Q:
I run a small business from home as a Sole Trader and not VAT registered.
When I buy stock from my suppliers I obviously pay VAT but what should happen when I sell the stock on to my customers?
I don’t show any VAT on invoices/receipts but the amount I charge equates to the price I have paid from my supplier, VAT costs plus a little mark-up. Is this correct?
If I don’t include the VAT costs somewhere, surely it is going to be extremely difficult to make a profit.
Do customers expect to pay 15% less if buying from a someone like me who is not VAT registered?
I am very confused….please help?
AW
A:
HI AW
The way that VAT works is that, in principle if you are a business and your “taxable” turnover exceeds the registration limit, which is currently £67,000 a year, you have to register for VAT. The limit applies to any 12 month period – so if your turnover in the year to 28 Feb 2009 was say £70,000, you’d have to register for VAT. You also have to register if your turnover will exceed the registration limit in the next 30 days.
Two further points: first, the limit applies to any business carried out by the “person” – so if you are a sole proprietor running an accountancy firm during the day and a pub in the evening, the registration covers income from BOTH activities. Second, you can also register for VAT voluntarily if your turnover is below the registration limit.
Like everything with tax, there are exceptions to the rule and certain businesses are EXEMPT from VAT which means that they don’t register regardless of their turnover. But if you are buying and selling goods, then chances are your supplies are taxable as the majority of goods are “taxable”. I’d have to know what you are selling to confirm that the sales are “taxable”.
The way that VAT works is that if you are registered for VAT, you claim back the VAT on the purchases and expenses (this is called your “input tax”) and charge VAT on your sales (this is called your “output tax”) and you pay the difference to HMRC when you submit your quarterly VAT return. The effect of this is that the amount of VAT that you pay to HMRC is the VAT that you make on your profit.
If you’re not registered for VAT, you can’t claim back teh input tax on your purchases, so you have to factor this into your budgetting as additional cost. But you don’t charge VAT on your sales.
The best way of showing this is to give an example so you can show how the figures work. Let’s think about something with a recommended retail price of say £17.25 – say a tee shirt.
Assume that you are a VAT registered business and you buy the tee shirt for £10 plus VAT of £1.50 and want to make a profit of £5. You’d sell it for £15 plus VAT of £2.25, ie total sales price of £17.25. On your VAT return, you pay the output tax of £2.25 less the input tax of £1.50. So you pay the net amount of 75 pence to HMRC.
Now let’s consider if you are not registered – a lot of small businesses trade below the registration limit – for example, if your sales are £40k or £50k a year. What this means is that you don’t add output tax to your sales, but you can’t claim back input tax on your purchases and expenses. This means that you have to treat the VAT on purchases as part of the purchase price.
This might seem to be a bad thing, but for small businesses it can actually help as you don’t have to add VAT to any profit. And it makes you more competitive if you are selling teh same goods as VAT registered businesses.
For example, in the case of our tee shirt which costs £10 plus VAT of £1.50, the total purchase price for the item is £11.50 as you can’t claim the VAT as input tax. If you still want to make your £5 profit, you sell it for £16.50.
And this is the important bit – because you’re not registered for VAT, you can sell the item for 75 pence less than a VAT registered business and still make the same profit. Alternatively you could sell the item for £17.25, the same as the VAT registered business, but then you would retain the additional 75 pence as additional profit.
So, as you have rightly concluded, to make a profit, you have to take the VAT INCLUSIVE amount of your purchases and add your mark up to that figure.
If you are buying from someone else who is not VAT registered, they shouldn’t charge you VAT in addition to their sales price, but the VAT that they paid on purchasing the goods will be included as part of their purchase price as they can’t claim it back.
I hope this clarifies things for you. VAT is a difficult subject and we can only ever explain the general principles on the forum. If you want more information, you can have a look at our “Beginners’ Guide to VAT” here on the website. Alternatively, a good starting point is the HMRC Notice “Should I be registered for VAT” which is here http://tinyurl.com/3a4rak on the HMRC website.
Marie