VAT registration due to exceeding threshold on turnover

[Adamcatterall]

Hi guys, I’ve submitted a few posts in this forum over the years and have always had great advise, I’ve reached another little pot hole on my venture so thought I’d seek some more advise as I’m sure it’s a topic which will be familiar to many and may help others too

It’s the Catch 22, increased sales now having to pay more tax...
My business is about to exceed the VAT threshold off £85,000 and I understand I will need to register for VAT, My dilemma is that my current mark up profit only stands at an average of 20% so I don’t know if it will be viable as it stands after becoming VAT registered. My business model consists of importing my own branded MotoX1 bikes from China and also ‘drop shipping’ other industry products from within the UK (% 20/80 MotoX1/DS )

dropshipping: products purchased cost including VAT
-current mark up approx 20%

MotoX1 Bikes: imported products purchased from China (no VAT on sales invoice from supplier)
-current mark up profit 60%

I believe I would be able to claim back VAT for all my ‘drop ship’ orders because my suppliers charge me VAT, however I don’t get charged Vat on my own branded bikes imported from china. Would this mean that I would take a 20% loss on my own branded bikes unless I increase my retail prices?
- Now, I do have a uk based forwarder who takes care of my imports, when my MotoX1 bikes reach the uk I pay both a sales invoice and a import duty/ vat Invoice. Could I claim any of these invoices back once VAT Registered thus reducing my landing costs?

Questions:
Will my business model still be sustainable after VAT Registration (without increasing my prices)

what VAT scheme would be better, I’m aware of a fixed rate scheme with reduced tax% but I wouldn’t be able to claim back any expenses

what is the fixed rate scheme percentage for my industry

is now the time to appoint an accountant, or is filing still fairly straight forward with good book keeping?

***
please check my calculations for working out my tax payments to HMRC

cost of products ex vat :£400
Cost of products inc vat £480

retail of products ex vat: £460.80
Retail of products inc vat: £576

taxable liability = 115.12 - 80= £35.12 to HMRC

retained profit after vat payment (excluding corporation) = £60.88

****
Thanks I’m advance
Kind regards Adam
MotoX1
Website for reference www.motox1-atv.co.uk

 

[paulears]

The vat you pay on those imports IS the VAT. The supplier cannot charge a UK tax, so they invoice net. The VAT on import you claim back so in effect, you pay VAT on your magic taking one from the other so it's not company people think, it goes up by 20% because your payments for your stock can be claimed back. You'll make less, end to end having to add the VAT but you probably have other purchases where VAT can be recovered, many expenses like fuel can did up!

 

[MikeJ]

I'm sure that's helped a lot

 

[busowner987]

ONE OF THE UK'S LARGEST DISTRIBUTORS OF PITBIKES, DIRTBIKES, QUAD BIKES AND MORE WITHIN THE UK!

 

[STDFR33]

Company or sole trader?

 

[Adamcatterall]

Hi, limited company

 

[STDFR33]

You might be able to separate the drop shipping from the retail but isn’t straight forward.

I think now is the time to take professional advice.

 

[BusterBloodvessel]

- Now, I do have a uk based forwarder who takes care of my imports, when my MotoX1 bikes reach the uk I pay both a sales invoice and a import duty/ vat Invoice. Could I claim any of these invoices back once VAT Registered thus reducing my landing costs?

You are then paying VAT. You don't pay it to the supplier, you pay it to the UK Gov't and your forwarding agent is handling that for you.

Your figures are wrong, unless I'm misreading your post....I can't understand your £115.12 figure. Luckily for you, wrong in a good way

Actually, now I think I do see. You have taken off 20% from your current retail figure of £576. It doesn't work like that, it is 20% on top of your net figure. So to work back from a retail you take off approximately 15-16%. I use 16% as a rough calculation in my head etc.

Current Retail To Consumer = £576
Net Price Less VAT = 480 (and if you work this back - £480 x 1.2 = back to your retail of £576)

So, you have therefore collected £96 on behalf of the government that you owe them. However you have already paid them £80 VAT on your import, so the net you need to pay the government over is £16.

 

[Adamcatterall]

Hi there, Thanks allot for your reply.

yes thats correct I deducted 20% from the example retail price because I would like to keep my retail prices the same when VAT Registered to maintain my competitive advantage against leading retailers (Im aware this will reduce my mark up percentage) in order to do this I will be looking at setting all my current prices to include the VAT

i just wanted to ensure that by doing this i would still remain profitable, Or is it common practice to have to increase retail prices to account for VAT?
-I have established consistent sales with my current pricing strategy and feel that if i increased them by 20% i would have a decline in sales pushing me back below the VAT threshold. Now i have reached it I want to try and at least maintain/scale more.

Regarding my imported bikes, am i right in saying that i can in fact claim the VAT portion of the invoices back once registered? for example my last shipment had the following invoices from my forwarder:

1) DUTY £414 + VAT £1246
2) SALES INVOICE: £1025 (And claim 20% off this sales invoice total?)

Thanks in Advance,
Adam
MotoX1

 

[BusterBloodvessel]

Not quite, read my post again...you don’t deduct 20% from the gross total. The maths don’t work back that way. It’s 20% ADDED to the net. That equals 15%-16% of the gross.

what you mean by if it’s normal to increase prices...well it’s normal to account for the VAT. But customers (assumedly) aren’t going to accept paying 20% more if your competitors are selling at the same price as you. There’s no benefit to them...

 

[Mr D]

Hi there, Thanks allot for your reply.

yes thats correct I deducted 20% from the example retail price because I would like to keep my retail prices the same when VAT Registered to maintain my competitive advantage against leading retailers (Im aware this will reduce my mark up percentage) in order to do this I will be looking at setting all my current prices to include the VAT

i just wanted to ensure that by doing this i would still remain profitable, Or is it common practice to have to increase retail prices to account for VAT?
-I have established consistent sales with my current pricing strategy and feel that if i increased them by 20% i would have a decline in sales pushing me back below the VAT threshold. Now i have reached it I want to try and at least maintain/scale more.

Regarding my imported bikes, am i right in saying that i can in fact claim the VAT portion of the invoices back once registered? for example my last shipment had the following invoices from my forwarder:

1) DUTY £414 + VAT £1246
2) SALES INVOICE: £1025 (And claim 20% off this sales invoice total?)

Thanks in Advance,
Adam
MotoX1

VAT is an added tax.

What you want for an item - say £10 - you then add 20% to. That's the VAT. So for the buyer its £12, 1/6th of which is VAT and 5/6ths of which is your money to pay your costs.

In reality most businesses are spending and selling in the same quarter and the VAT spent is offset against the VAT collected.
So you don't have to increase your prices by 20% - maybe 10% would work. Maybe less.

Or even you could choose to not change your prices at all and simply cover the VAT payment yourself. Which would be very noble of you but at some point you are going to have to increase your prices - your other costs will tend to over time increase in total.
Regardless you would charge your buyers 20% VAT and would show on invoices say £10 item price £2 VAT no matter what percentage you increased prices by or not.

Government doesn't care - you will be an unpaid tax collector for them regardless while you remain registered.

 

[lesvatadvice]

If you are going to build up your business, register for VAT. There will be some 'pre-registration' input tax which will soften the blow anyway.
Avoid the flat rate scheme, as it will cost you input tax recovery.
And probably avoid cash accounting as you have retail sales.
But, do appoint an Accountant, to cover off all these issues. You will have different procedures from 1 Jan 2021 in relation to import VAT.

 

[Adamcatterall]

Thanks for the replies guys, yes I understand it allot more now. I could not get my head around the calculation! i assumed i could just deduct 20% from my total cost price and that would be the VAT paid but its just the net total isn't it what i deduct from before the VAT is added

Current Retail To Consumer = £576
Net Price Less VAT = 480 (and if you work this back - £480 x 1.2 = back to your retail of £576)
/QUOTE] - The penny dropped here thanks!

Yes I agree, I think at this stage I would feel allot more rest assured appointing an accountant now

Thanks Again, You guys will probably be hearing from me again at some point

 

[Adamcatterall]

Hi Guys sorry i have just been doing some sums to work out by best options for VAT Im torn between the fixed rate and the standard rate scheme... please confirm my workings out as to me it seems that the fixed rate scheme would be much better for me currently unless ive got it completely wrong.

My current figures are as follows
£10704.70 (Vat charged if registered and retail prices remain the same)

£6723.44 (Vat paid available to claim back if vat registered)

£3981.26 ( The difference between the charged/paid payable to HMRC) -

looking at this, the difference paid to HMRC would be around 37% of the charged value...

I have looked at the fixed rate scheme for my industry which falls into 'retail of vehicles and fuel' and this stands at 6.5%, Does this mean that on the fixed rate scheme i would only have to pay £695.80 instead of £3981 (6.5% of the charged VAT?)

 

[STDFR33]

I have looked at the fixed rate scheme for my industry which falls into 'retail of vehicles and fuel' and this stands at 6.5%, Does this mean that on the fixed rate scheme i would only have to pay £695.80 instead of £3981 (6.5% of the charged VAT?)

No.

You charge the customer £100 plus VAT (£120).

You hand over to HMRC £7.80 (6.5% of £120).

 

[Mr D]

The fixed rate scheme should broadly be similar in total to what your normal vat payment would be.
Over time.

Government not usually in the habit of bilking themselves out of considerable sums of money unless there can be backhanders or political capital from the money.

Rough calculation - 6,5 percent gives around 4,174 in vat payable.
The administration is a bit easier.