Is VAT Registration Worth It for a Sole Trader Selling Used Items Under the VAT Margin Scheme?

[Deleted User]

A bit of advice please .

As a non-VAT registered sole trader, I'm finding that I have to turn down profitable deals to stay below the VAT threshold. 

For example, I recently had to turn down  a deal involving four items worth £20k in total, worth around £24-25k as a

few deals like this would push me close to the VAT threshold, yet I would "only" have made £20k before costs and taxes .

Currently, I have to try and maintain at least a 30% profit margin on my sales to stay under the VAT limit and make a living wage, 

which is challenging when postage costs can account for a third of my turnover. 

 The other issue is my competition is from sellers working with 10-15% margins

 but turning over £300 - 500k - often set up as limited companies with them / partner as directors .  I spoke to a few who said

they signed up to the VAT margin scheme and only pay 20% of their profit - is this all in or do the still have to pay taxes on their profit aswell?

I know there is alot more paperwork and costs involved but struggling at the moment working 7 days a week  

and earning way less than minimum wage if i added up the hours I put in ...

DullGreyGuy

So you are selling secondhand items? I assume you do mean the marginal scheme and not the flat rate scheme? 

Under the marginal scheme you pay 16.67% VAT on the difference between your purchase price and your sale price, you cannot claim back VAT on any purchases or expenses. You would obviously still pay your personal taxes on your now reduced profits. 

If you incorporate then you pay the VAT still, you pay between 19% and 25% corporation tax on profits and then any money you take out the company you have personal tax to pay... depending how you take it out may lower profits so lower corporation tax or your personal tax may give some credit for the corporation tax paid. 

If you are selling £89,000 and have the option to increase it to £91,000 then generally not a good idea if the market won't accept higher prices. If your turnover would have been £300,000 but you've intentionally turned down sales to keep at £89,000 then clearly thats a bad idea. 

[Deleted User]

DullGreyGuy said:

So you are selling secondhand items? I assume you do mean the marginal scheme and not the flat rate scheme? 

Under the marginal scheme you pay 16.67% VAT on the difference between your purchase price and your sale price, you cannot claim back VAT on any purchases or expenses. You would obviously still pay your personal taxes on your now reduced profits. 

If you incorporate then you pay the VAT still, you pay between 19% and 25% corporation tax on profits and then any money you take out the company you have personal tax to pay... depending how you take it out may lower profits so lower corporation tax or your personal tax may give some credit for the corporation tax paid. 

If you are selling £89,000 and have the option to increase it to £91,000 then generally not a good idea if the market won't accept higher prices. If your turnover would have been £300,000 but you've intentionally turned down sales to keep at £89,000 then clearly thats a bad idea. 

Thanks for taking the time out to respond ,  I have figured my turnover could be increased easily to  around £130-140k with an additional approx  10 -  15k profit  a year  but always been put off by worrying that the VAT / Paperwork / accountacy would eat alot of this up... if I could try for one tax year and see what happens that would be great but heard once you are registered it can be a nightmare to get out of ..  

DullGreyGuy

[Deleted User] said:

DullGreyGuy said:

So you are selling secondhand items? I assume you do mean the marginal scheme and not the flat rate scheme? 

Under the marginal scheme you pay 16.67% VAT on the difference between your purchase price and your sale price, you cannot claim back VAT on any purchases or expenses. You would obviously still pay your personal taxes on your now reduced profits. 

If you incorporate then you pay the VAT still, you pay between 19% and 25% corporation tax on profits and then any money you take out the company you have personal tax to pay... depending how you take it out may lower profits so lower corporation tax or your personal tax may give some credit for the corporation tax paid. 

If you are selling £89,000 and have the option to increase it to £91,000 then generally not a good idea if the market won't accept higher prices. If your turnover would have been £300,000 but you've intentionally turned down sales to keep at £89,000 then clearly thats a bad idea. 

Thanks for taking the time out to respond ,  I have figured my turnover could be increased easily to  around £130-140k with an additional approx  10 -  15k profit  a year  but always been put off by worrying that the VAT / Paperwork / accountacy would eat alot of this up... if I could try for one tax year and see what happens that would be great but heard once you are registered it can be a nightmare to get out of ..  

The whole purpose of the marginal and flat rate schemes is to make VAT a lot less of a headache... the first is 1/6th of the difference between what you paid for it and what you sold it for, the second is a fixed percentage of what you sold it for (percentage depends on a combination of your trade and having minimum expenses). 

It gets more complex if you use traditional VAT method and sell a variety of things and some are on discounted rates or exempt goods etc but its just more book keeping... rather than recording you bought a widget for £12 you have to record it was £12 gross, £10 net, £2 VAT

[Deleted User]

Thanks again for taking the time out to respond...

After doing some more reading I may have to go down the Vat marginal scheme as I am really being held back by the VAT limit (currently under by around 5k a year ) but struggling to justify the hours I put in to make more than minimal wage .

I buy from a auctions and shops mostly musical instruments , used cameras and music memorabilia  who have added the VAT mostly would I still be able to use the scheme or is for only when buying from non vat paying sources ? 

 Also could I claim Mileage allowance still as I do alot of driving at around 12k a year ?


and the VAT back  costs like Ebay fees - postage - fuel

if so it would not be so bad even though I would have preferred them to raise the VAT threshold inline with inflation .

thanks again
 

DullGreyGuy

Can't claim fuel and mileage allowance

The marginal scheme replaces being able to claim the VAT back hence you are only paying 16.67% on the markup rather than the normal 16.67% of the total sale value, this delta represents the VAT you'd otherwise had been able to reclaim. 

Sometimes its worth doing the sums as to if the marginal system or the traditional system works out better for you even if its more paperwork