VAT on Firewood

[Mark]

My son has just started a fire wood log business selling to local domestic customers.
His supplier charges him 20% VAT but he charges no VAT because he is not VAT registered.
I understand that if he was VAT registered he would have to charge 5% VAT as its domestic fuel.
If he registers for VAT would he be able to claim back the difference?

[Trevor S]

Firewood is covered by HMRC’s notice 701/19 – extract below:

“7.1.3 Firewood
Ready-cut pieces of wood of a size suitable for use as fuel such as logs, short waste ends or damaged timber, and held out for sale specifically as firewood maybe sold at the reduced rate. If not sold as firewood they are standard-rated.”

If your son’s sales meet these criteria, and he registers for VAT, he would need to charge VAT at 5% on his sales, but could reclaim the VAT incurred on his costs. That is likely to mean that his VAT returns would result in HMRC paying him – although how much would depend on factors such as his profit margin and what other costs or income he might have.

As a simplified example, assuming that the purchase and sale takes place in the same VAT period and there are no other transactions:-

• Purchase price of £120 (incl. VAT) and a sale price to customer of £147 (incl. any VAT).
• Currently: income £147, expenditure £120, profit £27.
• If VAT registered: income £140 (£147 – £7 VAT paid over to HMRC), expenditure £100 (£120 – £20 VAT reclaimed from HMRC), profit £40.

If his turnover exceeds the VAT registration threshold (£85k over the past 12 months), he will have to register for VAT. Businesses below that threshold can apply to register for VAT voluntarily – and the example above implies that this may be worthwhile for him. But it’s worth checking with real figures. The higher his profit margin is, the less worthwhile registration will be, due to the 5% being calculated on his sale price rather than purchase price. And he’ll need to consider any additional costs – such as electronic record keeping (if he doesn’t already have this) / any help with VAT return submission.

[Mark]

Thanks Trevor for the reply.  This is how I thought it might work but I thought there might be a HMRC “catch” somewhere that I was missing from the research, so your reply is very much appreciated!  I will help him with the numbers to check the viability, but indeed it is a lower margin business relying on expanding volume, so it could be the way forward.

[Author]

Posts