The Wholesale Forums

[Trader_David]

I am having trouble understanding the implications of VAT. Heres 2 scenarios about.

Not VAT registered:
If I buy a product for £150 and pay input VAT @ 17.5% which is £26.25.
I then sell the product for £200. Hence my profit will be £23.75

VAT registered:
If I buy a product for £150 and pay input VAT @ 17.5% which is £26.25.
I then sell the product for £200 (inclusive of VAT). The output VAT will be £29.79
Because I am VAT registered, I can claim my input VAT back, which means I am out a total of £3.54 (29.79-26.25).
Therefore profit will be £200 – £150 - £3.54 = £46.46

Profit is greater if I am VAT registered.

Can anyone explain to me why it is better to not be VAT registered?
Am I missing something?

Thanks

[Supremetronics]

Basically what would happen is, the VAT you paid when buying £26.25 is offset on the VAT you charge £29.79.

As you have already paid £26.25 when buying the goods, you only pay £29.79 - £26.25 = £3.54 to inland revenue.

So in reality you have paid £29.79 in VAT (£26.25 + £3.54)

Therefore profit will be £200 - £150 - £29.79 = £20.21

So profit is less when VAT registered.

Thats why its better for retailers not to be VAT registered

[DSC]

fibbler's correct although don't forget you can also offset other VAT paid by your company, such as the purchase of a new computer.