A question about VAT

A question about VAT

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I am just looking for some clarification on how VAT actually works.

I am not currently VAT registered, but fear that I soon may have to be due to reaching the fresh hold. I have a question I would like clarification on to help me through this.

Is my understanding of VAT correct.

I purchase a piece of stock from my distributor and it costs me £10 excluding VAT and then sell the item on through my business.

Not VAT registered: Buy for £10 + £2 VAT = £12. Sell for £15 - £12 cost = £3 profit. VAT paid at time of purchase, but not claimed back as not VAT registered.

VAT registered: Buy for £10 + £2 VAT = £12. Sell for £15 - £2.50 (VAT at 20% paid to HMRC) - £10 (item cost)  - £2 (VAT on item cost) + £2 (VAT claimed back) = £2.50 profit. VAT paid at time of purchase and claimed back. VAT paid to HMRC on sale price.

From this it appears that it is far better to not be VAT registered as you lose all your profits in paying the VAT on the higher sale price and can only claim the smaller amount back that you pay on the purchase price. Am I right, if not can someone please explain it to me. Thanks

Replies (13)

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By iavago1
17th Feb 2014 19:27

Your understanding is
Almost there.

Your profit in your example will be £2.50.
Being your net sale price £12.50 less your net cost £10.00.

In the example your profit will be down by 50p because even though you can claim back vat of £2.00 you will have to charge vat at £2.50.

Hope this helps.

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Replying to clark.hall:
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By Marcus_West
17th Feb 2014 19:41

So better off not being VAT registered really?

Seems better not to be VAT registered really? I would make more profit that way wouldn't I?

 

On a larger scale though would it even out when I am then not paying VAT on selling fees like eBay and Amazon and so on and on items for business that I use and don't sell on?

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By WhichTyler
17th Feb 2014 19:31

VAT registered:

Sell for £15 less £2.50 VAT = net income £12.5

Buy for £12 less £2.00 VAT = Net cost £10

Profit £2.50

Yes this is lower because you have not increased your sales price. If you are selling to VAT registered businesses, you could sell for £15 plus £3  VAT, and make a profit of £5

Also if you are registered you will be able to recover any VAT on overhead costs (energy, fixtures & fittings, equipmment, phones etc)

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Replying to SteveHa:
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By Marcus_West
17th Feb 2014 19:38

Still better off not being VAT registered?

WhichTyler wrote:

VAT registered:

Sell for £15 less £2.50 VAT = net income £12.5

Buy for £12 less £2.00 VAT = Net cost £10

Profit £2.50

Yes this is lower because you have not increased your sales price. If you are selling to VAT registered businesses, you could sell for £15 plus £3  VAT, and make a profit of £5

Also if you are registered you will be able to recover any VAT on overhead costs (energy, fixtures & fittings, equipmment, phones etc)

 

I have edited my workings out in the original post now to correct the calculation. I am an online business so don't really have those extra overheads to claim, so not really a benefit to me. But to confirm on the calculation I have shown it is better not to be VAT registered that it is to be VAT registered as I would make more profit when not VAT registered. Have I got that right?

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By WhichTyler
17th Feb 2014 19:51

Hard to tell...

...if it would 'even out' as that will depend on the mixture of costs in your business.

If you are selling to the general public (who can't recover the VAT), VAT registration can seem to be a burden. However:

1. It's the law

2. As your sales increase, you may be able to negotiate better discounts with suppliers, and (hopefully) find it easier to get repeat business, etc. 

So the question to ask is: is it worth giving up market share, just to avoid a marginal loss? Would you rather not have the sales?

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By pawncob
17th Feb 2014 21:23
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Replying to Roella:
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By Marcus_West
17th Feb 2014 23:45

Still don't have to be VAT registered though?

I checked the link, but this is talking about selling EU to countries if you are VAT registered, but in the example I have shown I would not need to be VAT registered from what I understand so these rules on VAT would not apply and I would not have to register for VAT in any other country as I would not be selling good to these countries anywhere near to the value of the threshold required by those countries to register for VAT in them. So for someone who is not VAT registered you just sell to the EU and other countries just like you would in the UK and if VAT registered you treat EU sales like UK sales unless the EU buyer is VAT registered in their country in which case you can zero-rate the VAT of those sales, if you can be bothered with the hastle, otherwise you just charge and pay VAT in the normal way like the UK. This is how I read it, is that right?

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By coolmanwithbeard
18th Feb 2014 07:21

No need to register

See this from HMRC website:

You supply goods or services from the UK to other countries

If you supply goods and services both inside and outside the UK, then you may need to register for UK VAT if the value of your UK supplies alone exceeds the registration threshold.

You don't need to include supplies you make in other countries when calculating your VAT taxable turnover for registration purposes - so leave out of your calculation any goods and services you supply where the place of supply is another country rather than the UK.

 

I would advise having clear records to demonstrate this and if your UK turnover is 75K then you are close so I would advise monthly checks.

 

 

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Replying to ninathomas2000:
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By Marcus_West
19th Feb 2014 06:27

Thanks for that clarification, that is how I interpreted it. I am not that close yet, I only gave that as an example. I will keep an eye on it though.

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By JCresswellTax
18th Feb 2014 09:34

sorry but just couldn't resist flagging

'fresh hold ' instead of threshold :)

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By WhichTyler
18th Feb 2014 11:49

And don't forget...

... that some countries have much lower thresholds than the UK for registration. This may not matter now, but watchout for the changes in rules from Jan 2015

http://www.hmrc.gov.uk/posmoss/index.htm?WT.ac=VAT_POSnov

Also you have not said if you are supplying businesses or retail customers. UK VAT may applicable if supplying goods or services to non-business customers in the EC.

Normally, electronically supplied services supplied in a Member State will be taxable at the standard rate established by a Member State in accordance with Articles 97-98(2) of the Principal VAT Directive (formerly Article 12(3)(a) of the VAT Sixth Directive), unless an exempting provision in a Member State applies.

 

I tsuspect it is time to say: speak to an accountant,,,

 

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Replying to Tim Vane:
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By Marcus_West
19th Feb 2014 06:26

This talks about broadcasting, telecommunications and e-services and that is not my business so I don't think that applies to me.

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By paulwakefield1
19th Feb 2014 09:35

This thread may be useful

https://www.accountingweb.co.uk/anyanswers/question/vat-ebay-sales-do-i-...

And a search of other threads on Aweb might also be worthwhile.

As pointed out above, the place of supply can be in the UK even if dispatching to the EC.

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