Self employed, Pro/cons of reg as Ltd company

[jono_h]

I've always struggled to see why being VAT registered should make a trader more expensive. Yes you have to add 20% to the bill, but you get 20% back on fuel, capital outlay (vans etc).

Surely that allows you to work for a cheaper daily rate, which when subjected to VAT makes you comparable to the non-VAT trader?

 

[dizz]

VAT does exactly what is says - it's a Value Added Tax - if you "add value" aka make profit - your pay tax on it.

Example, consider New Boy (not VAT registered) and Loadsa Money (VAT registered), both are quoting on a job. They are given the same NET price of £100 from the supplier, that will be £120 gross (£100 x 1.2).

They provide a quote to Mrs Jones - Mrs Jones can only pay £170 for the job.

Newboy charges her £170, pays his costs of £120, and makes profit of £50.

Loadsa Money charges Mrs Jones £141.67 NET, that's £170 gross (141.67 x 1.2), collects the £170, and pays his costs of £120. He too now has cash in the bank to the tune of £50 on the job.

But three months pass and he has to do his VAT return.

He can claim the £20 he was charged from the supplier back from the VAT man. But he has to pay the £28.33 he charged Mrs Jones.

So he owes the VAT man £8.33 (£28.33-£20.00). So his profit from the job was £41.67 (£50.00 - £8.33)

Or, if you like, and as I said at the beginning, it is a profit on his "value add". His profit would have been £50 - but becasue of the VAT man, he pays tax on this value add to the tune of 20% - you calculate this simply without all the fuss above by taking the £50 and dividing by 1.2 (£50/1.2 = £41.67).

So if your firm makes a profit in the year you'll lose out. Suppose you make £20k profit - if you are VAT regsitered, you'll actual profit will be £20,000/1.2 = £16,667 - you'll pay the remaining £3,333 to the VAT man - or don't VAT register and go on holiday.

 

[WoodYouLike]

That's a bit too simple.

You forget in the job at hand the petrol/diesel both Loadsamoney and Newboy used are also VAT charged. Loadsamoney claims that back too on his VAT return, Newboy has to deduct the gross from his profits.

Then we have all kinds of other overheads both Loadsamoney and Newboy have to pay for. One can claim the VAT back on his VAT return, one sees the VAT paid only as pure costs.

 

[dizz]

That's a bit too simple.

Yes - I made it simple for the jono_h, so he could see how, as a VAT registered person, they are worse off, under the scenario I described.

You forget in the job at hand the petrol/diesel both Loadsamoney and Newboy used are also VAT charged. Loadsamoney claims that back too on his VAT return, Newboy has to deduct the gross from his profits.

No I didn't forget it - I could have muddied the waters by including it, but it makes no difference to my post, or the sentiment therein - read my first and last para - under these assumptions, your additions make no difference whatsoever.

Then we have all kinds of other overheads both Loadsamoney and Newboy have to pay for. One can claim the VAT back on his VAT return, one sees the VAT paid only as pure costs.

Yes I know - perhaps you could provide a counter argument that shows how being vat registered is better than not being vat registered even taking into considerations the items you mentioned. They don't change the overall sentiment one bit, which is, from my last post :

Para 1 - "VAT does exactly what is says - it's a Value Added Tax - if you "add value" aka make profit - you pay tax on it."

Last Para - "So if your firm makes a profit in the year you'll lose out."

This is regardless of any other costs attributable to the business - If you make a profit, you pay tax on that "value add" - and that is the rate of 20% - if you are not registered for VAT, you are better off financially.

 

[WoodYouLike]

Last Para - "So if your firm makes a profit in the year you'll lose out."

This is regardless of any other costs attributable to the business - If you make a profit, you pay tax on that "value add" - and that is the rate of 20% - if you are not registered for VAT, you are better off financially.

Nope, not really.

Making a profit as business means either paying Corporation Tax, or personal Tax (self-assessment).

The VAT of 20% is you being a tax-collector for the HMRC: add VAT to your price - your clients pays the whole some including VAT - you pay VAT on everything you buy and every 3 months (or monthly if you arranged to do this) you deduct VAT paid from VAT received and pay the difference to the HMRC. That's the method of Value Added Tax.

If you are not VAT registered, you don't have to charge your clients VAT, nor can you reclaim the VAT you paid yourself for running the business

Pure cash-flow matters really. Nothing to do with profit, only cash-flow.

 

[dizz]

The VAT of 20% is you being a tax-collector for the HMRC: add VAT to your price - your clients pays the whole some including VAT - you pay VAT on everything you buy and every 3 months (or monthly if you arranged to do this) you deduct VAT paid from VAT received and pay the difference to the HMRC. That's the method of Value Added Tax.

That's what I described in my original post.

If you are not VAT registered, you don't have to charge your clients VAT, nor can you reclaim the VAT you paid yourself for running the business.
That's what I described in my original post.

That's what I described in my original post.

Pure cash-flow matters really. Nothing to do with profit, only cash-flow.

Assuming the same supply terms for Loadsamoney and NewBoy, they have to pay their supplier at the same time, both with VAT added, so neither are worse off than the other in CASH terms. Assuming the same credit terms to their customers, they get their money from their customers at the same time (either with VAT added or not), so they are no worse off than each other for cash coming in. BUT, three months down the road, Loadsamoney is worse off than NewBoy by a factor of 0.8333 ( the 1 / 1.2 I previously mentioned), so in Cash Terms, NewBoy is also better off.

So, to summarise, the last para on my original post should have read,

Last Para - "So if your firm makes a profit in the year you'll lose out, both in the net profit you make AND YOUR CASH FLOW IN GETTING THERE.

So stop muddying the waters, and just give me a mathematical, where two firms make a profit, of an example of how it is better to be VAT registered - nothing you are saying, in words, makes my original post incorrect.

 

[dizz]

P.S. You and Loadsamoney are under the misconception that because you charge VAT, you have that VAT element as an extra to "add" to your cashflow, which you only have to pay to the VAT man three months later.

BUT don't forget NewBoy has matched your gross price - he too has the extra he can add to his "cashflow" - the only difference is, NewBoy doesn't have to pay the VAT man the VAT on the "profit" he made during the three months, whereas Loadsamoney does.

 

[WoodYouLike]

That's because your original post starts at a wrong presumption, namely that VAT registered businesses and none VAT-registered businesses charge the same.

They don't - and if they do they're off their rockers and should not be in business at all.

As said before in one of my other replies: if you really think clients ONLY buy on price, you're wrong or just following the herd (most of the businesses failing during this recession have been the once competing on price - leaving no profit to run the business).
If your client has nothing else than the price to base its decision, they will go for price.

So, recalculate your own example and re-do your maths.

 

[dizz]

That's because your original post starts at a wrong presumption, namely that VAT registered businesses and none VAT-registered businesses charge the same.

They don't - and if they do they're off their rockers and should not be in business at all.

I started with the assumption that they charge the same to explain why it is better ALWAYS not to be VAT registered than VAT registered. How else would you like me to explain it?

I have assumed everything else is equal - i.e. they use the same suppliers, they provide the same quality of work, etc. Mrs Jones now is indifferent between NewBoy and Loadsamoney, except price.

Your rebuttals were to say it's not that simple - look at fuel, look at cash flow, look at other costs ... None of these have any bearing. And now because none of these have born fruit, you say businesses should not compete on price - and I'm afraid that has nothing to to with my original response either, as I am not suggesting anyone should compete on price - that's just another red herring I'm afraid.

It's very simple, if you disagree with my original post to the OP, give an example to show me, in financial terms, why it is better off to be VAT registered - it's a simple question, just don't muddy the waters.

 

[WoodYouLike]

I would like you to explain it as it is in the REAL WORLD, not in your mind.

If there's anyone muddying the waters with fantasy scenarios, it's you.

 

[dizz]

OK good answer you're right, it really is better to be VAT registered than Not, because er, um, well I don't know 'cos I cannot explain it.

 

[WoodYouLike]

Have it your way

 

[jono_h]

Sorry, but I don't get why fuel and other overheads can be disregarded.

In the example both traders use £10 of petrol to get to the Customer. Non-vat has to pay £10 for his fuel, VAT gets 20% back so in effect only pays £8 (although may not see that until 3 months down the line)
That seems to go some way to redressing the balance.

 

[dizz]

Sorry, but I don't get why fuel and other overheads can be disregarded.

In the example both traders use £10 of petrol to get to the Customer. Non-vat has to pay £10 for his fuel, VAT gets 20% back so in effect only pays £8 (although may not see that until 3 months down the line)
That seems to go some way to redressing the balance.

I haven't disgregarded it, but it acts the same way as any costs - I gave the example and started off with £100. Go back to my example, and re-do the maths and you'll see what I mean. If I take your £10 gross fuel costs as an example (that's £10/1.2 = £8.33 Ex VAT). NewBoy and LoadsaMoney both have net costs of £108.33 and gross costs of £130 now. Mrs Jones can still only pay £170, so NewBoy makes a profit of £40 (instead of the £50 before).

So Newboys total profit is £40, whilst LoadsaMoney makes a profit of £40/1.2 = £33.33, and pays £6.66 to the VAT Man). I have just used my quick way, rather than the detailed way, but if you work through the details you'll see it is the same.

When you say goes some way to redress the balance - it is only because the profit has been reduced from £50 to £40 on the job - so LoadsaMoney only now has to pay the £6.66 instead of the £8.33 to the VAT man. If both firms can still retain their £50 target profit, and encourage Mrs Jones to pay £180 (instead of £170) there is no difference to my original example.

Essentially, NewBoy will always be better off whenever both firms make money - if both make NO profit in the year, then there is no difference, and if each firm makes a loss, it is of course better off to be VAT registered, and my last para of my initial post still stands :

Last para : "So if your firm makes a profit in the year you'll lose out."

The more profit you make, up until the VAT threshold, when you need to register for VAT, the better it is to NOT be VAT registered!

 

[onlyfitidealboilers]

Go LTD an you wont get credit anywhere. id think again about going self employed

Now, I would be very interested in hearing why a LTD can't get any credit anywhere?????

because you are not liable for anything you can just wind the coompany up over night an the state has to pay the **** you left behind thats why you would find it very hard getting say a new van on finance when setting up.

if you have been ltd for a few years with no probem the bank may consider you for a overdraft.