becoming a sole trader

[JWD]

hi all...

done a little research into this topic and i'd very much like some clarification from the more experienced among us:

- If i become a sole trader, i should be able to get a refund of VAT 20% on the tools i purchase to make the product i sell shouldn't i?

- is there a lower limit on the profit you can make? I would be turning and selling bowls/butcher blocks/ coffee tables but probably at a glacial pace as i'm still in education...

thanks
Joe

 

[Beau]

Vat is a separate matter. You can put the cost of tools and materials against any profits but you need to be Vat registered to claim it back. You do this voluntarily if you want but you then you have to charge 20% Vat on the goods you sell and have to make a quarterly return. If your turnover is over a certain amount you automatically have to be Vat registered but cant remember how much this is now as it's gone up quite a bit in recent years.

I never bothered the Vat man when furniture making as it never made enough money and I could not see any overall advantage to it. Now in my new line of work have chosen to be Vat registered due to only having to charge 5% on my goods but claiming back 20% on purchases.

 

[defsdoor]

There's also the flat rate VAT scheme but it may not suit your expenses/invoice ratio.

 

[Paddy Roxburgh]

You can only claim back VAT if you are VAT registered. When you are VAT registered you have to charge 20% VAT on all sales and pay this to the VAT man every 3 months and reclaim the VAT you have payed on business expenses. If your turnover is above £83,000 then it is compulsory to register for VAT, if your turnover is less it is optional.

 

[beech1948]

You can be both self employed and in a job at the same time. You simply account for the self employed items as an additional earner and can use the tax authorities calculator totals any tax due.

VAT is compulsory over the £83 000 threshold below that level VAT is either a voluntary registration or you do not charge VAT and do not reclaim VAT.

VAT can be a real pain to work out depending g on the volume of invoices and bills you will process. VAT authorities actually try to discourage early registration when on low earnings and so little VAT to pay.

You become self employed by simply informing the tax people that you are working as such......dead easy

Good luck

 

[JWD]

Shame fellas

here's me thinking i could get one up on the tax-man - daft

appreciate the speedy replies though!

 

[Rorschach]

I seriously considered this for a while as I export nearly all my work, so no VAT to charge for the most part. The hassle of the paperwork every 3 months was just too much for the small gain.

 

[MartinCox]

I think you’ve a good cross section of thoughts there. I would just add another.

If you are selling to businesses, then adding VAT to your invoices isn’t a cost issue to them as they claim back that VAT that you have charged. If you are selling to non-VAT registered businesses or private individuals, then you would be charging VAT but the buyers couldn’t reclaim. In that case, the additional 20% cost of your goods might be material.

However, I never found the VAT accounting but onerous after the initial set up. I was given help in setting up a couple of simple spreadsheets on which you input your bought invoices into various categories (helpful not least because some things you buy don’t have VAT on them e.g. bank charges). On another spreadsheet you input what sales you have made (although for small businesses, you can use “cash accounting” for which you don’t record what sales you have made but rather sales for which you have been paid in that quarter). You use the figures on the two spreadsheets to go onto the VAT form you have to submit. The first time did require thought but after that, it was easy.

Many reasons to register or not to register but I don’t think the hassle of form filling should be a major factor

 

[Rorschach]

It was the hassle in relation to the gain I was talking about.

I don't buy enough tools and an materials in a year to make the VAT offset worth it. I worked out at the time it might save me a few hundred £'s a year, but there would be several days worth of extra paperwork each year, more reason for HMRC to come looking at me because my numbers would be odd as I export so much etc etc. I figured it was worth paying a little more for an easy life and simple accounting.

 

[MartinCox]

I can understand those reasons. You do have to weigh up all the factors. We turned over £750,000 - therefore we had to register obviously - and the offset meant we refunded around £35,000 every quarter. But it was never “our money” and we were acting as (unpaid) tax collectors. With simple spreadsheets, it took us an hour an quarter after the the learning curve quarter to fill in the form but we were inputting bought and sales invoices for maybe an hour a week.

Everyone will be different. If someone were starting out and had to buy a load of equipment then getting back 20% of that might be a benefit for the initial cash flow.

 

[Lons]

Tools and equipment you buy for the business as well as any of those you already own which you might want to use for the business, ( although you need to double check those ) can be claimed back as capital allowance if you use the traditional self assessment method though a bit different using cash accounting or simplified returns.

There is plenty of advice available on the gov.uk sites so you need to do your homework.

Bob

 

[MusicMan]

Exceptions to the point that customers can reclaim VAT is that (a) private customers and (b) educational institutions cannot reclaim VAT, so your products will simply cost 20% more for them. If you sell mainly to VAT registered businesses then indeed they can reclaim. So analyse your likely customer base before registering before you have to.

 

[Eric The Viking]

Martin Cox is spot-on.

I've been VAT registered (twice, at different times), been a sole trader and a limited company, and now I'm back to being employed, albeit part time.

The simplest rule is to think of the customer: if they don't mind you charging them VAT, that's fine. If they do mind (most private individuals), do everything you can to avoid it.

You offset many costs of your business against profit. Whilst you can capitalize equipment purchases, you can also write off kit fairly rapidly (depending on what it is and how fast it wears out/becomes obsolete).

By far the best thing is to read up a bit on doing business accounts, and possibly get a good accountant. I say 'possibly' because you may not be able to justify the cost - they're not cheap, and you can't claim back the cost of personal tax returns as an expense (business accounts are different). It would be well worth paying for an hour of an accountant's time to have a conversation about the best way to proceed, but if you do that, take some prepared numbers with you - how much you expect to make over a year, what your expenses might be, etc. You'll need this stuff anyway, and it will help them help you.

E.

PS: I understand Rorschach's discomfort about the admin though: UK VAT is one thing, but international stuff is a whole different league of silly bureaucracy.

 

[mr rusty]

Do get a good accountant. They will save you more than they cost. I suggest a small firm of chartered accountants not a one man band. I've had the same firm for 36 years

 

[Cordy]

You may not need an accountant
My business started in 1967; I am still earning £££ and paying tax

About 10 years ago my then accountant advised me to do my own accounts
Since then I have done just that
In fact, in recent years tax returns have got easier with on line form filling

Good luck
John