VAT on stock

Hudson1984

Hi all,

i'm starting a little estore selling hobby products.

all other taxation i'm ok with it's just VAT.

my supplier gives a 35% discount on RRP, however they have listed trade price as;

£xxx/1.2 x 0.65 this indicates that they are selling to me less VAT. I'm a bit confused by this, my turnover isn't going to be in the VAT bracket in year one so I wasn't going to register for VAT but if someone could just explain the system a bit more to me i'd be really gratefull

Buzby

The price you pay is shown ex-vat. However this will be added at 20% on the invoice and you will pay this.

Your VAT status is irrelevant - if you were registered you could reclaim this, but as you're not - it will bump up your pricing.

Hudson1984

ah that's fine I'm aiming to sell at RRP - 20% so the price level is still ok as planned

cheers

StuC75

Your Invoices for stock will still carry vat that you will be charged..

Thats likely to have you operating on a low margin..

E.g. an item with a £100 RRP would cost you (100/1.2 * 0.65) £54.16 + VAT (£10.83) = £65..

You would be selling it at £100/1.2 = £83.33

Is that £18.33 enough to cover your costs & fees to return enough of a profit? (Obviously there is a scale here on the price of what you are selling)..

Hudson1984 wrote: »

ah that's fine I'm aiming to sell at RRP - 20% so the price level is still ok as planned

cheers

Hudson1984

well the profit margin of course would be nice to be higher however to remain competitive 25% discount is pretty set in stone.

This isn't my main employment so doesn't need to generate masses of cash, (would be a dream to grow it into a full time business but I can't see it happening if i'm honest)

So what would you recommend? register for VAT and claim it back?

googler

Hudson1984 wrote: »

So what would you recommend? register for VAT and claim it back?

I wouldn't register for VAT until you have to.

You'll have to complete a VAT return every three months. If your business is in profit, you'll be sending money to HMRC every three months.

For the example above

an item with a £100 RRP would cost you (100 * 0.65) £65 + VAT (£13 approx)

You would presumably now sell at £120 incl VAT/1.2, the VAT element being 20/1.20 = 16 approx. you therefore owe HMRC around £3 for every item like this that you sell in the three months, and have to repeat the process every three months. If I'm not mistaken, you now have less profit.

You need to keep VAT invoices for every sale and VAT receipts for every purchase, and you become an unpaid tax collector.

Hudson1984

yeah that was my thinking. I'm trying to keep outgoings as low as possible and run it as a hobby.

I'd really love to make it full time but when I did it last time I barely broke even (really would need an actual shop to make much of a profit as many games are only available to actual hobby shops rather than online retailers) but I can't give up my day job to risk that sort of thing

StuC75

A few errors in those calculations there..

The £100 RRP already includes VAT (100/1.2 = £83.33 Excl Vat + 16.67 VAT gets back to £100 recommended Retail Price..

The suppliers List Price suggests 35% Discount from RRP (This being the VAT Registered end sellers suggested margin).. so the invoiced price for it bought from supplier is 100/1.2 *.65 = hence £54.16 then VAT of £10.83 is added on to give an Incl Vat cost of £65 supplied... All list prices are always excl of Vat, and the discount has to be off excl vat price since the supplier cannot give a discount against the VAT element..

The Op is intending to sell at 20% below RRP (Since who would actually pay at above RRP by essentially double loading the VAT that googler impies?).. so that brings them down to selling at the £83.33 (standard RRP Less 20% vat)..

vat registration permits reclaiming the amount incurred from the purchase of the goods (since that is still paid) but is offset from the onward re-sale of the item - so reducing the amount of vat that 'you' the middleman has paid in the chain.. since that is ultimately bourne by the end Buyer rather than the sellers at any stage of the process..

googler wrote: »

I wouldn't register for VAT until you have to.

You'll have to complete a VAT return every three months. If your business is in profit, you'll be sending money to HMRC every three months.

For the example above

an item with a £100 RRP would cost you (100 * 0.65) £65 + VAT (£13 approx)

You would presumably now sell at £120 incl VAT/1.2, the VAT element being 20/1.20 = 16 approx. you therefore owe HMRC around £3 for every item like this that you sell in the three months, and have to repeat the process every three months. If I'm not mistaken, you now have less profit.

You need to keep VAT invoices for every sale and VAT receipts for every purchase, and you become an unpaid tax collector.

googler

So that makes it even worse; input/output tax difference is 16.66 - 10.83 = £5.80 on each item sold that the OP will be due to HMRC, subject to any VAT they've paid on any other allowable expenses.

Please feel free to tell me again if my arithmetic is wrong, but I feel the point isn't the exactness of the calcs, more the obligations the OP will have for no reward.

Hudson1984

blimy i'm even more confused now!

My understanding was for £100RRP product i'd pay £65, sell for £80 so profit of £15. is that now incorrect

StuC75

That is correct workings.. but the £15 is gross profit from which you deduct your other costings and fees etc.

As for the confusion that is Vat.

Googler was just miscalculating the excl vat prices & markup wrongly..

With Vat the context is 'who' is paying the tax / vat..

Without being vat registered it would be OP paying the £10.83 when they source the item - so it is in the £65 that they pay..

Once they are vat registered then that £10.83 is essentially reclaimed, and £16.66 is what the end "buyer" would be paying in the £100rrp.

So as vat registered the OP basically becomes the tax 'collector' for the additional £5, by offsetting what has already been paid with the end transaction amount..

And this is what happens throughout the chain of Manufacturer -> Distributor -> Supermarket -> End Customer.. only 20% of the end price is ever paid in Vat (wherever that falls) rather than everyone adding 20% along the way (which would just inflate prices no end!)

Hudson1984 wrote: »

blimy i'm even more confused now!

My understanding was for £100RRP product i'd pay £65, sell for £80 so profit of £15. is that now incorrect