Small Business - Understanding Costs

Keeling1985

Hello,

I have recently started my own business and after countless hours on You tube and the web I am just not understanding how this works in terms of margin and VAT. I have a supplier that is giving me a 60% discount off their list price. 

This is a sample of the costings that I see -


So I get the first 3 lines - the energy surcharge, the NET and the VAT they are charging. So my total cost is 316.80 to pay. So then it adds on the energy surcharge and then the VAT on the customers price which is £336+£33.60= 369.60 + VAT = £443.52.

So if someone can correct me if this next bit is wrong that would be great as this is where my headache starts.

How do I work out my PROFIT MARGIN?
This is the costing that the customers see -



The confusion comes from the customers price as their NET is my total costings including VAT and Energy. Do I take into account that the VAT coming back is part of my margin? 
My VAT is £52.80. Customers VAT is £73.92. So £21.12 difference to be paid to HMRC VAT? As you can't charge more VAT than I have paid.

If someone could clear this up for me that would be great. We aren't really in a position yet to get an accountant so the first few orders will need to go through before that happens. But I just want to make sure I am doing the calculations right

Thanks
Lee

Jeremy535897

As you are VAT registered, you pay any difference in VAT to HMRC, so ignore it. You pay £264, you charge £369.60. Your gross profit is £105.80, which is 40%.

DullGreyGuy

Are you VAT registered if you dont have any customers yet?

If you are then you pay the VAT to the supplier and dont charge your customers and so use the gross wholesale price as the basis of your calculations.

tightauldgit

Your gross profit margin is your sales - costs divided by your sales. Ignore the VAT because that's a wash in the end so use ex-VAT figures.

Your costs are £264
Your sales are £369.60

Your profit is £105.60

Your margin is about 28.5%

Your markup is (as it says in the box) 40% 

Keeling1985

Thanks for all of the replies.

Keeling1985

DullGreyGuy said:

Are you VAT registered if you dont have any customers yet?

If you are then you pay the VAT to the supplier and dont charge your customers and so use the gross wholesale price as the basis of your calculations.

We registered for VAT as we had quite a lot of outgoings to get setup and was advised that by registering we can get the VAT back on things business related. I am under the impression that by registering and claiming VAT back we are in a position regardless of the 85k threshold to charge VAT when selling? Is this correct? 

Jeremy535897

Yes, once registered for VAT you charge VAT whatever the level of your taxable supplies.

MobileSaver

Keeling1985 said:

DullGreyGuy said:

Are you VAT registered if you dont have any customers yet?

If you are then you pay the VAT to the supplier and dont charge your customers and so use the gross wholesale price as the basis of your calculations.

We registered for VAT as we had quite a lot of outgoings to get setup and was advised that by registering we can get the VAT back on things business related. I am under the impression that by registering and claiming VAT back we are in a position regardless of the 85k threshold to charge VAT when selling? Is this correct? 

As @Jeremy535897 says, regardless of whether you are above or below the £85k threshold, if you are VAT registered then you have to charge VAT on everything you sell and you can claim back any VAT you pay on valid business purchases. Every time you do a VAT return you then pay or reclaim to/from HMRC the difference between the total VAT you have charged and the total VAT you have paid.

So essentially the VAT part of what you charge customers is never really your money, you are just collecting and holding on to it on behalf of HMRC. This is why you ignore VAT for profit purposes as it is a separate line in your accounts on your balance sheet and has nothing to do with your profit and loss account.

So, as said, when working out your profit margin simply ignore the VAT and pretend it is zero.