Make More Profit By Registering For VAT

For those of you who don’t like reading I’ll say right at the start that I think YOU SHOULD GET REGISTERED FOR VAT AS SOON AS POSSIBLE unless a large proportion of your work is for private individuals or non-registered businesses.

I’ve made a calculator to show how much extra profit you’d make by being VAT registered and to work out whether the Flat Rate Scheme is better for you.

While processing our suppliers’ invoices it never fails to amaze me how many courier owner drivers and even small courier companies aren’t registered for VAT. With the VAT rate due to increase to 20% in January it seems to me that it’s now essential that everyone in this business gets VAT registered as soon as possible.

How far would you drive to save 20p/litre on fuel costs? How much haggling would you be prepared to do to knock £2,000+ off the cost of a new van? How about all your customers agreeing to increase your rates by 20%? This is what you’re missing out on by not being VAT registered.

Many people seem to be scared of registering for VAT – worried that the paperwork will be too much or that they’ll have VAT inspectors visiting every few weeks maybe. The paperwork is simple, and under the Flat Rate Scheme it’s so simple that it shouldn’t take more than a few minutes every three months to administer.

Using the Flat Rate Scheme you add VAT (currently 17.5%, increasing to 20% in January 2011) to all your invoices (this will make no difference at all to most of your business customers because they can claim the VAT back) and then pay a lower percentage (currently 9%, going up to 10% in January. 1% reduction in the first year in both cases) of the total to HMRC once a quarter.

In case you’re not good with numbers that means (from January) that when you charge £100 for a job you’ll invoice for £120 including VAT and then have to pay £12 (£10.80 in your first year of registration) back to HMRC. That’s 8% of your turnover added straight onto your bottom line profits.

So what about the paperwork? Using the Cash Based Turnover Method of the Flat Rate Scheme you only account for VAT on payments you actually receive – so for many owner-drivers and small courier companies all that’s needed is to sit down once a quarter with your bank statements, add up all the payments you’ve had into your account and multiply the total by the Flat Rate percentage. That’s it. No piles of fuel receipts to sort through, no working out how much VAT you paid on the printer ink you bought with the shopping from Tesco, no messing about. You only claim back the VAT on capital purchases over £2,000 so everything’s made simple for you.

And there’s more good news. Providing you’ve still got the goods and the VAT receipts at the time you register you can claim back the VAT on any goods you bought for your business up to THREE YEARS before your registration date. So that van you paid £12,000 for 2 years ago is now worth a VAT reclaim of nearly £1800 to you. And the VAT on any ‘services’ you’ve paid for in the last 6 months (your CX subs for example) can also be claimed back, as long as the service didn’t relate to goods which you don’t own any more (repairs to a van which you’ve sold on for example) and you’ve still got the receipt.

For businesses which subcontract a lot of work out to VAT registered subcontractors or which rent or lease their vehicles it can be more profitable to pay VAT in the normal way rather than using the Flat Rate Scheme. The paperwork is slightly more complicated but it’s still pretty simple and isn’t really a lot of extra effort added onto your existing responsibility for keeping proper financial records.

Most people have an idea of how standard VAT works I think, but the basics are that you charge vat at 17.5% (20% from Jan) on all the work you carry out. You then owe that 17.5% to HMRC but before paying them you deduct from it any VAT you’ve paid out in connection with your business – so you’re claiming back the VAT you pay out on your fuel, vehicles, subcontractors, phone bill, computer equipment, CX subs etc. If, like most courier businesses, you tend to pay your suppliers before you get paid by your customers you should opt for the ‘Cash Accounting’ method of accounting for VAT – so you only have to pay the VAT to HMRC when you’ve already been paid by your customer and you claim back the VAT you’ve paid to suppliers only when you’ve paid it.

Whichever scheme you opt for, stop handing over your money to the Government for nothing and register for VAT as soon as possible. There’s a bit of a delay in registration and it can make it a bit messy invoicing customers while you’re waiting for your registration to be confirmed (see here) but you can avoid any problems by setting your registration date a couple of months after the date you apply. That way you’ll already have your VAT number by the time you have to start charging your customers VAT.

Do it today.

How to Register for VAT

Flat Rate Scheme for VAT

Cash Accounting Scheme for VAT

Reclaiming VAT on goods you bought before registration

Reclaiming VAT on services you bought before registration

Posted under Finance and Accounting

Posted by Alec at 10:06 am, August 23, 2010

8 Comments so far

  1. Barbara added on  February 11th, 2013 at 5:57 pm

    I’m confused with regards to VAT. Surely, if you charge VAT to your customers, and then claim VAT back on fuel, servicing etc – your Input Tax would need to be more than your Output! If that is so you would never have a profit as your expenses would also be more – based on 20% rate. Am I missing something that makes it work for Courier Drivers to register for VAT? Some advice would be appreciated as still doubt whether or not to register! Thank you.

  2. A simplified example:

    If the situation now is that you charge your customers £1,000 in a week and have expenses of £360 per week including VAT then your profit is £640 for the week.

    If you register for VAT you charge your customers £1,000 plus VAT (£1,200 total) and pay HMRC the £200 VAT you’ve charged LESS the £60 VAT which you can reclaim on your expenses – so you only pay £140 of the £200 VAT you’ve charged – you make an extra £60 profit.

    If you were to register under the Flat Rate Scheme then you charge £1,000 plus VAT (£1,200 total) and then pay 10% of that (£120) to HMRC, leaving you £80 better off.

  3. I’ve updated the tool which demonstrates the advantages of being VAT registered – The Financial Benefit Of VAT Registration For Same Day Couriers

  4. Barbara added on  February 20th, 2013 at 7:36 pm

    Thank you. Did also discuss this with a mate in the business and now understand that the money you are paying back to HMRC is money which you would not have unless you go VAT Registered. Phew!! Thanks again. Hope this helps other too!??

  5. nigel added on  June 10th, 2013 at 12:51 pm

    hi bit confused here, can you help
    been a courier for last few years getting paid a set wage for the job i do almost to the stage where you think your employed, anyway now the company says to make more money become voluntary vat registered and claim the vat back from fuel and van hire, after reading loads of comments on websites it seems i got to get the company to pay vat on top of my wages or am i wrong
    earn 600, van hire 100, fuel 200
    yours
    nigel

  6. Alec added on  June 10th, 2013 at 1:10 pm

    Yes, exactly that. If they pay you £600 pw now then they would pay you £600 + £120 VAT if you registered for VAT.

    If your total outgoings are £300 (and I guess they’re not because you’ve presumably got your mobile bill and other costs which are subject to VAT as well) then you’d either reclaim £50 pw (the VAT portion of £300) before handing over £70 pw of the VAT you’ve charged to HMRC – that’s £50 pw profit for you – OR you’d register under the Flat Rate Scheme and just repay HMRC £72 (64.80 in the first year) per week – that’s £48 pw (£55.20 pw in the first year) extra profit for you. The Flat Rate scheme is MUCH easier for you to keep track of, you just charge the VAT at 20% then pay HMRC 10% (9% in the first year) of everything you get paid.

  7. nigel added on  June 10th, 2013 at 7:28 pm

    hi Alex, i do have mobile at £40 (6.67vat) per month and a scanner at £15 (2.50vat)per week to take off as well, as for the scanner they invoice it at the bottom of payslip should this be seperate
    going by your workout of the 600,the bit i find confusing here is i know i can claim back the 50, but do i still have to pay HMRC 70, work vat £120 – reclaim £50 = £70
    nigel

  8. Alec added on  June 10th, 2013 at 7:53 pm

    I was going off the figures you mentioned.

    If you register for VAT and ignore the Flat Rate Scheme (FRS) then you just charge your customer the 20% VAT on everything you earn LESS the VAT on everything you pay out for. So think of a week with income £600, van £100, fuel £200 (your figures). Assuming ‘normal’ VAT as against the Flat Rate Vat Scheme – you’re charging £120 VAT on your £600 income then reclaiming the VAT on £300 (£50), so you pay £120, less the £50 you pay out for your van and fuel, less £2.50 for the VAT on your scanner, £1.50 for the VAT on your mobile and probably a few more quid pw on anything else you can be bothered claiming for. Your VAT bill is maybe £2808 per year and you’ve charged £6240 in VAT, so you’ve made £3432 extra profit for the year.

    I have to say though, unless you’re working a very short day the those figures aren’t allowing you to earn a fair amount for what you’re doing. None of my business though.

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