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VAT Question
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Excuse me if this sounds a silly question but never having done this sort of thing before I havn`t a clue!
I started a small retail business when I saw a gap in the market. The first week I took £200. I have been running 4 months now and every week double the takings are coming in!! Yippee my plan is working I think??? Anyway, to cut to the chase…my profit marjins are very poor ie: 30%. AM I correct in thinking if my turnoever gets to a certain amount I think it is £70k or something, the government will require 20% of my earnings leaving me with 10%??? If this is the case I see no point in allowing my business to attain this level of income, and will adapt my business hours accordingly. I hope I am wrong as I love my work and also thought about employing someone to help out at weekends.
As I say I apologise is this seems a daft question but if I don’t ask etc! Thanks anyone in advance.
I started a small retail business when I saw a gap in the market. The first week I took £200. I have been running 4 months now and every week double the takings are coming in!! Yippee my plan is working I think??? Anyway, to cut to the chase…my profit marjins are very poor ie: 30%. AM I correct in thinking if my turnoever gets to a certain amount I think it is £70k or something, the government will require 20% of my earnings leaving me with 10%??? If this is the case I see no point in allowing my business to attain this level of income, and will adapt my business hours accordingly. I hope I am wrong as I love my work and also thought about employing someone to help out at weekends.
As I say I apologise is this seems a daft question but if I don’t ask etc! Thanks anyone in advance.
Answers
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You will be required to register and obtain a VAT number when your turnover exceeds £73,000.
At that point *you* commence charging VAT on your goods/services and this is what you forwards to HMRC. However, you will also be able to claim back any VAT you have paid.......essentially you pay the difference between the two figures.
At that point *you* commence charging VAT on your goods/services and this is what you forwards to HMRC. However, you will also be able to claim back any VAT you have paid.......essentially you pay the difference between the two figures.
All you need to know:
http://www.hmrc.gov.uk/vat/index.htm
http://www.hmrc.gov.uk/vat/index.htm
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This site explains it
http://www.hmrc.gov.u.../when-to-register.htm
As has been said, once you register for VAT you must charge your customers VAT and you must keep very good financial records. It might be worth your while looking at an accounting package such as Sage(other software is available).
I believe that some software can produce invoices for you will all the relevant data. Once you are VAT registered all Company documents must include your VAT registration number.
http://www.hmrc.gov.u.../when-to-register.htm
As has been said, once you register for VAT you must charge your customers VAT and you must keep very good financial records. It might be worth your while looking at an accounting package such as Sage(other software is available).
I believe that some software can produce invoices for you will all the relevant data. Once you are VAT registered all Company documents must include your VAT registration number.
Here's how it works (based upon you currently having 30% of your turnover as profit:
You currently pay £70 (including VAT) for your stock. You sell it on at £100, making £30 profit.
Once you're registered for VAT, you'll be able to reclaim the VAT element on your stock purchases. That's £11.67, so your purchase will have actually only cost you £58.33. In order to carry on making £30 profit, you now have to sell your goods for £88.33, but you have to charge VAT on top, making your new price £106.00
If your customers won't stand that price rise, you can continue selling at £100, which will actually be £83.33 for you and £16.67 for the tax man. So your profit will then be £25, instead of £30.
Chris
You currently pay £70 (including VAT) for your stock. You sell it on at £100, making £30 profit.
Once you're registered for VAT, you'll be able to reclaim the VAT element on your stock purchases. That's £11.67, so your purchase will have actually only cost you £58.33. In order to carry on making £30 profit, you now have to sell your goods for £88.33, but you have to charge VAT on top, making your new price £106.00
If your customers won't stand that price rise, you can continue selling at £100, which will actually be £83.33 for you and £16.67 for the tax man. So your profit will then be £25, instead of £30.
Chris
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Phew!! Thanks everyone. Loads to get my head around there!
No factor30, my takings are doubling week after week as I increase my customer base. I can see 100k+ a year in the first year!! At the moment I include the vat in some of my costing at the point of sale allthough I dont show the vat in my workings. My competition which is a mult national sells some of my products at nearly what I can get it for from my wholesalers. An example of this are.....my supplier sells me an item at £1.00 +VAT=£1.20. My main competitor sells the same item at £1.30. I sell it at £1.25. Thats not to say all my sales are at that level its just that I have to keep certain items which are popular sellers at the right price to get my customers in. Most of my profits include the VAT that is charged to me so I cant increase them any more. Hope this makes sense.
Thanks also Buenchico… I guess you are talking about the flat 5% rate there if I am correct? That doesn`t sound that bad a deal really.
No factor30, my takings are doubling week after week as I increase my customer base. I can see 100k+ a year in the first year!! At the moment I include the vat in some of my costing at the point of sale allthough I dont show the vat in my workings. My competition which is a mult national sells some of my products at nearly what I can get it for from my wholesalers. An example of this are.....my supplier sells me an item at £1.00 +VAT=£1.20. My main competitor sells the same item at £1.30. I sell it at £1.25. Thats not to say all my sales are at that level its just that I have to keep certain items which are popular sellers at the right price to get my customers in. Most of my profits include the VAT that is charged to me so I cant increase them any more. Hope this makes sense.
Thanks also Buenchico… I guess you are talking about the flat 5% rate there if I am correct? That doesn`t sound that bad a deal really.
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Dont think so my friend! Ive been in the building trade for 30 years and looked long and hard for this opportunity. I am currently keeping my cards very close to my chest. Just hope my bubble doesnt burst! The best thing about my new work is that I had done it as a hobby for 20 years and didnt realise how much knowledge I had on the subject. My customers prefer buying from me than the internet as they require personal experiences and inside knowledge of my goods. I just need to get my head around the tax situation and then I know how far to go with it. I understand that splitting my products into 2 seperate businesses can sometimes avoid the vat trap. I am thinking of running another outlet with a specific item which accounts for 50% of my turnover. My wife may run this as she is also a business partner.
Those who argue that you are just acting as a tax collector for the government are being a bit disingenuous. If you are running a retail shop then the chances are that the vast majority of your sales are to general members of the public who (unlike other VAT registered businesses) would not be able to recover the VAT that you charge. The prices that you charge for the products will have been calculated so as to maximise income without having regard to any possible VAT element. What I mean is, when you start charging VAT you will not be raising your prices by 20% but taking the hit yourself out of the gross takings based on your existing pricing plan. Or, if you could charge an additional 20% without a net negative impact on sales you should be doing that now anyway, even without having VAT registered.
The good news is that you will be able to recover VAT incurred on business purchases, which you cannot do at present, so the net effect will be mitigated. And there are retail schemes and flat rate schemes to consider which may or may not be to your benefit depending on the numbers.
If your annual turnover is hovering around the VAT compulsory registration threshold it could very well benefit you to shut up shop for a week or two in order to keep under the threshold, but you will have to take into account the commercial impact that (otherwise regular) customers might not appreciate finding the shop closed when they expect it to be open.
The good news is that you will be able to recover VAT incurred on business purchases, which you cannot do at present, so the net effect will be mitigated. And there are retail schemes and flat rate schemes to consider which may or may not be to your benefit depending on the numbers.
If your annual turnover is hovering around the VAT compulsory registration threshold it could very well benefit you to shut up shop for a week or two in order to keep under the threshold, but you will have to take into account the commercial impact that (otherwise regular) customers might not appreciate finding the shop closed when they expect it to be open.
Thank you very much for that answer. I currently am in discussion to take on a partner and I am sure he will bring his own business talents which will assist with this matter. At the moment I purchase approx £1200 of stock a week which I can see increasing at least 20% weekly. I am not sure how much business purchases I need to incur to redeem my 20% back if I become Vatable?
My figures on sales at the moment work like this...I purchase something for £1 and am charged 20%=20p vat from my suppliers. Of course I cant charge VAT but have to include this cost in my mark up. The retail cost will then be £1.20 plus my profit say 40% which bring it to £1.68. Does this approach seem correct?? Thanks again.
My figures on sales at the moment work like this...I purchase something for £1 and am charged 20%=20p vat from my suppliers. Of course I cant charge VAT but have to include this cost in my mark up. The retail cost will then be £1.20 plus my profit say 40% which bring it to £1.68. Does this approach seem correct?? Thanks again.
That's a 40% mark-up, Itsmefolks. i.e. you've added 40% onto what you're paying.
If you want your profit to be 40% of what you sell for, that means that £1.20 must be 60% of your selling price. i.e. to go from your selling price to your purchase price, you'd multiply by 0.6. But you're doing it the other way round, so you need to divide by 0.6 instead.
£1.20 divided by 0.6 = £2.00 (which is what you'd have to sell for to achieve 40% of your selling price as profit).
Chris
If you want your profit to be 40% of what you sell for, that means that £1.20 must be 60% of your selling price. i.e. to go from your selling price to your purchase price, you'd multiply by 0.6. But you're doing it the other way round, so you need to divide by 0.6 instead.
£1.20 divided by 0.6 = £2.00 (which is what you'd have to sell for to achieve 40% of your selling price as profit).
Chris
