Total novice here with a question about vat

[Imclandestino]

Just want to make sure I am correct in my understanding of how vat works.

I buy stock from the manufacturer for £17.50 per product. 
I sell it for £24.38 at 25% off RRP

I’m not vat registered so would I have to pay vat on the product when I buy it from the manufacturer? 
If yes and I was vat registered,
making my sale price pre vat £20.31
Would I pay vat when purchasing from the manufacturer and claim it back or would it become vat exempt as vat is only charged once on a item? 

[Trevor S]

Very generally speaking, VAT is charged on every transaction in a supply chain (there are exceptions). When a VAT registered business makes a purchase in relation to their business activities, they are entitled to recover from HMRC the VAT they have incurred. So although VAT is collected at every step in the chain, the true cost of VAT should fall on the final customer.

Taking your figures, and assuming that they include VAT, if you were VAT registered:
• you pay your supplier £17.50, but
• you can reclaim £2.92 VAT from HMRC
• you charge your customer £24.38, but
• you must pay £4.06 VAT to HMRC.
In addition, you would be able to reclaim the VAT incurred on other costs directly relating to the business.

Something to consider – who are your customers? If they are VAT registered businesses, when you register you may be able to increase your prices to £24.38+VAT=£29.26, as it’s likely that they could reclaim the £4.88 VAT from HMRC.

Bear in mind that this is a very brief and simplified overview of the general principles of VAT. Much more information about your business would be needed to be able to fully assess the impact of VAT registration.

[Imclandestino]

Thank you for the reply! 
Would I have to pay the full £4.06 to HMRC then reclaim the £2.92
Or would I deduct the £2.92 from the £4.06
Then pay the remaining £1.14 to HMRC 

Thanks in advance

[Trevor S]

You would complete VAT returns periodically (normally quarterly, although some smaller businesses can apply for annual).  VAT amounts (in either direction) must be included on the VAT return covering the tax point of the transaction – this is usually the date of supply of the goods.  So if your purchase and resale took place in the same return period, both amounts would be included on the same return, and you would just pay the difference to HMRC.

[Imclandestino]

Thanks, this has been really helpful.

If you don’t mind could I ask one more question!

We are looking to offer a membership which includes discount on products. 
This works out fine for most products, however on a couple of items the discount we get from the supplier is lower. E.g.

£30 RRP 
£23.40 cost to us Inc vat

£19.50 cost to us net

£3.90 vat

£22.50 sale price to our customers

£3.75 vat 
£18.75 net 

This would obviously mean a loss of 0.75p

Now due to vat only being paid on profit. Would items like this be taxed differently?
E.g.

£19.50 cost

£22.50 sale price

£3 gross margin
0.50 vat 

£2.50 profit

 

Thanks in advance

[Trevor S]

Bear in mind that although the impact of VAT to you is generally a percentage on your profit, its calculation must be on transaction level. Your sales and purchases must be treated separately. VAT isn’t like income/corporation tax, where you calculate a profit and work out the tax on that.

So your first set of detailed calculations are correct. But actually, the reason why your second set don’t give the same answer is because you’re calculating your profit as being VAT-inclusive sales minus VAT-exclusive costs. For a true profit calculation, both figures should be on a VAT-exclusive basis, as these are your true income and expenditure figures after you’ve submitted your VAT return.

On the membership scheme, do you make any charge for joining? If you do, you need to consider the VAT treatment of membership income. If in reality the benefits of membership are little more than being entitled to a discount on future purchases, membership fees are likely to be VATable – because they’re seen as further (advance) payments for the items that will be bought.

[Imclandestino]

Thanks for the great response!

[Author]

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