Understanding VAT’s impact on your business
Be aware of the extra costs involved
Unfortunately, we all have to pay it and wholesalers are no different. Here we look at tax issues surrounding your supplier and what you should be aware of.
VAT is, of course, is the most common tax you will come across when dealing with your wholesaler. VAT is charged by suppliers of goods and services, and wholesalers certainly fall into the former category. As they are not entitled to any exemptions or a reduced VAT level, wholesalers will charge the standard rate of 15% on your purchase.
Effective since 1 December 2008 the rate of VAT has dropped from 17.5% to 15%. This move has been made with the aim of providing further support for growth and incomes during the economic downturn, and should deliver support of around 1% of GDP to the economy in total over the 2009-10 period.
For businesses, this means that any sales of standard-rated goods or services that take place on or after 1 December 2008 until 1 January 2010, VAT needs to be charged at the new rate of 15%. This means that cash businesses which previously calculated their VAT using the VAT fraction of 7/47 should, during this period, use the new VAT fraction of 3/23.
What you must be aware of is the fact that many wholesalers price their goods without VAT, so you may be under the impression that you have a brilliant deal when, in fact, you will have a 15% slapped onto the top of it.
Therefore, the 4 widescreen televisions you buy for just £1,000 will in fact set you back a lot more.
“From my experience, it's fair to say that many new traders do forget that the prices displayed by wholesalers won't include VAT,” says wholesaling book author Richard Grady. “I know of a couple of people that got very excited at the incredibly low deals on offer and got a shock when they got to the till and found another 17.5 per cent added to the cost.”
Although you are obliged to pay the VAT on these, and indeed any other, goods, you are entitled to claim the money back if your firm is VAT registered. Input tax (the VAT you pay on raw goods) can be claimed back as part of the legitimate expenses that your business runs up – if you regularly pay more VAT than you collect you can claim this money back on a monthly basis by filling in a return.
To become VAT registered, your firm's turnover must exceed £67,000 a year: this figure is subject to increases every year or so.
Recent increases have been aimed at helping new businesses that cannot deal with the burden of filling out continual VAT forms. However, although small firms often grumble about VAT, you can often save money by registering for it and many businesses voluntarily put their name forward even if they are under the threshold.
So, if you are VAT registered and you keep in mind the charge when purchasing, you will be able to shape your budget accordingly to ensure that your cashflow is unaffected.
You are entitled to claim the money back if your firm is VAT registered.