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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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.
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)
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?
BUT.......
It's not that simple.
http://www.hmrc.gov.uk/vat/managing/international/exports/goods.htm
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.
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,,,
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.