Charging VAT when sales are below threshold for new business

moneywhisperer

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Hi,

I’m setting up a small online side business that’s been designed to scale up easily and I’m unsure about what way to go about foreword planning for VAT charges to customers.

  • I don’t foresee the first year or two reaching the threshold required to charge VAT
  • I want to provide a consistent price to customers and don’t want to suddenly up the price once I start charging VAT

However:

  • Some of my customers will have their own VAT numbers and I’d like them to be able to purchase the service cheaper. They’ll likely be looking for this option.
  • I don’t want to come across as too fresh faced and would like to give an air of an established business without resorting to anything untrue. I feel a description of VAT charges and the ability to provide a VAT number may be important to this.

Do I just register for VAT now and suck up the extra paper work, despite this being, initially, a rather small side business registered as a sole trader?

A possibility I’d thought of was to list the price as my combined ideal price plus VAT, without any mention of tax being added, nor registering for VAT. If I hit the VAT threshold, I then register for VAT and start paying it, having the bonus of getting a little more money per purchase in the initial year or two. The customer will then feel as though the price is unchanged.

The downside is that I cannot cater to those who want to provide a VAT number and that some of my competitors are listing their price as ex vat, giving the illusion of being cheaper.

I’d imagine that I cannot list the price as cost + vat and just keep the additional vat price charged until I reach the threshold? At the very least, it feels misleading and I want to avoid selling to customers at a cost higher than they need to pay.

Any advice appreciated.
 
I’d imagine that I cannot list the price as cost + vat and just keep the additional vat price charged until I reach the threshold? At the very least, it feels misleading and I want to avoid selling to customers at a cost higher than they need to pay.

Revenue would not look at this as misleading, they would look at it as fraud. You could get into very serious trouble, much more serious than merely not paying tax due.
 
Revenue would not look at this as misleading, they would look at it as fraud. You could get into very serious trouble, much more serious than merely not paying tax due.

Good to confirm so, thank you. I do want to keep everything legally compliant and would have hesitated to do this even if it wasn't deemed fraudulent.
 
Firstly, online selling is very difficult. It doesn't happen overnight, it's extremely hard work and you are competing with hundreds of stores many of which will be very established.

Secondly, what percentage of sales will be to other businesses? Theoretically they are the only ones that will be looking for a vat invoice.

Thirdly, you will be paying vat on the goods you purchase, so am item costing €10 is costing you €12.30 as if you are not registered you can't claim the vat back.

Assuming a margin of 30% after other costs (postage, packaging etc), its just the vat on this amount that comes into your price equation, which isn't a big figure.


Example - item cost €30+ vat - 36.90

Retail price €60
Delivery cost €7.20 + vat
Packaging €1+vat
Real product cost incl vat €46.90
Profit €13.10


If vat registered
Product cost €30
Shipping/packaging €8.20
Total cost 38.20


Selling price €48.70 +vat (€60)

Profit €11.30


So not being vat registered has a price benefit of just €1.80 on above example.
 
Thanks for the response Peemac. I hope I'm fairly up to speed on what you covered - it's not as much what I'm wondering about and perhaps I phrased my question wrong.

I don't wish to go into detail about my business too much but I'll say that it's not a store (as such), it's a service/platform. I came to this point from needing the service myself with some forethought that it would be worth constructing my own usage around the idea of opening it to others in the future. With that same thought, I made it as scalable as possible. Its core functionality is all automated and has been built to work with x number of theoretical customers rather than just me. Worst case scenario, I've made a pretty robust service I use myself for my primary business, with very little operational costs, that has all the functionality of a platform I'd be paying somebody else for anyway.

I'm not sure if typical financial frameworks apply easily to this type of scenario. Besides my time, I've thrown very little into this and all costs are, for the most part, scaleable too. I don't have to (in a general sense) put any money into it until more resources are needed. I'm happy enough using the service myself but since I've got this far, am curious enough to offer it out to others and am that stage. I hope my question makes sense now but I'm wondering do I register for VAT right now when I know I'll be making little, if any, income on it for the near future. My primary reason for doing so is to instil confidence in a potential customer that this is as solid and legitimate a service as others. I truly believe so but it'll likely take offering full VAT options to encourage this. It just feels OTT if I've 10 customers for 6 months. I imagine the paperwork isn't too arduous, so perhaps it's something I should do. I won't have many expenses, regarding saving VAT on my own purchases, other than my time. That's the advice I was looking for, primarily. I'd imagine about 1/3 of customers would be to a business, the rest to individuals.
 
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Sorry, I had assumed it was a product.

If the service / platform is something a company wants, then they won't have an issue with vat not being added.

Just put "vat not applicable" on the pricelist.
 
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