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  • FIRST POST
    • SamPirul1985
    • By SamPirul1985 26th Oct 17, 10:07 PM
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    SamPirul1985
    Setting up a sole trader bussiness, reclaiming VAT
    • #1
    • 26th Oct 17, 10:07 PM
    Setting up a sole trader bussiness, reclaiming VAT 26th Oct 17 at 10:07 PM
    Hi, I have been reading a bit and still reading on the subject and I think I've almost there in figuring it all out, I thought I would ask to make sure I'm all on track.

    I want to start a small I.T. business in selling pre-built computer systems and components and also providing repair services to my friends and family and obviously grow from there.

    I obviously will not attract customers if my products cost more than the big known places, so my hope is if I buy at excluding VAT and from wholesalers, sell with full VAT and a little under to attract my customers and then finally reclaim that VAT and make the profit from there.

    Now in order to buy from some wholesalers I need to provide a VAT registration number, hence why I need to set up first before I can even actually get going.

    My questions are simply how and if it is actually possible to do this or am I missing something here?

    Secondly, if my business just doesn't go well and I have to just stop, then will they [gov] mistake my business as being some sort of VAT scam and want everything back? Will having all the invoices and customer details be enough? I obviously will only be claiming things that I actually sold so I don't think it will be even a lot. I think I have to build this business and work full time on the side in the long run and so it might not look like it's a viable business to them in that case, but these thoughts are just me being safe than sorry and at the same time making sure I actually have money to stay alive, however it's still worth making sure I have everything I need ready in such an event.
Page 1
    • jamesperrett
    • By jamesperrett 27th Oct 17, 12:36 AM
    • 685 Posts
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    jamesperrett
    • #2
    • 27th Oct 17, 12:36 AM
    • #2
    • 27th Oct 17, 12:36 AM
    I presume you are talking about becoming voluntarily registered rather than having to register due to your turnover...

    It is worth thinking about who your are going to be selling to. If you are selling mainly to VAT registered businesses then it makes sense to become VAT registered as they can reclaim the VAT you charge. If you are selling to private individuals then it doesn't really make sense. Yes, you can reclaim VAT that you have paid but you also have to add VAT to the rate that you charge which effectively puts up the price for individuals.

    While some wholesalers my appear to want VAT numbers for an account application, it would be worth actually speaking to them to see whether they would still accept account applications from a business with a smaller turnover. Many of the big retailers buy in huge volumes and you can't really hope to compete on price with them. Most successful small computer businesses compete on service - they want someone they can call anytime to fix their problem.
    • Tom99
    • By Tom99 27th Oct 17, 1:14 AM
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    Tom99
    • #3
    • 27th Oct 17, 1:14 AM
    • #3
    • 27th Oct 17, 1:14 AM
    I am not sure VAT works that way.

    My understanding is that you hand over to HMRC all the VAT you charge when you sell but offset by the lower amount of VAT you paid when buying parts
    .

    I don't think there is anyway you benefit from the fact you charge your customers more VAT than you pay. Ie HMRC always end up with 20% VAT on the final item price although that may have come in parts from the various companies involved in the build.

    As a sole trader it is better not to be VAT registered because you do not have to charge 20% on everything you sell, therefore you will be able to charge less than your competitor who is VAT registered. You will just absorb the lower amount of VAT you paid on your stock.
    • fishybusiness
    • By fishybusiness 27th Oct 17, 8:28 AM
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    fishybusiness
    • #4
    • 27th Oct 17, 8:28 AM
    • #4
    • 27th Oct 17, 8:28 AM
    I want to start a small I.T. business in selling pre-built computer systems and components and also providing repair services to my friends and family and obviously grow from there.
    Margins are so tight you'll be flogging yourself half to death to make a profit.

    Got out of this industry circa 2010, nothing has changed that I can see except many more people use phones and tablets rather than PC's.
    • 00ec25
    • By 00ec25 27th Oct 17, 11:05 AM
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    00ec25
    • #5
    • 27th Oct 17, 11:05 AM
    • #5
    • 27th Oct 17, 11:05 AM
    you have no idea how VAT works despite you "reading a bit", did your reading include this? https://www.gov.uk/vat-businesses

    if you voluntarily register for VAT (you must register if your turnover exceeds the threshold in a rolling 12 month period - currently £85k) then you must do the following:

    a) add 20% VAT to the price of everything you sell
    b) reclaim the VAT amount shown on the (legitimate) VAT invoice from your supplier for items you purchased. Sometimes you may not be able to claim such VAT as it is either incorrectly shown or you don't have the correct paperwork to allow you to claim it.

    c) pay over to (or reclaim from) HMRC the difference between a - b every 4 months

    so if you are trading profitably you will also be making a net payment to HMRC. If you are trading at a loss you will have a rebate. If you have purchased more than you have sold each quarter you will have a net rebate.

    If you continually have a net rebate each quarter HMRC will (eventually) select you for VAT inspection on the basis you do not appear to be trading with a view to making a profit, in other words you are potentially not a legitimate business at all. If they decide you were doing it purely to extract VAT refunds they will prosecute you for tax fraud.

    You need to learn a lot more about how business works before you have an expensive lesson in dealing with the taxman.

    You cannot possibly expect to buy generic items from wholesalers and expect to be able to sell them to customers for less than the "big boys" sell them at because you cannot buy them from wholesalers at anywhere near the sort of price a wholesaler will sell ,000s of items in a single deal to a "big boy". Little businesses cannot compete on price with big boys, either your business is selling something they are not (extra customer service, expertise, unique/niche product) or your business is working a on a much smaller profit margin than the big boys tolerate because you have considerably smaller overhead costs than they do (no expensive shops costing £,000s in rent and rates) so can operate a "lean" business
    Last edited by 00ec25; 27-10-2017 at 11:26 AM.
    • SamPirul1985
    • By SamPirul1985 27th Oct 17, 2:42 PM
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    SamPirul1985
    • #6
    • 27th Oct 17, 2:42 PM
    • #6
    • 27th Oct 17, 2:42 PM
    you have no idea how VAT works despite you "reading a bit",
    Originally posted by 00ec25
    You cut out the part I also said "and still reading on the subject".. Never claimed to know everything, but it's a bit of a stretch to say I have no idea how it works..

    if you voluntarily register for VAT (you must register if your turnover exceeds the threshold in a rolling 12 month period - currently £85k) then you must do the following:

    a) add 20% VAT to the price of everything you sell
    b) reclaim the VAT amount shown on the (legitimate) VAT invoice from your supplier for items you purchased. Sometimes you may not be able to claim such VAT as it is either incorrectly shown or you don't have the correct paperwork to allow you to claim it.

    c) pay over to (or reclaim from) HMRC the difference between a - b every 4 months

    so if you are trading profitably you will also be making a net payment to HMRC. If you are trading at a loss you will have a rebate. If you have purchased more than you have sold each quarter you will have a net rebate.

    If you continually have a net rebate each quarter HMRC will (eventually) select you for VAT inspection on the basis you do not appear to be trading with a view to making a profit, in other words you are potentially not a legitimate business at all. If they decide you were doing it purely to extract VAT refunds they will prosecute you for tax fraud.

    You need to learn a lot more about how business works before you have an expensive lesson in dealing with the taxman.

    You cannot possibly expect to buy generic items from wholesalers and expect to be able to sell them to customers for less than the "big boys" sell them at because you cannot buy them from wholesalers at anywhere near the sort of price a wholesaler will sell ,000s of items in a single deal to a "big boy". Little businesses cannot compete on price with big boys, either your business is selling something they are not (extra customer service, expertise, unique/niche product) or your business is working a on a much smaller profit margin than the big boys tolerate because you have considerably smaller overhead costs than they do (no expensive shops costing £,000s in rent and rates) so can operate a "lean" business
    Originally posted by 00ec25
    The purpose of my post is to make sure I have all of this done properly so I don't make a mistake and forget to not provide or be able to provide to HMRC when they come asking if in the event my business just doesn't work out or is really slow for the first few years at least. At the end of the day if I convince you of my business plans, nothing changes so I'm not going to bother writing this part out, all I asked is what things must I comply with for the HMRC to feel satisfied and as you said, learning an expensive lesson, I'm asking and learning before I jump in.

    I mean if I have made a pre-built system and sold it to a customer, I have proof of sale, proof of purchase with the VAT invoice of the components, then I think the HMRC should be satisfied after all that this is what I've done. This is my question here, what things am I required, how can I ensure I am doing everything by the books.

    The reason of wanting to be VAT registered is because wholesalers always seem to be asking for VAT numbers, but as someone suggested here in this thread, I can just ask if some are willing to let it pass, but my gut feeling is they won't. The whole point of buying from wholesalers is they are going to give me trade prices, which means I can make more of a profit and undercut as like you said, I have less overheads than say shops and places who sell with more because they are known, trusted brands, for example and they increase their prices by a lot.
    • Tom99
    • By Tom99 27th Oct 17, 2:48 PM
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    Tom99
    • #7
    • 27th Oct 17, 2:48 PM
    • #7
    • 27th Oct 17, 2:48 PM
    I would try and get the discount from the wholesaler without being VAT registered. have some headed paper ready to place an order.

    If you are VAT registered you are going to have to charge your customers 20% on top of your whole bill, not just your componant cost, which will make it expensive for them unless they are also VAT registered.
    • SamPirul1985
    • By SamPirul1985 27th Oct 17, 2:49 PM
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    SamPirul1985
    • #8
    • 27th Oct 17, 2:49 PM
    • #8
    • 27th Oct 17, 2:49 PM
    I presume you are talking about becoming voluntarily registered rather than having to register due to your turnover...

    It is worth thinking about who your are going to be selling to. If you are selling mainly to VAT registered businesses then it makes sense to become VAT registered as they can reclaim the VAT you charge. If you are selling to private individuals then it doesn't really make sense. Yes, you can reclaim VAT that you have paid but you also have to add VAT to the rate that you charge which effectively puts up the price for individuals.

    While some wholesalers my appear to want VAT numbers for an account application, it would be worth actually speaking to them to see whether they would still accept account applications from a business with a smaller turnover. Many of the big retailers buy in huge volumes and you can't really hope to compete on price with them. Most successful small computer businesses compete on service - they want someone they can call anytime to fix their problem.
    Originally posted by jamesperrett
    My hope is to be selling to and working with small businesses mostly, because I think that's where I'll make more of my profits than individuals. I'll give it a go and see if they are willing to accept my small business without a vat number, but lets see.
    • DigForVictory
    • By DigForVictory 27th Oct 17, 3:02 PM
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    DigForVictory
    • #9
    • 27th Oct 17, 3:02 PM
    • #9
    • 27th Oct 17, 3:02 PM
    There is absolutely no harm in trying to buy trade goods at trade prices, but they'll charge you VAT as they expect you to reclaim it. While you are still assembling systems for friends & family & even others there is no point being VAT registered as it just adds 20% to everything you do.

    Once you do hit the threshold, or realise you are going to, then you have to bite the bullet & register & that's where a good accountant can advise you - for example on whether to carry on as a sole prop or to go limited.

    Me, I'd go limited stat just to seperate my personal finances from the business money. As a sole prop, if you sell £100 pounds worth of goods at a car boot, when that money hits your bank account, HMRC won't distinguish between earnings as an IT bod & car boot income. As far as they look at it, every penny in is income, and they'll want their 20%. That you didn't buy the stuff to car boot, that you didn't reclaim any input tax on the stuff? They won't give a hoot.

    If you find yourself ever renting a property even if it is grandma's bungalow, then you get into the murky waters of Partial Exemption and it really is worth going limited to Stay Well Out of that!

    Hoping your idea takes off!
    • NineDeuce
    • By NineDeuce 27th Oct 17, 3:18 PM
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    NineDeuce
    How can you buy without paying VAT?
    • spadoosh
    • By spadoosh 27th Oct 17, 3:20 PM
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    spadoosh
    I dont know why you would register for VAT.

    Lets say you buy £100 worth of parts (£20 you claim back on vat) so £80 cost to you. You sell the good for £200 (£40 charged vat) so £160 to you. Your profit is £80.

    Ok no vat. You buy £100 worth of goods. You sell the goods for £190 (cheaper so more likley, agree?). Your profit is £90.

    If you reclaim VAT you have to charge it. If you charge it your products become 20% more expensive. Whilst your costs might be low with things like rent. I can assure you most companies dont pay 20% on rent. Not to mention they benefit a lot more from economies of scale.

    Your best chance of undercutting them is by avoiding charging VAT as long as you possibly can. Thats how the small guy can compete.

    If i was you i would completely ignore vat until your turnover hits £85,000. Big companies dont make money because they reclaim VAT. In fact it always costs them money, they have to pay to manage it. A VAT registered business is simply a collecting agent for HMRC's money, one which you pay for the privilege.


    I think youre concentrating on things that dont need to be concentrated on tryin gto work out where you will make money. If youre looking for it in VAT you will not find it. If this is to pursue something you enjoy and have money youre willing to lose go for it. If this is to make money, you need to do a lot more reading and work out exactly where you will make money. You started off by saying servicing friends and family (ooo err!) and in your last post youve moved to small businesses. Depending on the nature of the businesses they might not hit the threshold for VAT and if they do the might be vat exempt and thus theres no benefit anyway.

    VAT should be way down the list of your priorities. Having something to sell at a reasonable price that people want to buy should be your priority.

    Have you done a business plan? Cash flows? Research? Marketing? If you answer no to any of them completely forget about VAT.
    Don't be angry!
    • POPPYOSCAR
    • By POPPYOSCAR 27th Oct 17, 3:23 PM
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    POPPYOSCAR
    My hope is to be selling to and working with small businesses mostly, because I think that's where I'll make more of my profits than individuals. I'll give it a go and see if they are willing to accept my small business without a vat number, but lets see.
    Originally posted by SamPirul1985
    Why do they want a VAT no? Have you asked them?

    Many small traders are not registered for Vat.
    • spadoosh
    • By spadoosh 27th Oct 17, 3:33 PM
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    spadoosh
    Why do they want a VAT no? Have you asked them?

    Many small traders are not registered for Vat.
    Originally posted by POPPYOSCAR
    I work for a business that employs 50+ people with a turnover considerably higher than the £85,000, we're VAT exempt. Never had even the slightest issues setting up trade accounts. Never once been asked for VAT numbers. We dont buy computers often though but when we do we use a local computer guy who doesnt charge VAT as he's cheaper. <HINT HINT OP!!>

    In fact i dont think ive ever come across a company that wouldnt sell something to me because they wanted a VAT number. They want the money, they never ever care about the VAT number.
    Don't be angry!
    • POPPYOSCAR
    • By POPPYOSCAR 27th Oct 17, 3:47 PM
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    POPPYOSCAR
    I work for a business that employs 50+ people with a turnover considerably higher than the £85,000, we're VAT exempt. Never had even the slightest issues setting up trade accounts. Never once been asked for VAT numbers. We dont buy computers often though but when we do we use a local computer guy who doesnt charge VAT as he's cheaper. <HINT HINT OP!!>

    In fact i dont think ive ever come across a company that wouldnt sell something to me because they wanted a VAT number. They want the money, they never ever care about the VAT number.
    Originally posted by spadoosh
    Yes, it seems very strange to me as well.
    • Pennywise
    • By Pennywise 27th Oct 17, 4:00 PM
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    Pennywise
    You really do need to have dialogue with the wholesalers. I was approached by a potential client last year who had set up a limited company (because the wholesaler application form asked for limited company registration number) and registered for VAT (because the wholesaler application form asked for VAT registration number). She just "assumed" that these were requirements of the wholesaler and didn't believe me when I said it wasn't and that she'd wasted her time and money and caused herself a lot of stress over it. (It was several months after she'd set up that she finally decided to talk to an accountant.). I know that limited and VAT wasn't required because I had another client who used the same wholesaler who wasn't either. She went away and, yes, they confirmed neither VAT nor limited was an absolute requirement, so we got her company closed down and the VAT deregistered and she now trades as a sole trader, which is where she should have been in the first place.
    • SamPirul1985
    • By SamPirul1985 27th Oct 17, 5:08 PM
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    SamPirul1985
    I've looked at five wholesalers/trade account websites and they all ask for it, some ask for turnover, details of my business, no of employees. I'm not even quite sure why these specifically matter to them and why they specifically ask.

    I haven't asked them, but all their application forms seem to want it, so look, I will go ask, if they don't then great.
    Last edited by SamPirul1985; 27-10-2017 at 5:19 PM.
    • Savvy_Sue
    • By Savvy_Sue 27th Oct 17, 6:11 PM
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    Savvy_Sue
    I've looked at five wholesalers/trade account websites and they all ask for it, some ask for turnover, details of my business, no of employees. I'm not even quite sure why these specifically matter to them and why they specifically ask.

    I haven't asked them, but all their application forms seem to want it, so look, I will go ask, if they don't then great.
    Originally posted by SamPirul1985
    They ask, because if you HAVE these things, they need to know them.

    If you're VAT registered, anyone you trade with will need to know your VAT number - primarily because that's the 'proof' that you are in fact registered.

    If you're a limited company, they may check your registration status before allowing you a credit account. Since you've got no accounts showing yet, they may well not offer you any credit.

    That's two reasons why they ask for these things.

    I fill in all sorts of forms at work - small charity. We are limited, so I can give a company registration no. We also have a charity registration no. so I can give that when asked. We don't have a VAT number so I just leave that blank.

    When VAT registered companies quote for us they often quote us net of VAT, we have to remember that we'll be paying that PLUS 20%, but that's the way they do it. When they invoice us, they show the net price, and the VAT, and the gross price. We pay the gross. We can't claim the VAT back, because we've got nothing to set it off against.

    If I'm trying to open a credit account with a supplier, they can check we file our accounts on time and that we look solvent, at least up to now.
    Still knitting!
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    • 00ec25
    • By 00ec25 27th Oct 17, 8:10 PM
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    00ec25
    You cut out the part I also said "and still reading on the subject".. Never claimed to know everything, but it's a bit of a stretch to say I have no idea how it works...
    Originally posted by SamPirul1985
    what you wrote about VAT says otherwise, however, you have now had it explained so you know how it works now
    I've looked at five wholesalers/trade account websites and they all ask for it, some ask for turnover, details of my business, no of employees. I'm not even quite sure why these specifically matter to them and why they specifically ask.

    I haven't asked them, but all their application forms seem to want it, so look, I will go ask, if they don't then great.
    Originally posted by SamPirul1985
    the fact a wholesaler asks for certain info does not mean they will not accept your custom if you cannot answer all their questions

    if they will only accept VAT registered customers then their application form would very clearly say so to avoid wasting everyone's time
    Last edited by 00ec25; 28-10-2017 at 5:41 PM.
    • motorguy
    • By motorguy 27th Oct 17, 9:24 PM
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    motorguy
    My hope is to be selling to and working with small businesses mostly, because I think that's where I'll make more of my profits than individuals. I'll give it a go and see if they are willing to accept my small business without a vat number, but lets see.
    Originally posted by SamPirul1985
    I think you're about 20 years too late with this business "idea". Selling your own pre-built computers to friends, family and small businesses is a recipe for disaster. I did it about 15 years ago and even then i was too late to the game (probably by about 10 years)

    If you really must persist, i would NOT attempt to VAT register until you have proven that you a high percentage of VAT registered businesses that you are supporting.

    Othewise you basically end up paying 20% VAT on your profit / charges for services.

    Say you buy parts for £300+VAT = £360. Great, you reclaim the VAT so its £300.

    Say you then sell it for £400 to a family member or friend. Well thats a VAT inclusive price so you've actually sold it for £333.33+VAT, so you've to pay the VAT man £66.67 in VAT. So instead of making a headline £100 VAT exclusive price rather than potentially £40 if you bough for £360 and sold for £400, you've actually to give the VAT man £6.67 out of that £40 now.

    You wont be able to compete with the prices that companies sell for off the shelf (as they have vast economies of scale) and people you'll be selling to will believe they are entitled to 24x7 support. Forever.
    You are not special. You are not a beautiful and unique snowflake.
    • motorguy
    • By motorguy 27th Oct 17, 9:27 PM
    • 15,671 Posts
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    motorguy
    I've looked at five wholesalers/trade account websites and they all ask for it, some ask for turnover, details of my business, no of employees. I'm not even quite sure why these specifically matter to them and why they specifically ask.

    I haven't asked them, but all their application forms seem to want it, so look, I will go ask, if they don't then great.
    Originally posted by SamPirul1985
    As a sole trader, not yet VAT registered, no trading history and with very limited buying power you're definitely not going to get a credit account and you're going to get the minimum level of discount.
    You are not special. You are not a beautiful and unique snowflake.
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