Dear Design Doctor
I hope you can help. I launched my company in September and am attending my first trade show in January with a hope of getting some wholesale orders.
I am not currently VAT registered, and have calculated my wholesale prices with the VAT included as I have not claimed it back. If/when I get wholesale customers, do I need to add VAT on to my prices? Would I benefit from becoming VAT registered before the show and recalculate my wholesale prices? I am so confused! I hope you can help!
‘Congratulations on doing your first trade show! Rest assured, you are not the only new creative who gets confused about VAT!
As consumers we pay VAT all the time on most of our purchases, but we aren’t really aware of it as it is ‘hidden’ in the cost of products and services we buy. It is often only when we become a business that we become aware of VAT.
VAT stands for Value Added Tax, and it is a transaction tax charged on most products or services. The current VAT rate in the UK is 20% for most products and services, but other VAT rates exists for example for kid’s clothes or bread etc.
The way VAT works is like this: businesses charge VAT and you (as a business or consumer) pay your suppliers the VAT. They then pay the VAT to HMRC, the tax man (or claim it back – see below).
Please note: You can only charge VAT if you are VAT registered.
So, don’t include VAT on your price lists, until you become registered. You might want to tell your retail clients verbally that you are not-VAT registered if you like to, or you might state on your invoices that you are not VAT registered, so that they know.
However, you do have to pay the VAT on all business invoices that you get that charge VAT. As you are not VAT registered you can’t claim this back from HMRC.
Businesses that are VAT registered have to do a quarterly VAT return, and they can deduct the VAT that they charge their trade and consumer clients from the VAT that they pay out, and they then either pay the difference or get VAT returned from HMRC.
Should I register for VAT?
If your business has a turnover of more than £79,000 in the last 12 months (figures for 2012/13) then you MUST register for VAT. If your turnover is getting close to this figure then it is advisable to become VAT registered in advance.
You can register voluntarily for VAT.
This is especially advisable if most of your trade clients are VAT registered too (e.g. you are a freelance graphic or web designer working for other businesses, or you are a designer maker selling wholesale only). The advantage is that you can deduct the VAT on any of your incoming invoices from your own outgoing invoices.
If you are registered for VAT then your business will look more professional or business like, as businesses will assume that your turnover is over £79K. However, most design and craft retailers will not expect many small designers to be registered for VAT.
If you register for VAT it is strongly recommended that you work with a qualified bookkeeper or accountant to help you to get started, or to do the quarterly return for you. Obviously this will add costs to your business (although many good accountants will argue that they will save you money by knowing what to deduct legally and by saving you time!).
You will need to keep very good records on a quarterly basis, and potentially pay the VAT on a quarterly basis.
Especially if you are working with international buyers and suppliers it is advisable to get expert advice as VAT can be a very complicated issue.
If most of your clients are consumers then registering for VAT will add basically 20% to the price that they pay, as they are unable to claim VAT back.
If you are thinking about becoming VAT registered and you sell mostly to consumers, then I suggest that your start increasing your prices incrementally in the run up to becoming VAT registered. As consumers can’t claim the VAT back this will mean that if you become VAT registered that your prices jump by around 20%.
If you want to learn more about finance and financial administration then I recommend you get creative business adviser Alison Branagan’s book The Essential Guide to Business for Artists and Designers, Essential Guides, which has got a very good chapter on finance.
If you want more up to date info about VAT then check out the HMRC website concerning VAT and how to get started.
Good luck with your trade show and selling wholesale!’
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