VAT Help - The basics on absorbing costs & working it out

[squish]

Hi Everyone,

I'm newish to the forum and have just spent 3hours ready lots of interesting posts. I hope someone can help please.

VAT and everything that comes with it seems very daunting so I'm trying to get my head around it.

I've just hit a turnover of £67,000 (dec-dec) and I'll need to register VAT soon this could be in the next 6m to 1y). It's a really hard decision on how I want to move with the business to be honest (I'm currently about the expand my online presence) but after doing some figures does this sound correct?

A turnover of £77k would mean I pay £12,833 in VAT (or would it be £15,400)

Roughly £30k worth of expenses I can claim 20% vat back on so I would receive (as such) £5k

So paying a £7,333 VAT bill


Now how to absorb / deal with the added costs as currently it's only around £10k profit (which is then my wage as I'm a sole trader)

Not VAT registered with a turnover of £70k, I would be paying £5000 in VAT as above (not claimable)

Or

Be registered for VAT add 10% to my prices (I'm a clothing retailer) then the turnover is £77k, pay £12,833 in vat but get to reclaim £5k so the VAT bill would be £7,833 but I would have taken £7k extra from my customers which covers most of it.

Or would a £77 turnover Inc vat not actually be at the VAT threshold because without VAT its £64,166....oh my head hurts.

Obviously some customers may not buy due to the 10% increase (especially online) but hypothetically speaking as a business I wouldn't loose out too much in terms of pounds,
Although it's the paper work side of it that's daunting (more of a time issue than capability)

Could someone please clarify if the above is correct or nowhere near please?

Help is appreciated - I'm going to book my self onto the 'How VAT works' HMRC 2hr course but wanted to get this clear 1st.

Thank you for taking the time to read:| xxx

 

[TotallySport]

very very roughly speaking, you need to take £25,000 more than the VAT threshold to earn the same profit, and if you don't you'll be earning less.

Depending on how you want to grow the business depends on if you want to take the risk or slow down growth and stay under the threshold or grow, and how long will that take.

You'll also find that working out how you price things will change over the years and agian how you run your business based on varying principles, the thing you have to do beyond anything is don't sell at a loss.

The best thing to do, is absorb some products VAT, add VAt onto others, monitor what customers do and price according in the future, there is no fixed princple and if you do have one you could end up with stock for longer than your need or want.

 

[kulture]

My neighbour is facing the same problem. Is there anything legitimate that he can do. Or is it a simple case of stop selling for 2-3 weeks just before the end of the company year and go on a long holiday?

 

[TotallySport]

if you know thats your business model not to go over the limit, then you can plan the year not to go over the limit, by buying differents amout, holding back and pushing stock at the right times etc, takes a fair bit of monitoring. The other is a holiday or two, but in retail not the easist to do and hold customer loyalty especially online.

 

[kulture]

My neighbour is lucky, they are the only shop in the area selling what they sell. They have a very loyal customer base who would not think it at all strange that they went away for a couple of weeks. Not a long term solution, but it could hold back the eventual day when they have to register. When they do the money they save not going on holiday and the extra few weeks trading would go towards the drop in profit.

 

[TotallySport]

Personally I would want to grow the business so I would look to expand the business, if you neighbour can launch online and bring in and extra 30k a year, they should be better off in other ways, better discounts with suppliers, changing from a sole trader to ltd (assuming they are a sole trader) they can change the way they draw money to be more effective, after you get past that 30k you should be pushing up up up, not trying to grow would be hard for me, it also depends on age and expectations.

Its taking the steps to get past that 30k, 30k's worth of t-shirts is alot of t-shirts, 30k worth of cars isn't that much.

 

[squish]

Thank you all for comments.

I too have a shop with quite a loyal (if not recent) customer base and it would be possible to close for a holiday as I go overseas on buying trips anyway but generally get help in rather than close (most of it free).
Although of course it's different with online customers.

Like you say it may be wise to hold off for the moment and when I feel confident I can hit the £100k then go for it as such.
It would be hard to go above that but I'd hope I would, as I do want to keep growing, I'm never quite happy staying still. I expanded the shop to double the size after 18m and now 6m later turning over 60% more with a view to expand more online in the coming months, I would hope to expand 30% by the end of the year.

So I think I have answered my own question here and that's to go VAT registered when it hits the £73,000 figure. Exciting times !!

Looking at my figures above do they seem correct?

 

[Paul Kelly ICHYB]

Ideally, you do not 'absorb' the VAT, you add VAT to your prices! Your t/o increases, but profit gets better, as you are 'claiming' your VAT related to costs back!

Increase your prices a little now. Yes, this will increase your t/o now, but makes it easier to 'absorb' adding VAT when you need to!

 

[BobBuilder]

Increase your prices a little now. Yes, this will increase your t/o now

a lot of businesses would find that increasing prices doesn't at all increase turnover...

 

[paulears]

if the turnover is 70K, but your profit is 10K, taken as your drawings, then doesn't that mean 60K is stock and other business expenses - which probably have VAT content, so 30K of expenses leaves a gap?

If the end users aren't VAT registered, then you are faced with the problem of reduced margin - but are you sure your supplies are all accounted for?