VAT and profit margins

[Khaleesi78]

Bit of background before I get to my question...

I'm setting up an online business at the moment and it will be predominantly dropshipping at the moment. To give an example of the margin, the RRP is £59.99, my buying price is £28.39 (ex vat) giving a profit margin of 58.36%?

Once I take VAT into consideration I'll be looking at a margin of 38.36%, would I be better off if I go VAT registered? I can't get my head around it!

[Peach1886]

If you're going to have to pay vat on whatever you buy to sell on, then you can only claim that back if you are registered...if you're not registered then you are absorbing the vat costs for your customers...

[Khaleesi78]

That's my thinking, so am I right I'm thinking I'll make more if I go VAT registered from the start?

[AlexanderHamilton]

So at the moment you are not VAT registered so:

You buy a product for £28.39 plus Vat meaning you pay £34.07. You sell it for £59.99 so your profit is £25.92

If you become VAT registered you buy the product for £28.39 as you can claim the VAT on the purchase back but you only get to keep £49.99 of the RRP meaning your profit is £21.60.

[Khaleesi78]

How do I lose the £10 profit? Is that due to paying out VAT?

[AlexanderHamilton]

Yes.

If you are VAT Registered you have to charge VAT to your customers then hand it over to HMRC. So unless your customers are willing to pay £71.99 in total (£59.99 plus 20% VAT) then you have to charge £49.99 plus 20% VAT.

[smeerf]

If you're VAT registered, you must charge your customers VAT, complete a monthly/quarterly VAT return with HMRC and supply VAT invoices to customers. This means if you sell something for £120, £20 of that needs to be paid to HMRC.

You do get to claim back the VAT you paid to your supplier which will partially offset what you owe HMRC, but I can't see the advantage in becoming VAT registered at the start up stage.

[Khaleesi78]

It's unlikely I'll go over the threshold for compulsory registration so if it's going to cut my profits I'll not register until I have to.

Thanks so much for your help, I used to do the books and VAT returns for a business but it was 18 years ago and I couldn't quite get my head around everything!

[Khaleesi78]

I'll still need to register with HMRC as a sole trader though won't I?

[AlexanderHamilton]

Yes. You will need to get a UTR number from them & send a self assessment every year.

[Khaleesi78]

Yeah I thought so, great! I'll do that on 1st October which is the day I plan to do my soft launch... wish me luck! Thank you so much for your help