64,000 VAT Threshold question – Self Employed Sole Trader

alanpartridge_2

I have a tax question I didn’t know where to ask:

64,000 VAT Threshold question – Self Employed Sole Trader

I am researching the details involved setting up a small business, it would be just me and I would be a Sole Trader (not a limited company at first, although I would reserve the business name with company house).

I know I would have to register as a Self Employed sole trader with the Inland Revenue and pay Class 2 NI contributions (£2.20 a week if yearly profit is over £4,635) & Class 4 contributions (8% of yearly profits if they are over £5,435).

I don’t think I would have to pay Corporation Tax (20% of yearly profits) as I would not be trading as a limited company at first (I would be a sole trader).

The one thing that is still confusing me a bit is the Value Added Tax issue, every place I look for more info seems to be confusing and badly explained even on the inland revenue website.

My business would be selling computers which I build with parts I buy from UK suppliers (which include standard tax) and I would be selling in the UK only.

I know that if my ‘taxable turnover’ in a year is over £64,000 then I have to charge VAT in my sales (and be VAT registered). But I am not sure in my case what ‘taxable turnover’ actually is!

Theoretical Example:
Say I build a computer for £200 (exact cost of parts I bought) and sell it for £300 which gives me £100.
£30 of that £100 pays for other expenses produced by the sale such as postage & packing cost plus a transaction fee on accepting credit cards, which leaves me with £70 profit in the end. If I sell 2 of these computers a week (104 a year) then what is my taxable turnover for that year?

a)[FONT=&quot] [/FONT]My profit would be: 70 x 104 = £7,280
b)[FONT=&quot] [/FONT]The amount of money coming through my hands would be: 300 x 104 = £31,200
c)[FONT=&quot] [/FONT]The amount spent on stock would be: 200 x 104 = £20,800
d)[FONT=&quot] [/FONT]The amount spent on stock and expenses would be: 230 x 104 = £23,920

Is one of these my taxable turnover? Or can anyone explain a bit better?
Also the VAT threshold would still apply to me as just a sole trader (and not a limited company) right?

Any info would be really helpful and much appreciated, any ideas anyone?

nickmoul

Sorry but taxable turnover = Sales. In your first example you said "sell for £300" thats your taxable turnover.

Remember VAT is a tax on your profit really, ie

(sell + vat) - (cost + vat) = vat to pay. Any vat on cost and business exes is deductable.

You should take advice about whether to be a Ltd Company, it used to be a better bet, but now its not so clear. You can buy a Company ready made for under £100 on the Internet and it protects your private assets (eg home) if anything goes wrong.

Best of luck, you're going into a tough sector, make sure you search out a niche (eg high performance PC's) to make you own.

Nick

Pennywise

I see that you mention corporation tax which is of course only for limited companies, but you don't mention income tax which is payable by sole traders. If your total taxable income (including profits) is over the personal allowance threshold, then you pay 20% income tax as well as both class 2 and 4 NICs.

alanpartridge_2

So my taxable turnover in this example would be 300 x 104 = £31,200 (point right?, even though that £300 isn’t real profit only £70 of it is.

(thanks for sorting out my understand of taxable turnover…..hopefully!)

Now how would the example I used (all the figures are there) work if I was VAT registered? (imagining I am selling 5 computers a week, to go just over the 64,000 threshold) (please anyone help!)

You said: (sell + vat) - (cost + vat) = vat to pay, but what do you mean by “sell + vat” (doesn’t help me really) is it A, B or C?

Which of these is right (I thought it was A):
a) Add 17.5% to £200 (cost of parts bought)
b) Add 17.5% to £300 (my sale price including £30 expenses & the £70 that was my profit)
c) Add 17.5% to £230 (cost of parts & all expenses)

I can only understand a formula once I have seen an example put through it, otherwise my brain gets lost defining the variables.

My supplier says that the amount of VAT (my input tax) in that £200 stock order would be £29.82.
Can anyone give an example using my figures? Pleeeeeeeeeeeeeeeease !

NOTE about pennywise’s post:
I thought Class 4 NI contributions were “Income Tax” but obviously I was wrong (or just forgot). So are you saying if I am a sole trader I pay 20% income tax (plus NI contributions) and if I am a limited company I pay the same 20% income tax & another 20% Corporation Tax (plus NI contributions) ?

I swear these complicated rules are only made so we all employ accountants.

BlondBoy

From the BusinessLink website:

Put simply, a business will pay VAT on its purchases, which is called input tax, and charge VAT on its sales, which is called output tax.

If a VAT-registered business charges more output tax on sales than it pays in input tax on purchases, it must pay the difference to HM Revenue & Customs (HMRC). If more input tax has been paid than output tax charged, HMRC will refund the difference.

Think that's the simplest way to put it!

By the way, if you're looking at importing computer components, get your registration in early - it may take a while. It's one of the areas that they think is prone to carousel fraud (http://en.wikipedia.org/wiki/Missing_trader_fraud) they'll take longer to process it, which can be a pain.

Best of luck!

chappers

basically you sell a computer for £300+£52.50 VAT your turnover is £352.50
You buy parts at £235(£200+VAT)
when you come to do your VAT return you would owe the VAT man £52.50 less the VAT you have spent on the parts ie.£35 .The net amount you would owe in VAT would be £52.50-£35= £17.50 but from this you can also claim back the VAT on other expenses incurred during the VAT quarter eg postage, tools you have purchased, fuel, infact anything you buy for your business that incurs VAT.
So say during that quarter you bought £117.50 worth of stationary for your business you could also claim back the £17.50 VAT from the stationary leaving you with a net VAT bill of £0.00, further to that if you bought £235 worth of stationary you would be able to claim back £35 VAT against the £17.50 VAT you owed and you would get a refund of £17.50.

I will now work through your example.
By the way your supplier is wrong, if £200 is including VAT then the amount of VAT is £29.79 and the amount and the cost before VAT is £170.21 to work out the cost before VAT for £200 use (£200*100)/117.5=£170.21

I will take the figures you gave as excluding vat
So selling 5 computer a month for £300

Sales 5@ £300 +VAT = £1500 + £262.50=£1762.50

expenditure 5 @ £200 +VAT= £1000 + £175 = £1175

VAT payable = 262.50-175= £87.50 less the VAT on any other business expenses.



Income tax/corporation tax


If you are a sole trader you pay class 2 national insurance at the relevant rate £2 odd per week and class 4 at the relevent rate for profits over a certain amount (sorry can't remember the figures along time since I was a sole trader).
You also pay income tax on all profit over your personal allowance at 20% upto the 40% threshold and then 40% on all profit over that


As a limited company you need to think of yourself and the company as seperate with you being an employee of the company.
You can pay yourself as normal under PAYE if you like and pay NI and income tax as normal and then corporation tax on any company profits.

Or more efficient is to pay yourself,as a director upto your personal allowance, that way no NI and then to take all your earnings as dividends from the company these are part of the companies profits and therefore liable to corporation tax at 20%, this is not as efficient as it used to be but will still save you Ni and is far more efficient if you dividends are above the 40% income tax threshold.

I would recommend you set up a limited company i have used thes people http://www.uk-plc.net/?utm_source=google&utm_medium=cpc&utm_term=ukplc
then get an accountant to do your first years books and then follow his formula from then on in.

As someone else said you are going into one of the most competitive markets going so unless you are going to offer something special I would think twice.
I have afriend who has been struggling along doing just this as well as IT support for the last 5 years and he's just about to pack it all in and get a job in a factory .

alanpartridge_2

Ah yes you are right, the VAT included in the £200 cost IS £29.79 (may calcs were a

bit guessy before). Thanks for the "cost before VAT" formula it is very handy.

The thing is I want the sale price to the customer to be £300 including VAT (not

£352.50), so to my calculations the price without VAT is 17.5% of 255.31 which is

£44.67 (together they come to £300).

If my sale price is £255.31 plus 17.5% £44.69 VAT totalling £300 to the customer.

PC cost (inc input tax) = £200
Input tax (17.5% of pc cost) = £29.79
Sale price to customer = £300
Output tax (17.5% of sale price) = £44.69
PC sale price (without output tax) = £255.31


VAT owed = (output tax - input tax)
44.69 - 29.79 = £14.90

So on that PC sale at £255.31 + £44.69 VAT (£300 to customer) the VAT payable is

£14.90 however I have not included the £30 expenses on the sale which brings my VAT

payable down to £0 right?

OR (quite possibly) do I include the expenses in the 'pc cost' BEFORE applying

output tax (e.g. 230 + 40.25, instead of 200 + 44.69) ??

Im sure I've almost worked this out in my head, but is that output tax going to be

£40.25 or £44.69, thats the main thing I need to know. I think that would make my

payable VAT either £14.90 or £10.46 on a PC sold at £300 including VAT.

Assuming is was 14.90 (not too sure it is) then I can roughly esimate my remaining

profit: 300 - 200 - 30 - 14.90 = £55.10 (with VAT paid).

Am I right, or close?

P.S. thanks for the info and links everyone (already know businesslink), the ukplc

site looks good, I was thinking of using http://www.duport.co.uk/ before.
I know the PC market is extreamly hard and competitive but I have to give it a go,

of course I would look into other sales opportunities such as training, software

fixing services, data recovery, component only sales etc..
Thanks for explaining Income tax/corporation tax, that makes sense to me now.

TaxGeek

Selling price inc VAT = £300
Output VAT = £44.68
Business Sales = £255.32

Parts inc VAT = £200
Input VAT = £29.79
Cost of Sales = £170.21

Expenses inc VAT = £30
Input VAT = £4.47
Expenses = £25.53

VAT owed to HMRC = £44.68 - £29.79 - £4.47 = £10.42
Business 'profit' = £255.32 - £170.21 - £25.53 = £59.58

Note, this assumes VAT is payable on all sales/costs at 17.5%. On this basis, may be best to avoid registering if sales are below the VAT threshold.

alanpartridge_2

Ah haaa, I see your right I forgot about the input tax I am paying on those £30 expenses (4.47 of the 30 is VAT).

Thanks so much TaxGeek, your example exactly explains it as it applies to me. I was close (4p out) and I wasn't sure if I include the 17.5% tax on the £30 expenses in the output tax, but you explained it nicely.

I would not deliberately register for VAT until I thought the turnover would reach the 64,000 threshold (although I would have to register even if I only predict that the limit will be reached in the 12 month tax period - argh more complication!).
But as the pc/tech business is mainly high price items giving big turnovers (and not necessarily big profits) I would predict that I would reach the threshold in year 2 (probably just under in year 1).

I going to make a nice excel spredsheet with all the info I gathered here (thanks everyone!) so it works everything out for me and takes some strain off my brain.

Any other info is welcome, I may have more questions before long ^_^

chappers

get your self a copy of quick books it works as a ledger, generates invoices , does your tax and VAT, cash flow forcasts, can reconcile against your bank account etc is accountant friendly. Really save yourself a headache.

alanpartridge_2

Thanks Chappers

QuickBooks 2008 looks great and I was looking for something that is accountant friendly plus all those features it has, I would definitely use it.