VAT ignorant please help !!

[itsmefolks]

This may seem strange but I am setting up in the retail business and I don’t know much at all how vat works, how or if I should pay it or if I can claim it!!!

Here is my situation…. I am purchasing say an item at £1.20 inc vat and it retails at £2.00 inc vat. What happens with the vat if I am not earning enough to register currently £60k plus I understand? Thanks in advance.

[ummmm]

If you're not VAT registered then nothing. You buy it and then you sell it...(but you do not add VAT on)

As soon as you hit the VAT threshold you have to start being organised with money. You buy something inc VAT...you need to book-keep your accounts showing this (purchase day book) You sell something including VAT and you book-keep that (sales day book) at the end of the quarter you take the VAT from the sales and minus the VAT from the purchases and the difference is what you pay over.

[Buenchico]

The VAT threshold is currently £70,000. If your annual TURNOVER (not your profit) is already over that limit, or if you think that it is soon likely to be so, you need to register for VAT.

Then you need to keep records of all your purchases and sales, noting the VAT on each transaction.

For example, let's suppose that you buy an item for £20 + VAT (which, at 20%, is £4).
You need to show the £20 and £4 separately in your expenditure account.
You have to pay the supplier £24 but you'll be able to reclaim £4 from HMRC.

Later you sell that item, at a profit, for £30 + VAT, thus charging the buyer £30 + £6 = £36.
Again, you need to show the £30 and £6 separately in your income account, as you'll have to pay £6 to HMRC.

If your turnover doesn't reach £70,000 you can simply ignore VAT altogether (since you can't reclaim it but you don't have to pay it either) and enter your gross expenditure and income into your account. (i.e.for my example above, you'll simply show your expenditure as £24 and your income as £36).

Chris

[Buenchico]

Oops!

I forgot the link:
http://www.hmrc.gov.uk/vat/index.htm

[ummmm]

So Chris said it a bit better than me...

Are you excel literate?

[itsmefolks]

Thank you everyone for that. Very helpful indeed.
Now I know the vat situation, I have now done some calculations on profits and things dont look great!! Or is it me?? My average sale will be in the £12.00 mark with occasional £50! On the basis that I sell £300 of stock in a day I will return net around £55.00!! Does that add up as a decent profit or not? I am sorry if I seem a numpty but all this is shiny brand new for me and I am having to ask some basic stuff. I have come from the building trade where I wouldnt get out of bed for £55 but I am willing to start from the bottom of the retail trade and learn as I get going. Many thanks for any constructive comments.

[bennhoughton]

Working out a projected profit and loss account, together with overheads, other associated costs and a balance sheet should already be part of your business plan - if you dont have a business plan I would strongly suggest you draw one up prior to making the commitment of setting up your own business.

There are always additional costs or things which you havent thought about, and a business plan will help identify these, as well as allowing you to keep referencing your performance against projections.

As a business owner who has only just set up 4 months ago, the business plan is the one key document i would recommend you spend most of your time on! This will help you work out whether £55 per day is acheivable, pessimistic, or optimistic, and ultimately, whether your venture is worth progressing with! After that, its the easy job of making sure performance hits targets!!

[itsmefolks]

Many many thanks point taken.