Charging VAT

[conned tractor]

So it's not exactly contracting but regarding my plan B and I know i'll get the answers here.

I want to know if charging VAT to the customer affects how they percieve the price.


Plan B sells a product to a retailer, who in turn sells that to a consumer.


Scenario A) - Plan B registered for VAT.

So, they, the retailer, charges VAT to the customer (if of course they are VAT registered, but unlikely (I think) that a retailer wouldn't be). Therefore a point of sale price of £200 + 20% (£240) is acheived by the retailer.

If Plan B is registered for VAT, then I sell the product at £150 + 20% (£180) to the retailer.

The retailer pays a VAT bill at the rate of VAT in - VAT out (£40-£30).

Retailer makes a profit (£60 margin - £10 VAT due) = £50.


Scenario B) - Plan B not registered for VAT.

Sale price is £200 + 20% (£240).

I'm not registered for VAT, I sell the product for £150 to the retailer.

The retailer pays a VAT bill at the rate of VAT in - VAT out (£40-£0).

Retailer makes a profit (£90 margin - £40 VAT due) = £50.

I think i've just worked out by writing this that it doesn't matter, but would be happy for someone to confirm my thoughts are correct.

[LisaContractorUmbrella]

You are right - it doesn't matter VAT has no effect on profit and loss; VAT that's charged on sales is payable to HMR&C, VAT that is payable on purchases is deducted from this figure. Either way VAT is a tax and should never be included when you are trying to work out profits.

HTH

[TheFaQQer]

So it's not exactly contracting but regarding my plan B and I know i'll get the answers here.

I want to know if charging VAT to the customer affects how they percieve the price.


Plan B sells a product to a retailer, who in turn sells that to a consumer.


Scenario A) - Plan B registered for VAT.

So, they, the retailer, charges VAT to the customer (if of course they are VAT registered, but unlikely (I think) that a retailer wouldn't be). Therefore a point of sale price of £200 + 20% (£240) is acheived by the retailer.

If Plan B is registered for VAT, then I sell the product at £150 + 20% (£180) to the retailer.

The retailer pays a VAT bill at the rate of VAT in - VAT out (£40-£30).

Retailer makes a profit (£60 margin - £10 VAT due) = £50.


Scenario B) - Plan B not registered for VAT.

Sale price is £200 + 20% (£240).

I'm not registered for VAT, I sell the product for £150 to the retailer.

The retailer pays a VAT bill at the rate of VAT in - VAT out (£40-£0).

Retailer makes a profit (£90 margin - £40 VAT due) = £50.

I think i've just worked out by writing this that it doesn't matter, but would be happy for someone to confirm my thoughts are correct.

If you are selling to a retailer, then ultimately it makes no difference because they will claim the VAT back (assuming they are large enough to be registered).

If you are selling to either (a) a company that is not registered for VAT, or (b) to the public, then it will make a difference. You need to then decide whether you absorb some / all of the VAT yourself or whether you pass on the VAT to the client. For the last increase, my wife (who is not registered) decided to absorb the cost herself and cut her margin accordingly.

[conned tractor]

Thanks.

[MarillionFan]

You are right - it doesn't matter VAT has no effect on profit and loss; VAT that's charged on sales is payable to HMR&C, VAT that is payable on purchases is deducted from this figure. Either way VAT is a tax and should never be included when you are trying to work out profits.

HTH

Actually that's not an accurate statement. In the OP's case he is not selling to the end consumer, but as a retailer VAT does affect your profitability. (I am assume VAT Threshold at 60k, can't remember exact amount)


Scenario A. You are Not Vat Registered. You sell direct to the consumer, have a turnover of £60000. Your cost of sales is £30000 exc vat, so £36000 including. As you are not VAT registered you cannot claim back the £6000 in VAT. Bus as you don't pay vat on the £60k, it means you don't have to pay £10k out. Your P/L is £24000 for the year

Scenario B. You are Vat Registered. You sell direct to the consumer, have a turnover of £60000. Your cost of sales is £30000 exc vat, so £36000 including. As you are VAT registered you have to pay £10k on your sales, but you can claim back the VAT. Hence your P/L is £20000 for the year.

In this case the difference between VAT registered and non registered is worth £4k.

So if you have a small online business, under the theshold, then it would be better to be non VAT registered, because your retail price of £49.99 (for example) which customers would expect to pay regardless of your VAT status is more profitable for you as a retailer.

You could of course reduce your margin to grow your sales, at which point you'd go over the VAT limit and have to register anyway.

I would always recommend someone starting out to wait until they hit threshold before registering for VAT as it's worth a few extra K.

[d000hg]

If you're selling to business, then it should make no difference. But of course the mind doesn't always work logically so if you and a competitor both charge the same but your site shows the inclusive rate and theirs the exclusive, people might perceive yours as a bigger number. So show your prices without VAT.

[LisaContractorUmbrella]

If you're selling to business, then it should make no difference. But of course the mind doesn't always work logically so if you and a competitor both charge the same but your site shows the inclusive rate and theirs the exclusive, people might perceive yours as a bigger number. So show your prices without VAT.

I am not sure you can do that doogh; I think if your business is VAT registered you are obliged to display the price including VAT

[Wanderer]

I am not sure you can do that doogh; I think if your business is VAT registered you are obliged to display the price including VAT

Can you display an ex-VAT price to try and appear cheaper and then add VAT on later? If you are selling to a consumer then it does have to include VAT but to a business it doesn't. If in doubt, I would say just display both prices.

Displaying prices | Business Link