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How does VAT affect your product business?

Updated: 4 days ago

Earlier today, Tuesday 23rd June 2020 Tamsyn Jefferson-Harvey from Seed Accounting Solutions joined me over on Instagram for a live on VAT. You can watch the full live back here, or if you prefer the highlights you can continue reading my recap of our chat below.


A while back I posted a few tips on how VAT affects your pricing even if you are not registered and it had a wider reach and more saves than I ever had before which made me think that there really isn’t very much advice around VAT that is jargon-free and specific to our industry. Since I’m not an accountant, I know I don’t have enough knowledge about this to share so I invited Tamsyn to come and chat about it.


Tamsyn’s business specialises in accountancy for small and micro businesses which means that she’s very used to answering all sorts of questions that are specific to our industry and our small businesses. In the live we do our best to demystify VAT and show how it’s relevant to your business and something you do need to think about.




What is VAT?


VAT is a tax that is charged on top of your products and services, here in the UK that is 20%, and any business that is registered, voluntarily or because they have gone over the threshold will need to charge it.


There are certain types of products that are 0% VAT such as baby products or books but if your business turnover is over the threshold you still have to register for VAT even if you don’t always charge it.


When you register, you essentially become a tax collector on behalf of the HMRC. You can then reclaim some of it back on purchases you make for products and services and you pay the difference to the HMRC.



What about 0% VAT and part VAT?


You may have heard terms such as 0% VAT or part VAT mentioned and it can sometimes be difficult to know what applies to your products.


In the first instance speak to your accountant, if you have one that specialises in small business they will be able to talk you through the process without the jargon and they will often have access to specialist VAT advisors. If you do not have an accountant and want to find out for your self you can try to reach out to a VAT consultant such as https://thevatconsultancy.com/.


It’s important to point out that 0% VAT and VAT-exempt is different. If your business is fully exempt you can not claim back VAT. Exempt is usually for things such as insurances and health services like dental and medical.



What is the Flat Rate Scheme or fixed rate VAT?


It’s designed for small businesses when you first register for VAT and it reduces the administrative burden.


You disregard your expenses, you charge VAT at 20% and then you pay your fixed rate, say 7.5% on your gross sales.


Say the ex-VAT price is £10, then you would charge £12 (£10 + 20% VAT), you would then pay HMRC 7.5% of the £12 so £0.90 instead of £2 if you were on the regular scheme. However, you can not claim back VAT on any of your purchases or services.


If you go on the flat rate scheme you need to monitor all your purchases and compare if you could have claimed back more than you are “saving” by being on the flat rate.



What are the benefits of being registered or holding off registering?


Here in the UK, our VAT threshold is a lot higher than in the rest of Europe but this is likely to change in the future. In some parts of Europe, they don’t even have a threshold but all businesses are registered.


If you are buying a lot of your supplies and material from within Europe there may be benefits to registering for VAT voluntarily as you wouldn’t be charged VAT for your European purchases if you have a VAT number and you would be able to claim back VAT if you buy from registered UK businesses. This also goes for services you use that you are charged VAT for.


When you do register you can also retrospectively claim back VAT on some of your purchases if you are still using those assets within your business. This could be an expensive piece of equipment for example. For goods, you can claim back up to 4 years but it has to be goods or materials you still have and use in your business, and on services, it’s 6 months.


One example of when it may be worth considering voluntarily registering is if you make baby clothes and you know they are 0% VAT but you buy all your fabric and supplies from a UK VAT registered business.


Another example when you may want to consider registering is if you are doing a lot of UK manufacturing and you are not really selling anything yet but you have lots of outgoings where you are charged VAT so you could claim back quite a bit.


VAT is a hassle, there’s no other way to describe it and sometimes it’s nice to just hold off as long as you can if it doesn’t mean a lot of savings for your business so its definitely something to consider carefully and if you can, discuss with your accountant.



Future proof your business


To be able to scale your business it’s important that you take VAT into account from the beginning. For example. If you know you want to go over the threshold, consider this when you price your products as it can be difficult to have to put your prices up by 20% when you do register. I always advise building your customer base at the price point that affords you to scale your business.


It’s also important to set up systems and processes as you want your business to operate in the future so you can scale it. This is why I’m such a firm believer in getting help so you can focus on growing your business.



Why do some retailers prefer to buy from other VAT registered businesses?


Retail is built on relatively small margins so even the small difference of being registered can make a huge difference to a retailer's profit.


For example, if you are registered and you sell a retailer a product that retails at £10. They then need to pay HMRC £1.67 each time they sell your product (well every quarter when they do their returns) but if you are also registered then the £0.83 that you charged them for VAT will be deductible which means they only need to pay HMRC £0.84. That might not seem like a lot but if that applied to all their sales, plus the services they use then their VAT bill will be a lot less buying from a VAT registered businesses.


At a large retailer, well any sized retailer but in particular at a larger business a decision might come down to which supplier will bring in the most money and the highest margin so if you have two brands that are very similar to one another with similar price points then they may go for the registered supplier.


You can still wholesale but you just need to make sure that retailers still make their margins on your products. You can read a bit more about how to price your products over on this blog post.


I think it’s a good idea to start selling to independent retailers first as they are a bit more flexible on this, to them it’s very important that their range is curated and they may be more flexible for the right product. Of course, if a big retailer comes knocking on your door you can deal with it as and when it happens.



To conclude


VAT is complicated and having a small business accountant to help you will save you time and probably a lot of headaches too. I think from my chat with Tamsyn it’s pretty obvious to me why having an accountant vs. trying to do it all yourself is a good investment and can save you both money and time but I also appreciate that it’s not always something you can afford, although, it’s not as expensive as I thought it would be when I first started my business.


I really hope that this live and post helped to answer some of the questions you may have.


Book recommendation from Tamsyn: The Emyth by Michael E. Gerber



Find out more about how Tamsyn and her business and book a discovery call over on her website. https://seedaccounting.solutions/. Follow Tamsyn over on Instagram @seedaccounting.

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