August 13, 2015 by Andrew Minalto - 32 Comments

VAT Registration – THE END of Your Business?

vat-registrationThere’s really no two ways about it – registering for VAT almost always means less profit for you at the end of the day.

I’ve mentioned this a few times in various Q&A posts and even wrote a guide on how registering for VAT when you don’t need to is the biggest tax mistake an eBay seller can make!

As covered in that guide, there is really one main exception to this rule, and that’s if you sell zero rated goods. Zero rated goods have a VAT rate of 0% so in this case you’d actually be better off registering for VAT from day one as it wouldn’t affect your sale price but you would still be able to reclaim VAT on all business expenses (more on that later).

The products that qualify for 0% VAT or the reduced rate (usually 5%) are very rare, so it’s highly unlikely that this will apply to you.

You can take a look at this page for a full list of reduced or zero rated goods and services:

https://www.gov.uk/rates-of-vat-on-different-goods-and-services

Some of the more common products that qualify for 0% VAT include:

  • Books
  • Magazines
  • Leaflets / Flyers
  • Children’s Clothing
  • Children’s Shoes
  • Motorcycle Helmets

So if you happen to sell one the above products, then you should definitely look in to registering for VAT, if not – then hold off for as long as you can!

Let me say this again, so that it’s 100% clear:

You will (almost always) be worse off if registered for VAT!!!

Strangely there is actually a lot of confusion about this point, especially online, and I think this stems mainly from a misunderstanding of the figures and in particular – reclaiming VAT on business expenses. I don’t want to spend too long on this aspect of VAT registration, as I have covered it previously, but let’s do a very quick example calculation:

Minalto’s Muscle Machines

Let’s say I have a business selling workout equipment and gym gear.

Turnover is £75,000 a year and gross margins are 60%, which means a mark-up of 150% (100-200%+ is what I aim for when importing from China).

So if I’m NOT VAT registered, the calculations are simple – I pay 20% VAT on the total value of the goods I import, which is £25,000 a year.

20% of £25,000 = £5,000 VAT paid per year.

Now let’s see how it works out if I am registered for VAT:

So the first difference is that the VAT I pay on the import value of my goods is reclaimable, so I’ve saved £5,000 already!

Plus I can also reclaim VAT on all of my business expenses, and this includes:

  • eBay Fees
  • Postage (some postage is VAT exempt though, such as 1st and 2nd class stamps)
  • Packaging
  • Etc.

Using our £75,000 annual turnover, let’s be generous and assume £15,000 in VAT reclaimable business expenses.

And as Minalto’s Muscle Machines is VAT registered, I can reclaim £2,500 back from that £15,000.

But now we’re on to the last part – the VAT I have to charge on my sale price.

From my £75,000 in annual turnover, £12,500 of that was VAT.

Alright now that I’ve walked you through the figures so that you can see how I’ve calculated everything, let’s take a look at the final result:

NOT Registered for VAT:

£75,000 (Turnover) 
- £30,000 (Landed Cost of Products (£25,000 x 1.2)) 
- £15,000 (Other Business Expenses) = £30,000 (Annual Profit)

Registered for VAT:

£75,000 (Turnover) 
- £12,500 (VAT on Sales
) – £25,000 (Landed Cost of Products (£30,000 – Reclaimed VAT)) 
- £12,500 (Other Business Expenses (£15,000 – Reclaimed VAT))
= £25,000 (Annual Profit)

And there you have it!

The result is that registering for VAT would reduce your profit for the year by £5,000 or 17%!!!

I hope this finally answers the age old question about reclaiming VAT on purchases…

Now that we’ve got that out of the way, and you hopefully now understand what I meant when I said you are nearly always worse off when registering for VAT, let’s take a look at some ways you can put off registering, even if you pass the threshold!

At the moment the VAT threshold is £82,000, so if you reach that turnover in a 12 month period then you have to register for VAT (you have 30 days from the date you pass the threshold before it’s considered late registration).

How to Hold Off Registering for VAT?

vat-treshold1. Apply for an Exception

If your VAT taxable turnover goes over the threshold temporarily, then you can write to HMRC and request an exception. You will need to provide evidence and explain why you believe your VAT taxable turnover will be less than £80,000 in the next 12 months.

Be warned that HMRC won’t just hand out an exception to anyone who asks for it. Not at all! You need a genuine reason for a one-off spike in sales… for example you sell tennis rackets and had a big spike in sales because Andy Murray won Wimbledon or you had a large one-off order from an overseas store etc.

And seasonal variation is not considered grounds for an exception, so don’t write saying you had a spike because it was Christmas, as Christmas happens every year! Only something that you don’t reasonably expect to be repeated.

And now on to our second way to postpone registering for VAT…

2. Reduce Your Sales on Purpose

Before you ask, no I haven’t gone mad! And yes, in certain occasions I would actually advise a slight deflation of sales if it means staying under the VAT threshold. Of course that doesn’t mean when you reach £81,999 you should refuse any more business, no of course not! Merely that when you’re approaching the threshold you should take a close look at your business and re-evaluate your product lines – possibly cutting low margin products (as they won’t be much use when VAT is factored in anyway).

I have one last method to keep your business from being VAT registered, and even though it’s actually the most effective, I considered not including it in this blog post – simply because it can be misunderstood and then cause further problems.

What am I talking about?

3. Registering Multiple Businesses

The VAT threshold applies to individual businesses, not business owners. So if I have one business doing £60,000 in sales and another doing £55,000 in sales (a total of £115,000) I don’t have to register either for VAT.

When/if to register as a Ltd company is a whole other question of course, and is something that I’ve covered at length previously: Tax and Business Registration for eBay Sellers

I won’t give any specific advice here (PLEASE DON’T ASK IN COMMENTS ABOUT THIS) as what’s best depends entirely on your individual business and when you’re at the point that you start thinking about VAT registration and Limited companies, then you really need to hire a professional accountant.

They’ll be able to take a look at your business(es) and let you know what can and can’t be separated. Remember, HMRC have some specific rules on what they consider to be one business entity and it’s more complicated than simply having two different eBay accounts!

But if you can legally register multiple entities for your different businesses, then that’s really the best way to hold off the dreaded VAT registration for as long as possible.

So while that’s all well and good, what do you do when the time comes and you have no choice but to register for VAT? Well don’t worry, it’s not the end of the world.

Registering for VAT

ebay-tax-registrationWe’ve already gone over when you need to register for VAT – which is as soon as you go over the threshold, currently £82,000 (but it rises every year), so let’s now look at the how.

How to Register for VAT?

The easiest way is to register online, as this way you’ll automatically be provided with a VAT online account/Government Gateway Account, which you need to submit your VAT returns to HMRC.

You can also register via an agent (there are hundreds of them online). If you register this way you will need to sign up for a VAT online account when you receive your VAT number from HMRC.

There are also some circumstances where you can’t register online, and instead have to do so by post. This includes if:

  • you want to apply for a ‘registration exception’
  • you’re an EU business ‘distance selling’ to the UK
  • you import (‘acquire’) goods from another EU country
  • you’re joining the Agricultural Flat Rate Scheme
  • you’re registering the divisions or business units of a body corporate under separate VAT numbers
  • you’re disposing of assets on which 8th or 13th Directive refunds have been claimed

Regardless of whether you apply online, via an agent, or by post yourself – you should receive your VAT registration within 14 working days, though I have seen it take up to a month on some occasions.

Do I Need An Accountant?

This is a question I get asked a lot and for sole traders who are just starting out, my answer is no, as they can usually get by with some simple software: Accounting for eBay Sellers Simplified

However, I personally outsource all of my accounting to a professional company.

After all, I always talk about outsourcing different aspects of your business to a professional who is more knowledgeable and will do a better job than you, and this couldn’t be more true than with accounting.

Being VAT registered means submitting a VAT Return to HMRC every 3 months, known as your “accounting period” and this needs to include information on:

  • your total sales and purchases
  • the amount of VAT you owe
  • the amount of VAT you can reclaim
  • what your VAT refund from HMRC is
  • Etc.!

All your figures have to be calculated correctly and precisely – HMRC won’t simply accept estimates.

This isn’t the simple and easy end of year assessment that you need to fill in if you’re a sole trader! It is much more complicated. So unless you want to trade in your business for an accountancy course, I strongly suggest you hire a professional accountant to take care of all of this for you. They will have the expertise and working knowledge to advise you and make sure everything is done correctly.

As with a lot of things in business, a good accountant is an investment rather than a cost!

And to be blunt, if you can’t afford to hire an accountant when you’re at £80,000+ turnover, then something is very wrong and your business will most likely fail anyway.

And this brings me nicely on to my final points for today’s post…

How to Remain Competitive After Becoming VAT Registered?

competitionIt’s more important than ever to practice all the things I teach on this blog and in Easy Auction Business course once you’re registered for VAT. After all, you are now competing against sellers who aren’t registered and are therefore at an advantage to you.

And that means you need to focus on being a smart seller:

Focus on your brand!

Your brand and marketing is, as always, incredibly important as it’s your brand, listings, images, and descriptions that will allow you to charge higher prices and maintain your margins.

Focus on high margin products!

As I briefly mentioned earlier, this is also a very good time to re-evaluate your product line and to cut any products that don’t make the grade, margin-wise. Personally I aim for 100-200% ROI as a minimum when importing from China. Low margin sellers simply won’t be able to survive once they’re registered for VAT.

Focus on your costs!

If you’re selling £80,000+ a year, then you should be planning your stock and getting the best prices possible. Don’t make stupid mistakes with importing, such as using the wrong shipping method, ordering in too small quantities, ordering from a bad supplier etc.

£80,000 and above is actually a fairly large turnover for a sole trader/small eBay business so use that to your advantage.

Create multiple selling avenues!

This really goes without saying, but I’m going to mention it anyway – you cannot rely on a single selling platform for your business! Please don’t risk £80,000 a year on eBay alone. Expand to Amazon, offline sales, and most importantly – create your own online store.

This is the best way to take advantage of your growing economies of scale, to expand your marketplace and increase sales, and to maintain your margins.

I won’t talk any more about this, as these are hopefully all points that you’re well aware of by now. Just remember that it’s even more important that you sell smart now than before, and please don’t get sucked in to the lowest price battle, as I’ve seen that happen to a few business owners who are worried about losing profits/increasing prices, and it never ends well.

Well that pretty much brings us to the end of today’s post.

I hope you’ve found this useful, and it’s helped to allay some fears about VAT registration!

Although it’s not something that you want to do voluntarily, mandatory VAT registration should be viewed as a success, and not something to dread. After all, you’ve reached £82,000 in turnover so well done!

Now on to the next milestone of £100,000 and beyond! 🙂

Until next time,
Andrew

32 Comments
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  1. Hi Andrew,

    I’ve asked you about this before and I’m just abit worried I sell low value items on eBay ranging from £1.75 to £9.95 and eBay is now charging VAT for business registered sellers therefore will I have increase my prices to cover the VAT?

    Your response will be much appreciated.

    Regards
    Bobby

    1. Andrew Minalto

      No Bobby, no.

      I will explain this topic in detail later on today in my Facebook page:

      https://business.facebook.com/Andrew-Minalto-120635098045609/

      Thanks,
      Andrew

      1. Thanks Andrew,

        Will be keeping an eye out for it.

  2. Hi, I notice you mention that you claim back VAT on eBay and PayPal fees, however everything I have read suggests that both of these are VAT-exempt and therefore can’t be claimed upon (which means that eBay traders are hurt even harder by VAT registration compared to a regular cash trader?)

    1. Andrew Minalto

      Hi Andrew,

      Thanks for your email.

      PayPal fees are not VAT applicable (it’s a financial service, you don’t pay VAT on bank fees either).

      eBay fees are. When you register for VAT, you submit your VAT number to eBay and they simply won’t charge you VAT anymore.

      Sellers who are not VAT registered, pay VAT on eBay fees by default.

      Hope this helps!

      Thanks,
      Andrew

      1. Hi Andrew,

        Thank you for your prompt response, however I still have to challenge what you say about eBay fees including VAT, because I am a non VAT-registered seller, and my eBay fee invoices specifically state they are VAT exempt. In addition to this, I spoke to an eBay advisor and they also confirmed the same thing – that eBay fees are exempt from VAT for both VAT-registered and non-VAT businesses.

        What’s your take on this?

        1. Andrew Minalto

          Hi Andrew,

          I don’t really understand where it is coming from, first time I hear eBay fees are VAT exempt.

          It clearly states on eBay help pages that VAT is applicable:

          http://sellercentre.ebay.co.uk/business/about-vat

          Thanks,
          Andrew

          1. Hi Andrew,

            This is rather confusing.

            The link you sent only explicitly states that VAT is included for non-business users, however it does go on to say “If you have indicated that you are a business established in an EU country other than Luxembourg, and have provided us with your VAT identification number, we do not need to charge VAT on your fees.”

            And then if you scroll down and click “VAT on eBay fees for Business Sellers who reside in the UK & Ireland”, the first line of text states “If you have indicated that you are a business, your fees will be invoiced net of VAT.”

            So eBay can’t even provide a straight story on the matter…

            Additionally, a quick Google search brought up this link http://tamebay.com/2015/03/was-ebay-vat-on-fees-correctly-charged.html

            The bottom of the article contains a statement from eBay, which ends with “This means that from 1 January 2015 we are no longer required to collect VAT on fees to small businesses.”

            Finally, there’s still the question of reclaiming VAT – your article says that you reclaim VAT on eBay fees, however as you said above VAT isn’t charged to VAT-registered sellers so therefore there’s nothing to reclaim?

            Kind Regards,
            Andrew

          2. Andrew Minalto

            Andrew,

            Just like when dealing with EU suppliers – if you’re VAT registered, they won’t charge you VAT. But it doesn’t mean that transaction is VAT exempt.

            It is called VAT reverse scheme and you still calculate it in your books.

            You should speak with an accountant if this all thing is still unclear for you.

            Andrew

          3. Hi Andrew,

            I understand the Reverse Charge Mechanism, I was simply querying the statement of “reclaiming” VAT, as you would do on any UK goods/services. I understand now that you didn’t literally mean claim back the VAT.

            Kind Regards,
            Andrew

          4. Andrew Minalto

            yes, sorry – that may be the confusing part! 🙂

            Andrew

  3. Darren Milhouse

    I no longer run my business do I have to deregister vat

    1. Andrew Minalto

      Yes, of course, if you don’t want to continue filling out VAT returns.

  4. Mark Robbins

    Almost no information on small but full time motor dealers on the net, because the cost of vehicles are high but in today’s cheap used car market, profits are incredibly low, it is very very easy to hit the VAT threshold within that rolling 12mth period……every small trader I have ever known in over 30 years of trading, finds it almost impossible to make a liveable profit from selling the cheaper used cars once registered, turnover is high….profit’s are ridiculously low…..factor in VAT and it becomes almost not worth your while……and that’s a fact, not a moan or “poor me” situation, the margin threshold if you are a decent, and i must stress honest, ( yes, there are still some of us left ! ) motor dealer working from home or small premises makes it virtually impossible to survive, you could earn more working at Mc Donald’s !

  5. Hi Andrew, I sell on eBay and I’m the vat threshold is looming. Can you clarify what sales count towards the vat registration threshold? UK only sales? Sales made to EU customers? Worldwide sales? Or all three? There is a lot of conflicting information and the HRMC website is not clear on this point. Thanks.

    1. Andrew Minalto

      It’s your turnover that matters – to ANY customers out there.

      Andrew

  6. Hi andrew
    Thank you so much for the reply. Great help.
    Thank you

  7. Hi andrew.
    Im completely lost in all this vat laws etc.
    Basically im an employee in a factory who earns 20k a year. I pay tax and ni as shown on my payslip.
    Now on the side iv started to sell on ebay uk. I import the goods from china and pay 20 percent vat for each parcel. Import vat.
    I sell the goods on ebay. Im only making profit about £500 each month. So do i need to pay vat on my profit? Could i get into trouble with the law if i dont? Hope you can answer my question as this is all new to me.
    Thanks

    1. Andrew Minalto

      Hi Gary,

      No, you don’t have to register for VAT or pay any VAT on your sales – UNTIL your business sales reach £82k per year.

      Thanks,
      Andrew

      1. Hi andrew
        Sorry to be a pain here. Would i have to pay some sort of tax for earning an extra £500 each month.. Like income tax? And would i need to inform hmrc that im earning an extra £500 each month?
        Thanks andrew

        1. Andrew Minalto

          Yes, you will have to pay income tax on that and need to register as Sole Trader.

          Please check this guide for more info:

          https://andrewminalto.com/ebay-tax-registration/

          1. Thanks again andrew.

          2. Andrew Minalto

            No worries! 🙂

  8. Hi Andrew, working through your blog, I find the amount of information given amazing and will shortly be subscribing to both your video courses. After a number of years in business it never surprises me how much I don’t know.
    However I think that your comment “3 Registering Multiple Businesses” needs more clarification for sole traders.

    I registered for vat voluntarily as I deal mainly business to business, but have since added eBay as an additional source of income. I checked with HMRC if the eBay side could be treated as a separate non-vat business and was informed it is “The Person” not the business that is registered for vat.

    For clarification a useful link is here: https://www.gov.uk/guidance/vat-registration-for-groups-divisions-and-joint-ventures

    All the best.

    1. Andrew Minalto

      Hi Colin,

      Thanks for your comment.

      Yes, that’s why I say you need to consult an accountant for this.

      Business separation for Vat is ONLY an option for Ltd. companies and even then – there are very strict rules to follow, basically they have to be totally separate businesses for this to work in line with the law.

      Andrew

  9. Hi Andrew,

    Great! I wasn’t expecting you to write the article for a while…so thanks for taking a more in-depth look so soon. I think I’ll be back with some more questions 🙂

    Paul

    1. Andrew Minalto

      You’re welcome Paul! 🙂

      1. Hi Andrew,

        I haven’t hit the threshold yet, but looking at my sales trajectory, it looks I will do so on Amazon alone (~£96,000pa, based on my recurring 30 day sales). Add in Ebay sales (~£48,000 pa). I’ve been trading at this rate for approx 5 months, and doesn’t taken into account any seasonal hike during Christmas, so I’m thinking of registered for VAT now.

        I know it’s early, probably by a couple of months or so, and you shouldn’t register before you really have to, but I’m wondering if it will be easier to do so now before I get too busy. I’m also finding I can’t trade with some European companies easily as I don’t have a VAT number. Not that it’s not possible, but sometimes businesses in europe don’t have the ability to add you to there computer systems/process if you aren’t a VAT registered company. So with an example, the goods I want to buy from Holland which are approx £1200 saving on a UK company, I’m losing out.

        What do you think? Register now and get it over with? The risk of course is my sales slow or accounts get bad metrics preventing sales and I don’t go over the threshold.

        Thanks, Paul

        1. Andrew Minalto

          Hi Paul,

          I would personally just wait until you reach the threshold. To make it simple on accounts do it in advance though (not when you’re actually already past the threshold). Say a month in advance would be fine.

          Andrew

          1. Paul N

            Thanks Andrew, I’ll probably wait then!

  10. Thanks Andrew .. another terrific, detailed, well written post. I’m an eBay novice and have been reading a lot of your older posts as well, and they have all without fail been a great help. I have a question related to the comment in the post about gross margins and mark-up. Do you exclude eBay selling costs & postage when you calculate it?
    Thanks,
    Andy

    1. Andrew Minalto

      Hi Andy,

      Thanks & it’s great to hear you find my posts valuable! 🙂

      In context of ROI (I often use), yes, I exclude them – as those fees happen ONLY when I make a sale (get my return). So my ROI calculations are purely based on goods cost and profit I make after all the fees. So for example, if I buy a product for £10 and after selling it I make a £10 profit (after all fees), that would be 100% ROI.

      Hope that explains.

      Andrew

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