VAT question

[GeoSpectrum]

I like a lot of framers am not registered for VAT. At the moment I'm a good way off from meeting the turnover threshold whre I would be required to register, however a question has been bothering me so i'd thought id ask.

At the moment I pay VAT on my materials etc. Given that they are worked into my costs and therefore the prices I charge my customers, if I do register for VAT at some stage is it just a matter of seperating out the VAT element and stating it seperatly? (disregarding for the moment all the work involved in VAT returns etc) I have read that you may have to raise prices by 20% when you register but if the 20% is accounted for in your pricing already why would this be necessary? Im sure the awnser will much more complicated than I think but im planning ahead!

Thanks.

[Jonny2morsos]

You might need to check current regulations but I believe you can claim back VAT for purchases up to three years. So if you have bought expensive items of equipment this will be an advantage.

Once you are registed you can obviously reclaim VAT on all your purchases BUT you will have to charge it on your selling price.

Given the price the customer pays is mostly your labour then you have to ask yourself if you can remain competitive once you start charging VAT.

I have a customer who split his business in to two separate entities once he was getting to the point of having to register.

[prospero]

The problem in our profession is that a lot of the cost is labour. You have to put 20% on top of that and there is nothing you can claim back. The only cost you can reclaim is on materials. There is also clawbacks on power/phone and various other overheads, but all in all it is going to cost you more. Doing the paperwork isn't all that complex unless you are doing imports/exports and stuff with multiple rates. And today you can do it all (and pay ) online.

Let's say you are doing a frame where the materials cost you £24. You charge £50 for the labour. Total retail = £74
If you were vat reg, you could claim back £4, making it £70. But you would have to pay 20% of that to the HMRC. So that means essentially a retail price of £84. Ten quid dearer.

Without labour, just selling on stuff - say a readymade frame you bought in: Cost to you £6 - sell for £12. You made £6
With vat, you are liable to pay £2 vat. But you claim back £1. So you made a fiver.


Fuel is vatted, but the procedure is different and unless you are running a fleet of vehicles it's not worth trying to claim it back.

If you are dealing with people who are also vat reg then it makes things easier for both parties. It's a bit of a conundrum. On one hand it's best to avoid it like the plague. On the other it will tend to stifle your future business growth if you try to keep your turnover under the threshold. And there is the vague impression that you do tend to get treated more seriously if you are vat reg.
One point.... If you do register, you can *reclaim the vat retrospectively for everything you have in stock that you paid vat on. Equipment and all. As long as you still have the stuff and you have the invoices.

* At least that was the case when I registered.

[Abacus]

Take a look at fixed rate VAT, the only calculation you make is gross turnover * fixed rate = vat to pay, you also get a 1% reduction in the rate for the first year.

[JamesC]

I would wait till you have to - it's extra hassle and something you can be inspected for.

Personally I think everybody should be able to keep their first 72k turnover VAT and only reclaim inputs after 1 third of this. That would encourage growth more and not penalise success.

I don't think anybody suddenly saves £10k in costs when turnover goes from £71999 to £72000 (or whatever the threshold is).

That's how income tax works so why not VAT.

Beign just over the threshold is arguably the worst place to be and encourages some people to turn away work!

[JamesC]

Admittedly income tax keeps going up in bands - but then so do business overheads so no need for VAT to. I just think everybody should have a "personal allowance" as the guys doign £80k a year are really worse off (not an unusual kind of turnover for a small frame shop).

[GeoSpectrum]

Take a look at fixed rate VAT, the only calculation you make is gross turnover * fixed rate = vat to pay, you also get a 1% reduction in the rate for the first year.

I thought I read somewhere that with fixed rate you can't claim back vat on material costs, so it would become and additional cost even at a lower rate of VAT.
Anyway up its nice to know a little more about it so thanks for the inputs so far. Realistically I'd have to outgrow my current workshop space to be able turnover the 6.5K or so per month. ( i think that is right?) that might require me to register. I'll ask my accountant next time I see him but I suspect it won't be happening anytime soon, I think my ambitions are more modest - or is that just me recognizing the reality of the business? Part of me would like the prospect of and 80K turnover (realistic?) and part of me wouldnt.