VAT help needed

[Anonymous]

I run on small online business turning over well under the VAT threshold. I resell a digital product and get charged VAT by my suppliers however I currently don’t charge VAT to my customers who are a mix of businesses and consumers. All told I’m losing a few hundred pounds a month as I don’t reclaim the VAT and if I do register I’ll save c. £50 / mth. Is it worth registering just to save this amount? Is there any way around this like putting the web site overseas? Thanks to any replies.

[Marie Stein]

Unfortunately that’s not how the VAT system works! Forgive me if I’m telling you stuff you already know but it sounds as though you have very limited knowledge of VAT so here’s a very brief explanation.

You are correct that under the normal rules, if you registered for VAT, you could recover VAT (ie your “input tax”) on the cost of the discs, plus other business related costs. However you’d also have to charge VAT on the sale of the discs (this is called “ouput tax”) and pay the difference to HMRC.

If you’re selling to businesses who can recover the VAT, then this isn’t a problem as you simply issue them with a VAT invoice. But you’d have to pay the VAT out of your retail price for retail sales. So you have to do the sums to work out whether or not you’d benefit by being registered for VAT.

For example: if you bought a disc for £10 plus £2 VAT (your input tax), and sold it to a business for £15 plus £3 VAT (your output tax), you’d pay the difference of £1 to HMRC. So in effect if you sell to businesses, then the VAT on your sales is charged to them and is no extra cost to you. So you would benefit by being able to recover the input tax.

If you’re selling to private individuals who can’t recover VAT, you’d calculate the output tax as 1/6th of the selling price. For example if your retail selling price is £18, you’d pay £18/6, ie £3. You’d still be entitled to claim the input tax, but you have to remember that the output tax comes out of your gross retail price and can eat away at your profit.

So what you need to do is to work out how much VAT you’d have to pay to HMRC as output tax on your current sales. If your sales are all or mostly to private consumers, then I suspect that you’d end up paying more VAT on your sales than the £50 a month you could recover. Plus once you’re registered for VAT, you have to pay VAT on all of your income which is liable to VAT (ie excluding zero-rated or exempt sales) so this could eat away further at your profit.

Most very small businesses simply don’t bother to register for VAT because any input tax benefit is simply wiped out by the output tax they have to pay. But you have to do the sums to see how it would work in your situation. There are various schemes that might help reduce your VAT liability but I can’t explain them all here. However have a look at HMRC’s Introduction to VAT page here http://www.hmrc.gov.uk/vat/start/introduction.htm for more information on how it works and the schemes that are available for small businesses.

And no, it won’t help to move the website overseas or anything like that. VAT is based on where the goods are sold and if you are buying and selling in the UK, then you are subject to UK VAT rules.

Marie

[Author]

Posts