Starting own business - advice needed please!

orangeslimes

schneckster wrote: »

Let me put it like this...

If you view like your customer...
£2300 out and £3000 in. VAT is £300 and £391. So you've paid 2300 and will get back £3000, of which you need to pay £391 to VAT man. So that leaves you with a profit of £309.

If you view it like a business, you pay out £2000 and get back £2608. So that's £608 profit. And then from the £391 VAT you get in, you claim back the £300 you paid out leaving a VAT bill of £91. Since the VAT you take in comes in with the £2608, you haven't got to find any more cash, anyway, so why worry about it? What it also means is that from the £3000 inc VAT you take in, only £91 is going to the taxman on VAT... so cash income from all of this leaves you with £2919 - £2000 which is £919 profit in your bank account, but only £608 taxable profit.

I just spent quite a long time puzzling over this and think you are wrong. Once you have paid your VAT bill you would be left with £608 in your bank account...
£3000 - £91 = £2909 (not £2919)
and you need to deduct the gross cost of the purchase not the net so
£2909 - £2300 = £609

that as far as I can see it right and there is no other way of looking at it (please correct me if i am wrong)

If you weren't VAT registered you would be left with £700

And of course, fuel to go to the wholesaler, admin, phone bills, sales costs (Ebay fees, etc) all attract VAT so that £91 VAT gets even smaller.

True - although fuel isn't that straightforward as there are different ways to deal with it - i.e. depending on the circumstances you can do it on a mileage basis, or receipts basis and if there is personal use of the car may need to include a fuel scale charge

Personally, I can't see why you wouldn't go VAT registered, but then, that's just me.

Why would you want to pay an extra tax you don't have to? Might be some situations where it is worth it but generally if you are just starting up probably not. Though it is true that it may add to your credibility as a business. Are you selling to other businesses who might expect/like you to be VAT registered?

schneckster

£3000 - £91 = £2909 (not £2919)

I did that sum in my head whilst in desperate need of caffiene, so fair cop!

I just spent quite a long time puzzling over this and think you are wrong. Once you have paid your VAT bill you would be left with £608 in your bank account...

This goes back to what I said about thinking like a business, not a consumer.

You pay £2000 + £300 VAT... bank account now = £0
You receive £2609 + £391 VAT... bank account now = £3000

The profit on the purchase is £2000 - £2609 = £609
Your VAT bill is £391 - £300 = £91
Where do you think the rest of the £391 goes after you pay the VAT? Yep! Your bank account! That's the VAT you paid out in the first place and HMRC doesn't want it. So your bank account now = £2909.

Doesn't help your bottom line profit in your books, but it is an extra £300 in your bank account you wouldn't normally have. And besides, if you're self employed, you don't want large profits as that produces large income tax on your self assessment.

And as for VAT being an extra tax you have to pay... you're not paying it! Your customer is. You're merely collecting it for HMRC and passing it on. But your customer can't claim back the VAT they pay. You can.

When you look at it like this, and see the extra money in your cashflow, I find it very difficult to justify not being VAT registered.

I hope this helps,

Schneckster

jo_b_2

sophie131 wrote: »

Hiya!
I'm looking to open an online shop. Ideally i'd love to open a real shop at some point but I don't feel it's sensible at the moment.
I'd be buying from a wholesalers and selling on, doing it all myself.
So here's the question:
How do I register as a business!? I've looked it up, but it's all quite confusing e.g what type of company would I be (limited etc). I don't have any idea how to go about it really.
Any help would be really appreciated!
Thanks!

Hi sophie131

There's actually a 'Small Business' board on MSE, so I've moved this thread over there where you might find some more useful advice about setting up your own business.

A quick browse on this board brought this to my attention; 'a course run by HMRC aimed at new small businesses and all free of charge.
www.hmrc.gov.uk/bst
they tell you what records you need to keep, when you will get your first bill and how much to put away each week to cover it.' Might be useful for you.

Martin’s asked me to post this in these circumstances: I’ve asked Board Guides to move threads if they’ll receive a better response elsewhere(please see this rule) so this post/thread has been moved to another board, where it should get more replies. If you have any questions about this policy please email [EMAIL="abuse@moneysavingexpert.com"]abuse@moneysavingexpert.com[/EMAIL]

orangeslimes

schneckster wrote: »

This goes back to what I said about thinking like a business, not a consumer.

You pay £2000 + £300 VAT... bank account now = £0
You receive £2609 + £391 VAT... bank account now = £3000

The profit on the purchase is £2000 - £2609 = £609
Your VAT bill is £391 - £300 = £91
Where do you think the rest of the £391 goes after you pay the VAT? Yep! Your bank account! That's the VAT you paid out in the first place and HMRC doesn't want it. So your bank account now = £2909.

sorry to have an argument about maths but you are wrong !

say that your opening bank balance is £0.00
1.) Buy goods hand over £2300. Bank balance now -£2300
2.) Sell the goods for £3000 total. Bank balance now £700 (-2300+3000)
3.) Calculate figures for the VAT return
Vat outputs: £391
Vat inputs: £300
VAT due £91
4.) pay VAT bill of £91. £700-91 = £609.00

In fact if you think of it as a business like you suggest and just ignore the VAT and look at the net figures
1. buy goods - £2000 net
2. sell goods - £2609 net
profit = £609

I think you are forgetting that you still have to hand over the £300.

Also yes having large profits mean you have to pay more tax- but they also mean that you have earnt more money to spend on fun things (or the mortgage)...

moneypooh

The key to tax and VAT is to keep your records up to date all the time. With simple spreadsheets being done regularly it can take a few minutes to add and subtract columns. It can really be that simple.

marco21st

Expecting you either ignore me or call me stupid...

Anyone giving away a hint what would be a good idea to sell on ebay?:eek:

kennyboy66_2

schneckster wrote: »

And as for VAT being an extra tax you have to pay... you're not paying it! Your customer is. You're merely collecting it for HMRC and passing it on. But your customer can't claim back the VAT they pay. You can.

When you look at it like this, and see the extra money in your cashflow, I find it very difficult to justify not being VAT registered.

I hope this helps,

Schneckster

If you are under the threshold, it really only makes sense to be registered, if almost all of your customers are VAT registered.

If what you supply is something where a lot of your labour has gone into it, say a painter and decorator, and your customers cannot claim VAT back, it would be utter madness to register for VAT while under the threshold.

schneckster

sorry to have an argument about maths but you are wrong !

say that your opening bank balance is £0.00
1.) Buy goods hand over £2300. Bank balance now -£2300
2.) Sell the goods for £3000 total. Bank balance now £700 (-2300+3000)
3.) Calculate figures for the VAT return
Vat outputs: £391
Vat inputs: £300
VAT due £91
4.) pay VAT bill of £91. £700-91 = £609.00

Your maths is right.... however, as you can see in my previous post I made the reasonable assumption you had £2300 in your account to start with to cover the initial outlay. In which case, my maths was not wrong.

In fact if you think of it as a business like you suggest and just ignore the VAT and look at the net figures
1. buy goods - £2000 net
2. sell goods - £2609 net
profit = £609

I didn't dispute that but now add the VAT in like a business would. The £300 in VAT you pay out, you get back from the £391 VAT you get in sales. Please read again.

I think you are forgetting that you still have to hand over the £300.

And I think you're forgetting you get that £300 back when you sell the goods.

Look, my whole point was not that of an accountant. It was that of a small business where cash is sometimes a rare commodity. LDV went bust not because they didn't have a business (they had full order books) but because they had no cash.

Your way: £2300 out, £3000 in, profit £700. Cash = £700
My way: £2300 out, £3000 in, VAT out £91, VAT back £300, profit £609. Cash = £909

Your way: taxable profit £700
My way: taxable profit £609, cash in bank still £909

From an accounts point of view, yes it's an added tax.
From a cashflow point of view... why wouldn't you?

We can agree to disagree, but I know which I'd prefer... and my loan rate is 15% ;o)

Schneckster

orangeslimes

schneckster wrote: »

Your maths is right.... however, as you can see in my previous post I made the reasonable assumption you had £2300 in your account to start with to cover the initial outlay. In which case, my maths was not wrong.
I didn't dispute that but now add the VAT in like a business would. The £300 in VAT you pay out, you get back from the £391 VAT you get in sales. Please read again.

And I think you're forgetting you get that £300 back when you sell the goods.

Look, my whole point was not that of an accountant. It was that of a small business where cash is sometimes a rare commodity. LDV went bust not because they didn't have a business (they had full order books) but because they had no cash.

Your way: £2300 out, £3000 in, profit £700. Cash = £700
My way: £2300 out, £3000 in, VAT out £91, VAT back £300, profit £609. Cash = £909

Your way: taxable profit £700
My way: taxable profit £609, cash in bank still £909

Schneckster

No - you don't get £300 back - you offset it against the £391 VAT charged on your sales.

Non Vat registered:
£2300 out £3000. You would end up with £3000 in bank if start with £2300 £700 profit (3000-2300)

VAT registered:
1. start with £2300 in bank like you suggest (it makes no difference to end result)
2. spend £2300 on goods. Account balance = £0
3. sell goods for £3000. Account balance = £3000
4. Calculate VAT - outputs (on sales) £391
- inputs (on purchases) £300
Bill = £91
YOU DO NOT GET BACK ANOTHER £300 - you offset set it against the VAT charged on your sales.
5. You pay £91 you end up with £2909.
profit £609 (2909-2300)

In this example you always end up with £91 more when not VAT registered and it doesn't help cashflow. But I think should draw a line under this argument and you can think I am wrong if you want.

sss555s

moneypooh wrote: »

The key to tax and VAT is to keep your records up to date all the time. With simple spreadsheets being done regularly it can take a few minutes to add and subtract columns. It can really be that simple.

kennyboy66
If you are under the threshold, it really only makes sense to be registered, if almost all of your customers are VAT registered.

If what you supply is something where a lot of your labour has gone into it, say a painter and decorator, and your customers cannot claim VAT back, it would be utter madness to register for VAT while under the threshold.

Thanked the above as i agree with them.


Kenny is right that as long as your turnover is less than the threshold you would be best to not register for VAT as it only really works if the seller and customer are both VAT reg.

For people selling to VAT reg customers your better to register for VAT otherwise your not as competitive as your rivals....


Vat reg

Purchase £2000 + Vat (300) Sell £3000 + Vat (450) £1k Profit

You send the difference in the Vat you paid and the Vat you received (£150) to HM and your customer reclaims the Vat you charged them from the Vat in their income meaning it only costs them £3k and you clear £1k profit.


Not Vat reg

Purchase £2300 Sell £3000 £700 Profit

To compete with the vat reg company above you have to sell for £3000 because if your not Vat reg then your customer can't claim any Vat back making it the same cost to them as the Vat reg company's price and cutting your profits to £700


Clear as mud