Can anyone explain VAT to me please

[courtjb91]

Hi,

I hope I don't come across as silly but I can't get my head around the VAT section on HMRC. The website is so confusing.

I'm getting quite close to the VAT threshold for business turnover and I know I have to register once I hit that threshold.

What I don't understand is how it will affect me financially.
Do I need to add vat to my services as when I buy the hair extensions the price includes vat so the client is already paying vat on the hair? Do I add vat to my fitting fee i.e increase my fee by 20%?
I'm such a worried and my turnover is currently 65% buying products that the client then pays for and 35% money from my service... if I have to pay an additional 20% to hmrc I can't take a loss that'll take my earnings down to 15% of my turnover but I don't think clients will be happy with a 20% increase overnight. I'll be getting an accountant as it's all too confusing now

I'm so so worried being over threshold is going to destroy my business financially as it's just little old me by myself and my turnover is so high because of the cost of hair not profit im making!

Thank you.

 

[BannerPenguin]

Basically you'd have to charge 20% on anything a client gives you money for. Of course, you could absorb this and keep your prices the same but as you said, it digs into your margin.

When you buy the hair you're paying VAT. What you do is deduct the VAT you paid compared to what you charged and pay the difference to HMRC quarterly. IE say you charged £3k in VAT to clients and all the stock you bought you paid £1k of VAT on, you only owe HMRC £2k. That's a simple explanation.

An accountant may be wise. Is the place you get your hair trade only? Id find a way of the client buying the hair and the money not touching your business account which will bring down your turnover drastically so you don't worry about VAT.

 

[salonfrog]

Hi

I would get yourself an accountant. It's not only the understanding you need but also the VAT submissions each quarter. If you'll be over the VAT threshold you're business is doing well and an accountant would be able to help you in other areas too.

Are you a limited company? At this level of income, that could be a wise move too.

Plus you'll sleep better at night.

 

[courtjb91]

Basically you'd have to charge 20% on anything a client gives you money for. Of course, you could absorb this and keep your prices the same but as you said, it digs into your margin.

When you buy the hair you're paying VAT. What you do is deduct the VAT you paid compared to what you charged and pay the difference to HMRC quarterly. IE say you charged £3k in VAT to clients and all the stock you bought you paid £1k of VAT on, you only owe HMRC £2k. That's a simple explanation.

An accountant may be wise. Is the place you get your hair trade only? Id find a way of the client buying the hair and the money not touching your business account which will bring down your turnover drastically so you don't worry about VAT.

Okay so the client pays the VAT on the hair (I pay the supplier and I charge the client exactly what I paid the supplier) and don't charge any VAT on my fitting fee it woukd equal out and I wouldn't owe anything?

But if I start charging clients vat on my fitting fee I'll owe hmrc the VAT from the fitting?

Hope that makes sense.

My turnover is so so high because hair is expensive. I wish I was making close to 85k profit but I'm just not! It's the hair cost making my turnover so high

 

[salonfrog]

Once you are registered for VAT you must charge VAT on every penny you charge a client. You do not have an option on what to and what not to charge VAT on.

I really think getting an accountant would be the best thing for you.

 

[Skyncare]

Hey courtjb91,

Sometimes it helps to have a working model to understand VAT.

So at the moment, your business might look like this:
You buy a product for £10 (ignoring the VAT) and sell it for £20 (no VAT added). Profit: £10

However, when VAT registered, it might look more like this:
You buy a product for £10 (£8.33 +VAT) and sell it for £20 (£16.67 +VAT).
Then when you do your VAT return, you offset the VAT you paid (£1.67) against the VAT you received (£3.33).
So if £3.33 - £1.67 = £1.66, then your profit would be £10 - £1.66 = £8.34

This may initially seem like a bad deal as your margin will seem lower, however you will be able to claim back your VAT on anything else you pay for which includes VAT, such as fuel for your drive to work, equipment purchased for the business.
Ultimately being VAT registered will likely have a positive effect on your business.

I hope this helps

 

[Beckybee]

How far in to the year are you?

I read a thread on here about a lady for when she got close, reduced her prices so she never reached the threshold.
But that won't work if you are only 6 months in

 

[BannerPenguin]

How far in to the year are you?

I read a thread on here about a lady for when she got close, reduced her prices so she never reached the threshold.
But that won't work if you are only 6 months in

This is quite a naive way of doing things. You'll never grow your business this way in my humble opinion

 

[Beckybee]

This is quite a naive way of doing things. You'll never grow your business this way in my humble opinion

I seem to remember the lady in question was near to her year end and saw it as £80k turn over would reduce by 20% the moment she stepped over the threshold by £1.

I think it really depends upon your business, I agree with you, some business need to just smash through the barrier and push forward, increase prices, and consentrate on quality rather than turn over.

Turn over is vanity, profit is sanity

 

[squidgernetball]

The sad thing about VAT is that it has nothing to do with how well your business is doing. People will see your turnover at £83000 and think you're doing great, but HMRC don't give a monkeys if your profit is diddly squat.

We went VAT registered about 3 years ago. You really don't want to limp over, you want to fly over. Banner Penguin is right. Do you really want to stifle your business and rein in your turnover. We're now heading for the £200,000 mark.

You don't have to charge vat to your clients as an added cost, but you do have to pay it. So we would charge £30 for a treatment and suddenly 20% of that went to the vat man. Except that everything we bought to do that treatment had vat paid on it, so that comes off. Plus we retail A LOT so all that we retail, we have bought in with vat paid. All this gets deducted from your final bill. You also have to give the client a receipt that shows the portion of the bill that is VAT.

We are a LTD company now, and it has really helped us with the costs of what you pay to HMRC. You definitely need an accountant. As a guide, our VAT bill is around £16,000 pa. Hope that helps a bit but PM me if you want.

Vic x