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How do we make our catering business viable when the vat you pay Hmrc is so vast?

Hi
We have a catering franchise at a golf club and our 2nd vat 1/4 is upon us & vat will be due once again. Can anybody shed some light on how to make the ratio of payments to Hmrc versus what we can claim back more in our favour? Our last 1/4 we paid over £4k and could only claim back round £400.00!!!!
Surely this ratio is incorrect.?
Continually paying at this rate will seriously affect the viability of our business ?
Any help/ advise welcome.

Thanx

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29th Nov 2011 20:18

Make your pricing work for you ...
I know it seems like a big hit to take, but you have to make your products tasty and valuable enough to your customers to be able to charge more - this is something I can help you with of you like - pricing for maximum profit.

You could also look at the following:

1) are you zero rating cold food sales such as cobs
2) have you looked into the flat rate scheme which can often give you a small advantage over other vat schemes and is more simple to administer

Send me a private message if you want some more advice

David

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29th Nov 2011 21:09

Flat rate

Catering rate is 12.5% of gross turnover which is £3,000 on £24,000 turnover, at the moment you would qualify for 1% discount as you are in your first year of registration, making amount payable £2,760.

However it might not be suitable for you if this quarter does not represent your generally expected quarter, for example if you are expecting to receive large bills for franchise fees with VAT on in the future, or might be making a few individual asset purchases which are under £2,000 alone but still considerable in aggregate.

If you expect every quarter to be like this you would save about £2,500 per year on the flat rate VAT scheme.

Regards

MtF

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29th Nov 2011 21:05

Hi there

If you are providing a catering service then I would probably expect to see the variances that you are seeing.  Presumably a lot of the raw ingredients you buy in (i.e. meat and fruit) are zero rated for VAT so you will not pay VAT on these items, yet when you cook the meat and put it into a sandwich and serve as part of your catering then you have to charge VAT.

It sounds from your opening sentence more like you are providing a third party catering service for the golf club, and as such all of your supplies will be standard rated - even the cold cobs.

I agree with David that you should definitely look into the flat rate scheme - I think the rate is currently 12.5% for catering, so if you are incurring minimal input VAT then you should make a healthy profit on the scheme.

Hope this helps

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29th Nov 2011 21:43

seems to me you are only just over threshold (annualised basis)

You might look at reducing your VAT below £73,000 and that way you can forget about VAT.

You might find you are better off, even though your turnover is lower.

At the moment the VAT is costing you approx. £1,000 per month.

Without knowing the capacity of the operation you are dealing with, this may not be possible, but it is a suggestion.

The other point I would make is why are you registered for VAT now. There is no need to register until your turnover reaches £73,000. You are only on your 2nd quarter and it appears your turnover is around £48,000 - £50,000 to date.

 

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30th Nov 2011 20:47

Definite winner

That didn't even cross my mind, so obvious.  I wonder what his accountant was thinking if he has seen one yet, of course may have purchased a VAT registered business with existing reg no but I guess that is unlikely.

MtF

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Existing Business

You don't have to purchase a registered business and take over their VAT number to be saddled with a VAT registration from day one.

Presumably the golf club would have been running the catering prior to this franchise being created, in which case the new business must look at the turnover of the previous business owner. If that was over the limit, VAT registration must be immediate. The same typically occurs when someone new in business takes over say a public house. There is no period of grace because the trade was VAT registered for the previous owner, whether you take over their registration or not. Presumably the golf club will have been VAT registered but will have to keep their registration for other income still continueing.

 

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30th Nov 2011 11:06

Them's the breaks

Catering is one of these businesses that are basically crippled by the VAT threshold in much the same way as small cafes, hairdressers etc (anyone who's customers can't or won't swallow VAT).

The usual aim of the game is to ensure turnover never exceeds the threshold. There are various ways & means but you have to be careful as many are of dubious legality.  

 

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30th Nov 2011 10:44

Cash accounting?

The VAT you collect isn't yours (sorry, ex C&E head on) so the theory would be that you should have no problem paying it.

If it's cash flow, why not look into cash accounting so that you only pay over the VAT that's been paid to you?

As has been pointed out, you are buying zero rated goods and converting them into a standard rated service (Bog developments notwithstanding). As a result you'll always be paying over a hefty sum as your input VAT is slight (by comparison to other businesses).

Hope that helps a bit.

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30th Nov 2011 20:50

My guess is

Peter Bonetti wrote:

The VAT you collect isn't yours (sorry, ex C&E head on) so the theory would be that you should have no problem paying it.

If it's cash flow, why not look into cash accounting so that you only pay over the VAT that's been paid to you?

As has been pointed out, you are buying zero rated goods and converting them into a standard rated service (Bog developments notwithstanding). As a result you'll always be paying over a hefty sum as your input VAT is slight (by comparison to other businesses).

Hope that helps a bit.

All his goods are paid for at the point of consumption so no debtors thus cashflow isn't the issue, however I believe you are wrong as his prices will be set by his customers in a round about sort of way, and there is no way he could increase them by 20% just because he went over some arbitrary turnover limit.  In short although the money belongs to HMRC he is getting royally screwed all ways.

MtF

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30th Nov 2011 21:50

Cash flow could be an issue

Many businesses use (not unnaturally) any income as available money and so there may be a problem when it comes to paying the VAT bill, it's certainly not unknown.

Everyone's prices are set by their customers in that same round about way and everyone with a similar business in the immediate area will be operating in the same conditions so that won't be unique.

Of course the franchise percentage may be very high. The VAT component of that could well make Flat Rate distorted in that the percentage won't have been calculated with that lump of input in mind.

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Margins

If the business is struggling to pay its VAT then its profit margins are almost certainly wrong.

In a catering business, if you aren't hitting average gross margins of around 65% you'll find that after paying for ingredients that there's not enough left of sales revenue to cover your fixed costs and make a profit.

If you haven't already, cost every item you sell and then change the selling price or ingredients used or portion sizes until you get a gross profit in the required range.

For starters, cost your top 10 selling dishes and get the margin right on them - they're the most important ones.

 

 

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05th Dec 2011 12:08

James is correct

The price will effectively be inclusively of VAT so VAT is in effect a cost when you set your prices. Look at your prices and deduct your VAT and other costs. You need to be making a profit after all your costs including vAT.

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Worked example

Say you're selling a burger and chips for £10.95, the VAT on it is £1.83. This means that £9.12 is "yours". This means that if you his your margin you should have £5.93 for overheads and profits. You therefore have £3.19 to spend on the ingredients.

Play around with your portion sizes, haggle with your suppliers, change your prices, etc until the margin is right.

 

 

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Bambi burger?

Is it just me? or is £10.95 a little deer?

I have to say though that Mr Hellyer does make an exceedingly good point.

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Devon is expensive!

Maybe things cost a lot down here, but £10.95 is a fairly typical price for a two burgers in a bun with some topping and chips. But then again, one of our local carveries charges more for food and drink than the Ivy...

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05th Dec 2011 17:49

Ivy?

The Ivy's prices are very reasonable.

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