This is one of the most asked questions I get about pricing products for wholesale - should I factor VAT into my wholesale pricing?
Pricing can feel tricky enough, but then adding in the consideration of VAT, should you/ shouldn’t you factor it in? What if you are VAT registered, what if you aren’t? Pricing can become even more confusing!
But pricing your products for wholesale really needn’t be so scary, even with the additional consideration of VAT.
Here’s the low down on factoring VAT into your wholesale pricing.
Should you factor VAT into your pricing? YES! Here’s why.
Firstly, even if you’re not registered to pay VAT right now, you want your business to grow, right? If you’re aiming, and expecting for your business to reach the VAT threshold it makes sense to factor VAT into your pricing so it doesn’t become a painful added tax to pay when you a registered for tax,
The other really important reason to factor VAT into your pricing, even if you have no intention of reaching the VAT threshold in your own business, is that the retailers you’re selling your products to likely will be registered for VAT, and will therefore need to pay 20% of their sales price, to HMRC.
Let’s break the VAT calculations down with some practical, easy maths...
Let's assume your RRP (Recommended Retail Price) for your product is £10
You can calculate the ex VAT price (price of your product without VAT) by dividing the RRP by 1.2.
£10/ 1.2 = £8.33. £8.33 is the amount the retailer gets when they sell your product, after they’ve paid 20% to HMRC for the VAT.
Therefore, they would expect to pay in the region of £4 - £4.55 for each of your products, at a common markup level of 2.2 to 2.5, or a margin of 45% to 52%.
If you don't take VAT into account you might have priced your products as; RRP £10, therefore wholesale price £5. So, if the VAT registered retailer sells your product for £10, pays HMRC £1.67 for the VAT, their ‘profit’ is £3.33. So, in reality this equals a mark up of 2, or a margin of 40% - which for most retailers is going to be too low.
Some smaller shops, or shops that aren’t VAT registered (which will be the minority), who are supportive of independent brands might be happy to work at this markup level, but most won’t - simply because it won’t work for them and their costs of business.
So, even if you aren’t VAT registered and don’t intend to reach the VAT threshold, you still need to factor VAT into your wholesale pricing.
What about when you are VAT registered, and so are the retailers you’re selling to?
If you are VAT registered and you sell to another business, you add the VAT on top of the ex VAT price. In this case your wholesale price.
This means, for your £10 product, a retailer would pay you £4.16 PLUS 20% VAT (if this is applicable to your product - as some categories, eg young children’s clothing is VAT exempt). The VAT in this case would be £4.16 x 0.2 = £0.83.
When the retailer sells your product for the RRP of £10 they will need to pay HMRC £1.67. If you are VAT registered, they would claim back £0.84 pence, which they paid you, and therefore pay HMRC £0.84 instead of £1.67.
Because of the VAT considerations, some retailers prefer to buy products from other VAT registered businesses. This doesn’t mean retailers won’t buy from you if you’re not VAT registered - not at all. BUT it does mean that taking VAT into account with your pricing is really important.
I hope that’s cleared up some of your questions around VAT and pricing for wholesale, and given you some food for thought for your next wholesale pricing review.
If you’d like some more support and guidance as you get set up for wholesale, checkout my course below - my roadmap to starting to wholesale in 4 easy steps.
Pin for later: