VAT refunds bad? & other VAT Q's

[DoubleE91]

I read a few things indicating that depending on your business structure, voluntary VAT registration can be financially beneficial.
I realised this would apply to my business, as I pay VAT on all my raw materials but mostly make them into non-EU exports. My business is roughly 25% within the EU, 75% outside.
So I could save 1/6th on my material costs across the board, and even opt not to increase the price of my EU items (put simply, obviously the price is actually going down to the customer so that with VAT they total the same as non-EU customers - I'm paying the VAT out of my pocket) and it would still turn an increase in profit.
Running the numbers it was quite obvious- as long as my material costs on which I would usually pay VAT, are higher than my EU sales, I will save money. Simply put - always buying standard rated items. Mostly selling zero rated exports.
So I have registered to proceed with this. Also because I have a hefty 4 year equipment backlog I can claim.

However I've been advised that if I'm constantly receiving refunds every quarter I will soon be asked why. Obviously the answer isn't that I'm not turning a profit. I was told they may actually want to in a way 'split' the business so that I would only get VAT back on 25% of my materials. It is my understanding this isn't guaranteed to happen, but if flagged up on it, essentially what I would be doing is considered wrong and I may be fined what I've saved too.

Is that correct? I saw nothing online to indicate this. Simply that with a VAT number I don't have to pay VAT on anything, and that I can zero-rate my non-EU exports. That adds up to a profit for me as it would for any heavy non-EU exporter - I don't see such fine print anywhere. How likely is this to flag up an issue?

Which brings me to another question. In light of this, I thought maybe if I could have most of my invoices zero rated, then I would not often have to apply for a refund, as I'll have already saved the money rather than waiting for a refund, so would just have my EU sales VAT to pay. Then again if it was a problem I'd imagine the zero rated invoices are going through my VAT number and what's going on can still be seen.

Final question - I did ask one of my suppliers to zero rate an invoice today. They said they can't as I'm not out of the country. We are both in the UK. My EU suppliers can zero rate invoices with my number - why not UK suppliers? Can somebody explain? I know I'm still entitled the VAT back as a refund - just not sure why they can't zero rate it whilst sellers in the EU can.

Thanks!

 

[duggimon]

You will likely be asked why you are constantly in a refund position, yes. However, since the answer to that question is just "75% of my sales are zero rated as they are exports outside the EU" then you can just answer that and that'll be the end of it, it's nothing to worry about.

EU suppliers can zero rate your invoices because they use the reverse charge system, UK suppliers cannot because they don't. In the same way, you charge VAT on sales to EU customers if they are not registered for VAT but if they are then you zero rate it. If you have UK customers you would charge VAT regardless.

 

[Scalloway]

Certain businesses will be in a regular VAT refund situation, such as farmers. HMRC may query it but once they accept your business model you should be ok.

 

[DoubleE91]

Thank you- that's very reassuring!

One last question, I can't find a clear answer on this. Does a regular VAT refund get taxed? It's clear profit that I'd need to account for to run my business properly but I'm getting the impression I wouldn't put it on my regular tax return? I do understand I'd already be paying slightly more tax anyway as recording the expenses without VAT brings my regular profit up. So with regular VAT returns my actual business profit + money in my pocket will always be significantly higher than what I actually report to HMRC and pay regular tax on? Seems too good to be true!

 

[KAC]

No the refund isn't taxed. As you say, what it means is that you only get tax relief on the net cost of your purchases as the VAT will no longer be an expense

 

[kulture]

The VAT refund is a reduction in the cost of materials. So the result is your margins go up, your profit goes up and so your tax bill goes up.

 

[kulture]

I used to have a bookshop. The sale of books is zero rated, so ALL my VAT returns resulted in me getting money from HMRC. The thing to remember is this is just the refund of your money.

 

[DoubleE91]

If somebody could just glance over these numbers to ensure I have this 100% understood that would be great!
Using easy rounded figures say tax threshold 10k and 20% tax with no NI.

Pre VAT reg:
35k US sales
10k EU sales
15k cost of materials
Profit = 30k
Report to HMRC 30k, taxed on 20k at 20% = -4k
Actual profit in pocket = 26k

After VAT reg:
35K US sales
(not raising prices) 8.4k EU sales + 1.6k VAT collected
12.5k cost of materials + 2.5k VAT paid
Profit exc. VAT = 31.4k
Report to HMRC 31.4k, taxed on 21.4k at 20% = -4.28k
Actual profit = 27.12k
PLUS a lovely VAT return of 2.5k-1.6k = 0.9k
Actual profit in pocket = £28.02k

If that's right, yikes that's nice, especially considering I'm not even charging my customers the VAT and choosing to eat it instead (I believe charging them would only result in a £500 overall gain - certainly not worth the custom I'd lose from a 20% hike)

 

[Scalloway]

Where do you get the £10,000 tax threshold from?

 

[DoubleE91]

Was rounding numbers as an example, but I suppose £11.5 wouldn't have been any harder , hah. I've kind of had the personal allowance stuck at 10k in my head for a few years now

 

[duggimon]

Assuming all your materials are VATed, all your EU customers are not businesses and you have no other costs then that looks roughly right

 

[DoubleE91]

I'm actually a sole trader still, though I'll be moving to ltd with an accountant in the new year. But great, yep that's fantastic. Thanks for all the help I'll b able to get my pricing structure updated with this in mind now.

 

[lesvatadvice]

Consider monthly VAT Returns, to help your cash flow.
And, make sure you have appropriate evidence for zero rated exports and removals.