Setting up a sole trader bussiness, reclaiming VAT

SamPirul1985 · 26 October 2017 at 10:07PM

Hi, I have been reading a bit and still reading on the subject and I think I've almost there in figuring it all out, I thought I would ask to make sure I'm all on track.

I want to start a small I.T. business in selling pre-built computer systems and components and also providing repair services to my friends and family and obviously grow from there.

I obviously will not attract customers if my products cost more than the big known places, so my hope is if I buy at excluding VAT and from wholesalers, sell with full VAT and a little under to attract my customers and then finally reclaim that VAT and make the profit from there.

Now in order to buy from some wholesalers I need to provide a VAT registration number, hence why I need to set up first before I can even actually get going.

My questions are simply how and if it is actually possible to do this or am I missing something here?

Secondly, if my business just doesn't go well and I have to just stop, then will they [gov] mistake my business as being some sort of VAT scam and want everything back? Will having all the invoices and customer details be enough? I obviously will only be claiming things that I actually sold so I don't think it will be even a lot. I think I have to build this business and work full time on the side in the long run and so it might not look like it's a viable business to them in that case, but these thoughts are just me being safe than sorry and at the same time making sure I actually have money to stay alive, however it's still worth making sure I have everything I need ready in such an event.

jamesperrett · 27 October 2017 at 12:36AM

I presume you are talking about becoming voluntarily registered rather than having to register due to your turnover...

It is worth thinking about who your are going to be selling to. If you are selling mainly to VAT registered businesses then it makes sense to become VAT registered as they can reclaim the VAT you charge. If you are selling to private individuals then it doesn't really make sense. Yes, you can reclaim VAT that you have paid but you also have to add VAT to the rate that you charge which effectively puts up the price for individuals.

While some wholesalers my appear to want VAT numbers for an account application, it would be worth actually speaking to them to see whether they would still accept account applications from a business with a smaller turnover. Many of the big retailers buy in huge volumes and you can't really hope to compete on price with them. Most successful small computer businesses compete on service - they want someone they can call anytime to fix their problem.

Tom99 · 27 October 2017 at 1:14AM

[FONT=Verdana, sans-serif]I am not sure VAT works that way.

[/FONT] [FONT=Verdana, sans-serif]My understanding is that you hand over to HMRC all the VAT you charge when you sell but offset by the lower amount of VAT you paid when buying parts
.[/FONT]
[FONT=Verdana, sans-serif]I don't think there is anyway you benefit from the fact you charge your customers more VAT than you pay. Ie HMRC always end up with 20% VAT on the final item price although that may have come in parts from the various companies involved in the build.

[/FONT] [FONT=Verdana, sans-serif]As a sole trader it is better not to be VAT registered because you do not have to charge 20% on everything you sell, therefore you will be able to charge less than your competitor who is VAT registered. You will just absorb the lower amount of VAT you paid on your stock.[/FONT]

fishybusiness · 27 October 2017 at 8:28AM

I want to start a small I.T. business in selling pre-built computer systems and components and also providing repair services to my friends and family and obviously grow from there.

Margins are so tight you'll be flogging yourself half to death to make a profit.

Got out of this industry circa 2010, nothing has changed that I can see except many more people use phones and tablets rather than PC's.

00ec25 · 27 October 2017 at 11:05AM

you have no idea how VAT works despite you "reading a bit", did your reading include this? https://www.gov.uk/vat-businesses

if you voluntarily register for VAT (you must register if your turnover exceeds the threshold in a rolling 12 month period - currently £85k) then you must do the following:

a) add 20% VAT to the price of everything you sell
b) reclaim the VAT amount shown on the (legitimate) VAT invoice from your supplier for items you purchased. Sometimes you may not be able to claim such VAT as it is either incorrectly shown or you don't have the correct paperwork to allow you to claim it.

c) pay over to (or reclaim from) HMRC the difference between a - b every 4 months

so if you are trading profitably you will also be making a net payment to HMRC. If you are trading at a loss you will have a rebate. If you have purchased more than you have sold each quarter you will have a net rebate.

If you continually have a net rebate each quarter HMRC will (eventually) select you for VAT inspection on the basis you do not appear to be trading with a view to making a profit, in other words you are potentially not a legitimate business at all. If they decide you were doing it purely to extract VAT refunds they will prosecute you for tax fraud.

You need to learn a lot more about how business works before you have an expensive lesson in dealing with the taxman.

You cannot possibly expect to buy generic items from wholesalers and expect to be able to sell them to customers for less than the "big boys" sell them at because you cannot buy them from wholesalers at anywhere near the sort of price a wholesaler will sell ,000s of items in a single deal to a "big boy". Little businesses cannot compete on price with big boys, either your business is selling something they are not (extra customer service, expertise, unique/niche product) or your business is working a on a much smaller profit margin than the big boys tolerate because you have considerably smaller overhead costs than they do (no expensive shops costing £,000s in rent and rates) so can operate a "lean" business

SamPirul1985 · 27 October 2017 at 2:42PM

00ec25 wrote: »

you have no idea how VAT works despite you "reading a bit",

You cut out the part I also said "and still reading on the subject".. Never claimed to know everything, but it's a bit of a stretch to say I have no idea how it works..

00ec25 wrote: »

if you voluntarily register for VAT (you must register if your turnover exceeds the threshold in a rolling 12 month period - currently £85k) then you must do the following:

a) add 20% VAT to the price of everything you sell
b) reclaim the VAT amount shown on the (legitimate) VAT invoice from your supplier for items you purchased. Sometimes you may not be able to claim such VAT as it is either incorrectly shown or you don't have the correct paperwork to allow you to claim it.

c) pay over to (or reclaim from) HMRC the difference between a - b every 4 months

so if you are trading profitably you will also be making a net payment to HMRC. If you are trading at a loss you will have a rebate. If you have purchased more than you have sold each quarter you will have a net rebate.

If you continually have a net rebate each quarter HMRC will (eventually) select you for VAT inspection on the basis you do not appear to be trading with a view to making a profit, in other words you are potentially not a legitimate business at all. If they decide you were doing it purely to extract VAT refunds they will prosecute you for tax fraud.

You need to learn a lot more about how business works before you have an expensive lesson in dealing with the taxman.

You cannot possibly expect to buy generic items from wholesalers and expect to be able to sell them to customers for less than the "big boys" sell them at because you cannot buy them from wholesalers at anywhere near the sort of price a wholesaler will sell ,000s of items in a single deal to a "big boy". Little businesses cannot compete on price with big boys, either your business is selling something they are not (extra customer service, expertise, unique/niche product) or your business is working a on a much smaller profit margin than the big boys tolerate because you have considerably smaller overhead costs than they do (no expensive shops costing £,000s in rent and rates) so can operate a "lean" business

The purpose of my post is to make sure I have all of this done properly so I don't make a mistake and forget to not provide or be able to provide to HMRC when they come asking if in the event my business just doesn't work out or is really slow for the first few years at least. At the end of the day if I convince you of my business plans, nothing changes so I'm not going to bother writing this part out, all I asked is what things must I comply with for the HMRC to feel satisfied and as you said, learning an expensive lesson, I'm asking and learning before I jump in.

I mean if I have made a pre-built system and sold it to a customer, I have proof of sale, proof of purchase with the VAT invoice of the components, then I think the HMRC should be satisfied after all that this is what I've done. This is my question here, what things am I required, how can I ensure I am doing everything by the books.

The reason of wanting to be VAT registered is because wholesalers always seem to be asking for VAT numbers, but as someone suggested here in this thread, I can just ask if some are willing to let it pass, but my gut feeling is they won't. The whole point of buying from wholesalers is they are going to give me trade prices, which means I can make more of a profit and undercut as like you said, I have less overheads than say shops and places who sell with more because they are known, trusted brands, for example and they increase their prices by a lot.

Tom99 · 27 October 2017 at 2:48PM

I would try and get the discount from the wholesaler without being VAT registered. have some headed paper ready to place an order.

If you are VAT registered you are going to have to charge your customers 20% on top of your whole bill, not just your componant cost, which will make it expensive for them unless they are also VAT registered.

SamPirul1985 · 27 October 2017 at 2:49PM

jamesperrett wrote: »

I presume you are talking about becoming voluntarily registered rather than having to register due to your turnover...

It is worth thinking about who your are going to be selling to. If you are selling mainly to VAT registered businesses then it makes sense to become VAT registered as they can reclaim the VAT you charge. If you are selling to private individuals then it doesn't really make sense. Yes, you can reclaim VAT that you have paid but you also have to add VAT to the rate that you charge which effectively puts up the price for individuals.

While some wholesalers my appear to want VAT numbers for an account application, it would be worth actually speaking to them to see whether they would still accept account applications from a business with a smaller turnover. Many of the big retailers buy in huge volumes and you can't really hope to compete on price with them. Most successful small computer businesses compete on service - they want someone they can call anytime to fix their problem.

My hope is to be selling to and working with small businesses mostly, because I think that's where I'll make more of my profits than individuals. I'll give it a go and see if they are willing to accept my small business without a vat number, but lets see.

DigForVictory · 27 October 2017 at 3:02PM

There is absolutely no harm in trying to buy trade goods at trade prices, but they'll charge you VAT as they expect you to reclaim it. While you are still assembling systems for friends & family & even others there is no point being VAT registered as it just adds 20% to everything you do.

Once you do hit the threshold, or realise you are going to, then you have to bite the bullet & register & that's where a good accountant can advise you - for example on whether to carry on as a sole prop or to go limited.

Me, I'd go limited stat just to seperate my personal finances from the business money. As a sole prop, if you sell £100 pounds worth of goods at a car boot, when that money hits your bank account, HMRC won't distinguish between earnings as an IT bod & car boot income. As far as they look at it, every penny in is income, and they'll want their 20%. That you didn't buy the stuff to car boot, that you didn't reclaim any input tax on the stuff? They won't give a hoot.

If you find yourself ever renting a property even if it is grandma's bungalow, then you get into the murky waters of Partial Exemption and it really is worth going limited to Stay Well Out of that!

Hoping your idea takes off!

NineDeuce · 27 October 2017 at 3:18PM

How can you buy without paying VAT?

spadoosh · 27 October 2017 at 3:20PM

I dont know why you would register for VAT.

Lets say you buy £100 worth of parts (£20 you claim back on vat) so £80 cost to you. You sell the good for £200 (£40 charged vat) so £160 to you. Your profit is £80.

Ok no vat. You buy £100 worth of goods. You sell the goods for £190 (cheaper so more likley, agree?). Your profit is £90.

If you reclaim VAT you have to charge it. If you charge it your products become 20% more expensive. Whilst your costs might be low with things like rent. I can assure you most companies dont pay 20% on rent. Not to mention they benefit a lot more from economies of scale.

Your best chance of undercutting them is by avoiding charging VAT as long as you possibly can. Thats how the small guy can compete.

If i was you i would completely ignore vat until your turnover hits £85,000. Big companies dont make money because they reclaim VAT. In fact it always costs them money, they have to pay to manage it. A VAT registered business is simply a collecting agent for HMRC's money, one which you pay for the privilege.

I think youre concentrating on things that dont need to be concentrated on tryin gto work out where you will make money. If youre looking for it in VAT you will not find it. If this is to pursue something you enjoy and have money youre willing to lose go for it. If this is to make money, you need to do a lot more reading and work out exactly where you will make money. You started off by saying servicing friends and family (ooo err!) and in your last post youve moved to small businesses. Depending on the nature of the businesses they might not hit the threshold for VAT and if they do the might be vat exempt and thus theres no benefit anyway.

VAT should be way down the list of your priorities. Having something to sell at a reasonable price that people want to buy should be your priority.

Have you done a business plan? Cash flows? Research? Marketing? If you answer no to any of them completely forget about VAT.

Setting up a sole trader bussiness, reclaiming VAT

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