inc. VAT) of £1.20

John

 

[NewTime]

Because VAT is 20% of the net price, not 20% of the gross (inc. VAT) price. For VAT to be 20p, the net would have to be 1.00 giving a gross price (inc. VAT) of £1.20

John

OK _ thank you for taking the time to reply! Thank you.

 

[paulears]

With my ex-teacher hat on, VAT as a percentage is always confusing when common sense rather than maths creeps in. You cannot add and remove VAT with a percentage on a calculator. 100 plus 20% = 120. Everyone gets this. But 120 minus 20% is NOT 100! Try it and see. The 120 is one hundred and twenty 'bits' , so to remove the VAT you divide it by 120 and then multiply that by 100. Ylunch use one of the shortcuts, which you probably did at school, like divide by 1.2, or multiply by .833 or the other often quoted formulas but once you get to grips with the maths it's not a problem, but you need to stop thinking about adding or subtracting percentages. It doesn't work. My local tesco customer service desk do VAT invoices if you buy a TV or other big ticket item. Trying to explain to the graduate on the desk that their maths is faulty is always funny, but exasperating. I usually ask if they can check the ex-VAT figure by adding the VAT back and when it produces a different price, their face is a picture! Complete confusion.

 

[Mr D]

I find it easier to think fractions.

Vat is the amount you want plus 20 percent - however when working backwards from what the buyer pays the sum is 1/6th of the price is vat. Buy 6 pounds of something subject to vat, your receipt shows 5 pounds and vat 1 pound. The retailer keeps the 5 pounds and accounts for the 1 pound separately.

Gets more fun when you look at flat rate scheme, a tad easier admin wise. You just hand HMRC a percentage of sales. But amount you hand over is not the vat you have collected. It's a percentage based on your business type and I believe there is also a first year discount too.
Vat, somewhat complicated tax system....

By the way buying at 75p excluding vat and selling for a pound including vat is a bad idea unless doing massive turnover and keeping costs down. Better to buy at 12p and sell for a pound.,..
Or higher than a pound.

 

[BubbaWY]

Best way I do it to find what the vat element of something is, is to divide it by 6. If something costs £100, divide by 6 and that gives you the VAT element = £16.66.

 

[paulears]

Yep - but that's giving you the means to produce and answer but not understand where it came from, so all these techniques won't convince the VAT man when you get it wrong. They all work, but people need to know why. If they get it wrong, like my Tesco example, how do we convince them they're wrong, when common sense and a calculator suggest it's right.

As a side note - has anyone else noticed the speed of refunds is really quick. I did the return on a Friday afternoon, and the refund appeared in my account on Sunday! That's pretty impressive for the current situation.

 

[Mr D]

Yep - but that's giving you the means to produce and answer but not understand where it came from, so all these techniques won't convince the VAT man when you get it wrong. They all work, but people need to know why. If they get it wrong, like my Tesco example, how do we convince them they're wrong, when common sense and a calculator suggest it's right.

As a side note - has anyone else noticed the speed of refunds is really quick. I did the return on a Friday afternoon, and the refund appeared in my account on Sunday! That's pretty impressive for the current situation.

Wow.
A decade ago it took 4 days. Nice to know some things about the civil service have speeded up.

 

[TopSpek]

If you don't want to read the algebra (which is very simple), then you can just skip to the second codebox and use the formulas.

In English, the full price is given by the price plus the price times VAT.

To find the relevant formulas, start with the equation:

FullPrice = Price + Vat * Price

and do the following algebra:

f = p + vp
->
f = p(1 + v)  // Factorise.
->
p = f / (1 + v)  // Make p the subject.

So now you can forget all of the above if you like. All you need to do is write down the following on a bit of paper and stick it on the side of your computer, or somewhere:

f = p(1 + v)
p = f / (1 + v)

Where p is the price, f is the full price after applying VAT, v is the VAT.

Test our formulas with some values:

Given the initial price and the VAT percentage, find the full price:

Let p = 200, v = 0.2
Then:

f = 200(1 + 0.2)
->
f = 200(1.2)
->
f = 240

Given the full price and the VAT percentage, find the initial price:

Let f = 240, v = 0.2
Then:

p = 240 / (1 + 0.2)
->
p = 240 / 1.2
->
p = 200

 

[NewTime]

I find it easier to think fractions.

Vat is the amount you want plus 20 percent - however when working backwards from what the buyer pays the sum is 1/6th of the price is vat. Buy 6 pounds of something subject to vat, your receipt shows 5 pounds and vat 1 pound. The retailer keeps the 5 pounds and accounts for the 1 pound separately.

Gets more fun when you look at flat rate scheme, a tad easier admin wise. You just hand HMRC a percentage of sales. But amount you hand over is not the vat you have collected. It's a percentage based on your business type and I believe there is also a first year discount too.
Vat, somewhat complicated tax system....

By the way buying at 75p excluding vat and selling for a pound including vat is a bad idea unless doing massive turnover and keeping costs down. Better to buy at 12p and sell for a pound.,..
Or higher than a pound.

Afternoon.

Of course, it's not ideal buying at 75p and selling at £1, but sadly I have issues with a particular product in which I can't find a suitable wholesaler for a decent price. There are lots of products that cost me less, but shower gel and shampoo is a product I am struggling to get a decent return on.

I would love to sell it at a better price, but it would lose the point of it being a pound shop if I sold things at £1.20 and so on.

 

[Mr D]

Afternoon.

Of course, it's not ideal buying at 75p and selling at £1, but sadly I have issues with a particular product in which I can't find a suitable wholesaler for a decent price. There are lots of products that cost me less, but shower gel and shampoo is a product I am struggling to get a decent return on.

I would love to sell it at a better price, but it would lose the point of it being a pound shop if I sold things at £1.20 and so on.

I used to use my local pound shop. About 15 years ago.
What he could stock and what you could stock would probably be similar - but now wholesale costs are higher and the value of a pound is not the same.

Last time I purchased shampoo wholesale it took almost 8 months to sell a carton. And was considerably higher price than a pound.
Made more than a pound profit.