Voluntary VAT Registration to SAVE money?

FoxyGuyHawoo

Hi, I want to set up my own business. As yet, what l'm about to describe is entirely theoretical. Without being too prolix:

I have a VAT registered supplier quoting me 100 bicycles (minimum order) @ £40 each EXCLUDING VAT. He got them as scrap or something. What he did was he changed the bicycle seats (they were attracting vermin). What l mean is: he gave them a small upgrade to make them saleable again.

Now, l figured out that if l buy them at that price, l can coat the handles in leather (quality unicorn leather ofc - l got a good source on the stuff) and sell the bicycles to the general public for a markup on the online shopping site U-Bay. I will make £10 profit.


THE PROBLEM:

The supplier made £15 worth of upgrades for each bicycle (mainly a new seat).
He is selling them for £40 each ex. VAT.
I am not VAT registered. The cost to me per bicycle would become £48 inc. VAT therefore (@ 20% VAT).

If l am to pay an extra £8 (£48-£40 = £8 VAT) then my profit per bicycle becomes £2 (£10-£8), and this would make the business untenable.


MY PROPOSED SOLUTION:

I get VAT registered, voluntarily, despite a projected income of £10,000 p/a.
Buy the bicycles @ £40 each.
Sell them for the standard price l would have sold them had l been non-VAT registered, i.e. £X.

£X is the same whether l'm VAT registered or non-VAT registered. On U-Bay, that is the typical sale price for a bicycle.

If l start off as VAT registered, the selling price will merely be 80% of £X, but of course l will then add 20% VAT to bring the selling price up to £X precisely. My profit will be £10.

If l start off as non-VAT registered, the selling price will be 100% of £X, i.e. £X precisely. My profit will be £2.


Is there anything wrong with this reasoning? Any laws potentially being broken?



Another twist:

Apparently there is such thing as a Margin Scheme. And l don't know if the matter is related but apparently also, you don't need to pay VAT twice, as would be the case with secondhand goods?

More on the Margin Scheme: in this scheme, VAT is levied on the profit of my supplier, not the full item cost to me. As l've mentioned, the supplier makes £15 of upgrades to each bicycle. But what l didn't mention was, his profit when supplying to me is £20 per bicycle.

Under the Margin Scheme, he would have to add £4 VAT per bicycle (instead of the £8 VAT l had calculated earlier, when l thought VAT was being charged on the entire cost to me). Thus, he is selling bicycles to me @ £44 inc. VAT per bicycle - IF l am not VAT registered.

Under the Margin Scheme:

If l start off as VAT registered, the selling price will merely be 80% of £X, but of course l will then add 20% VAT to bring the selling price up to £X precisely. My profit will be £10.

If l start off as non-VAT registered, the selling price will be 100% of £X, i.e. £X precisely. My profit will be £6.


£6 profit would still be untenable, so l would need to start off as VAT-registered, right?

And what of the Margin Scheme then? Would l need to charge the VAT only on my profit of £10?

How exactly does this Margin Scheme thing work?

Are there any better alternatives to the Margin Scheme that l can select?

Also, am l right in thinking that even if l am VAT registered and under the Margin Scheme, l would still have to buy stock at the VAT markup, and sell it at the VAT markup, and then claim it back at the end of each quarter? The exception being that under the Margin Scheme, the VAT markup will be based on my supplier's profit, and my profit when l sell on U-Bay?

I was basically told to go off and read the website instead, when l tried to raise these questions with HMRC, and l had waited ages on the phone (twice) as well. However, l don't understand what l'm reading on the HMRC website.

paddyrg

Cost of bike £40+VAT - you pay £48. The suppliers profit is none of your business, the price is £40+VAT.

If you're not registered, and sell for £50, profit is £2
If you are registered and sell for £50, (£41.67 + VAT) profit is £1.67 (you claim back the VAT you paid, but have to charge it in return)

FoxyGuyHawoo

Thanks for your swift reply paddy, l'm going to mull over the figures, l'm suffering from a mental block on this issue somewhere but my eureka moment where l finally get everyone's drift is sure to come soon.

Btw, under the Margin Scheme, surely my supplier's profit does come into play?

FoxyGuyHawoo

Btw, more responses to augment what paddyrg wrote, are welcome

Mistral001

Have you actually been give a quotation in writing for £40 plus VAT with the seller's VAT No. name and address on the quotation as well?


Sometimes people who are not VAT registered will casually quote a price and say that it is ex VAT meaning that there is no VAT.

paddyrg

Looking at the margin scene for secondhand goods, and I admit I'm no kind of VAT expert, I don't see where your supplier's profit comes into it, only yours (and you are taxed at a sixth of it, which seems pretty good deal for you!)

FoxyGuyHawoo

@ Mistral: It's all theoretical

FoxyGuyHawoo

paddyrg wrote: »

Looking at the margin scene for secondhand goods, and I admit I'm no kind of VAT expert, I don't see where your supplier's profit comes into it, only yours (and you are taxed at a sixth of it, which seems pretty good deal for you!)

Well, the supplier quoted me his price, plus VAT on the profit. He let slip his profit, and as far as l can see, he seems to be basing this on the Margin Scheme which l learnt about a few hours after hearing his price quote with & without VAT (this part is actually based on reality but it's only to answer your previous question). What l mean is:

his quote inc. VAT

appears to be

{his quote ex. VAT + [the VAT on his profit] }.


That sounds like the Margin Scheme being applied on him.

Now, considering l will save £1.50 if l use P&P where the P&P is ex. VAT, and also the £4 cheaper stock price (£40 rather than £44) if l buy whilst VAT registered, and considering that l still sell for £X anyway, is it going to be better for me to start off VAT registered?

The arithmetic is probably obvious to you but anathema to me. Ofc l can get precise figures by setting up a spreadsheet but l just want to know if l have grasped the basic principles first.

FoxyGuyHawoo

Thing is - hardly anybody advises to get VAT registered from the get-go, yet by my logic, everyone should get VAT-registered from the outset. So therefore l must be missing something in my reasoning.

See you chaps tomorrow, l'm sleeping now. I look forward for further input from you.

zygurat789

FoxyGuyHawoo wrote: »

Thing is - hardly anybody advises to get VAT registered from the get-go, yet by my logic, everyone should get VAT-registered from the outset. So therefore l must be missing something in my reasoning.

See you chaps tomorrow, l'm sleeping now. I look forward for further input from you.

If you are going to sell to VAT registered customers you should register ASAP, your VAT registered status will make no difference to them as they will claim the extra 20% VAT you have charged them back from HMRC.
If you sell to none VAT registered customers ie the general public, you should register as late as possible, they will have to pay your VAT and will not be able to claim it back; therefore your price will be higher and you will sell less than a non-VAT registered trader.

martindow

FoxyGuyHawoo wrote: »

Well, the supplier quoted me his price, plus VAT on the profit. He let slip his profit, and as far as l can see, he seems to be basing this on the Margin Scheme which l learnt about a few hours after hearing his price quote with & without VAT (this part is actually based on reality but it's only to answer your previous question). What l mean is:

his quote inc. VAT

appears to be

{his quote ex. VAT + [the VAT on his profit] }.


That sounds like the Margin Scheme being applied on him.

Now, considering l will save £1.50 if l use P&P where the P&P is ex. VAT, and also the £4 cheaper stock price (£40 rather than £44) if l buy whilst VAT registered, and considering that l still sell for £X anyway, is it going to be better for me to start off VAT registered?

The arithmetic is probably obvious to you but anathema to me. Ofc l can get precise figures by setting up a spreadsheet but l just want to know if l have grasped the basic principles first.

If you are registered for VAT you charge VAT on your sales but that it set off by the VAT on your expenses. Your supplier in effect pays VAT on his profit.

For you though that is unimportant as he will be charging 20% VAT on his sales. How profitable he is doesn't come into it.

If you register for VAT you will be paying HMRC each quarter. If you are not, your business is probably making a loss!

Selling to the public as opposed to VAT registered companies it is usually advised to hold off registering until you reach the threshold of around £80k and are forced to get involved with VAT.