Registering for Vat = huge loss!

malic

So I have a small retail business. My turnover has been growing over the last 5 years but not reached the 75k threshold so I have remained unregistered for vat. That's meant I've been paying vat on my stock charged by suppliers at 23%. I just include that in the cost and add my margin on top.

I'm getting close to the threshold this year so I need to registered for vat soon, I plan to do so Jan 1st 2014.

The problem is I have a lot of stock that I have built up over the last 5 years.
As I've already paid vat on that stock how can I be expected to charge vat again on it? 23% at purchase then another 23% at sale? My margins are typically 20-30% so I'd be up **** creek regarding my current stock.

My accountant tells me there is nothing in place for my scenario. The obvious answer would be to claim all the vat back I've spent on stock the last 5 years on the day I registered but I was told this is not an option. Is that correct?
Another idea was to set up a new company (I am sole trader) and somehow sell the stock to the company. Sounds complicated to me.

My only other thought is to have a big sale and try and clear as much of the remaining stock and not buy any new stock until I've registered but Christmas is coming, I'm going to need a lot of stock + it seems pointless selling stuff off and making no profit. I now wish I'd registered for vat from day 1 but this can't be an uncommon problem!

Any suggestions appreciated. Thanks.

Loughc

malic wrote: »

My accountant tells me there is nothing in place for my scenario. The obvious answer would be to claim all the vat back I've spent on stock the last 5 years on the day I registered but I was told this is not an option. Is that correct?


Another idea was to set up a new company (I am sole trader) and somehow sell the stock to the company. Sounds complicated to me.

Unfortuately your accountant is correct, you cannot claim the vat back on stock you've bought over the last 5 years, if you register for VAT in Jan 14 only invoices dated from Jan-14 on will be accepted.

I'd advise setting up a company as the cost and auditing fees/company registrations costs that come with it are much more demanding than that of a sole trader. Your Accountant may push this as he will ultimately get more fees from you if you do.

ssbob

malic wrote: »

My only other thought is to have a big sale and try and clear as much of the remaining stock and not buy any new stock until I've registered but Christmas is coming, I'm going to need a lot of stock + it seems pointless selling stuff off and making no profit. I now wish I'd registered for vat from day 1 but this can't be an uncommon problem!

Any suggestions appreciated. Thanks.

Hey man, unfortunately your accountant is correct, and to be honest I am not sure you setting up a new company would qualify as an arms length deal.

My thoughts would be(based on the fact that I know nothing about your business) to continue as normal through christmas and try order nothing new if possible and then when Jan comes you can sell off all the remaining stick at a reduced rate before ordering again.

I am not sure of your business model but if you were selling to businesses all along you should have been advised to register for VAT from Day one, because they don't care about the VAT element just the net amount.

Great to hear that you are expanding though;)

malic

Thanks for the replies guys, its good to have the situation confirmed. ssbob, its just selling to public so it seemed to make sense (up until now) not to register.

Looks like I'll get screwed even more by the government with this situation. I'll certainly try to clear some stock before the end of the year but this whole situation is going to be very harmful to my business. I believe the UK's inland revenue allow you to claim old stock back a year or two, do you think its worth trying to negotiate on the situation with the revenue? I'm not talking about a few hundred quid of stock here.

Loughc

malic wrote: »

do you think its worth trying to negotiate on the situation with the revenue? I'm not talking about a few hundred quid of stock here.

The revenue will not BUDGE on this, if there's a possibility on losing out on a euro they won't agree to it.

Gaillimh1976

Would your suppliers take the stock back

e.g. could you return stock to suppliers on last day of October, get a credit note

Register for VAT from Nov 1st, and buy large order of stock on Nov 1st

sonyvision

You could try talk to revenue,

But thinking it from revenue side they have rules in place and rules are rules,

will revenue let you claim back VAT on purchases outside the scope of your VAT date and potential give you a refund, I doubt it. let me know how it goes if you do try

ssbob

Gaillimh1976 wrote: »

Would your suppliers take the stock back

e.g. could you return stock to suppliers on last day of October, get a credit note

Register for VAT from Nov 1st, and buy large order of stock on Nov 1st

This seems like the most sensible solution, surely by now you have built up a great rep with your supplier(s) so possibly returning the goods to them and getting a new order delivered on Jan 1st would allow you to claim the VAT back.

malic

Gaillimh1976 wrote: »

Would your suppliers take the stock back

e.g. could you return stock to suppliers on last day of October, get a credit note

Register for VAT from Nov 1st, and buy large order of stock on Nov 1st

That is a good suggestion, I'll look into this.

malic

sonyvision wrote: »

You could try talk to revenue,

But thinking it from revenue side they have rules in place and rules are rules,

You mean blatant theft. I've already paid the vat that is fact. They should be helping me not harming my business, the reality is if I do well so do they.....I'll get off my soap box now :mad:

Peterdalkey

Gaillimh1976 wrote: »

Would your suppliers take the stock back

e.g. could you return stock to suppliers on last day of October, get a credit note

Register for VAT from Nov 1st, and buy large order of stock on Nov 1st

Seems like a very good idea! As it is a paper exercise, there would not be any need to physically ship the goods back and forth, the legal ownership only needs to transfer back and forth.

clarkey1980

15. Relief for stock-in-trade for newly registered traders

A person who has become liable for VAT may claim a credit, if any, for VAT suffered on the stock-in-trade

(i.e. goods for re-sale but not capital goods, tools) held at the beginning of the first taxable period for which he or she is registered. Where the rates actually charged at the time of purchase of the goods differ from the rates applying at the time the relief is being sought, the local Revenue District should be consulted in relation to the exact amount of VAT which can be reclaimed. No relief is available in respect of VAT on goods purchased prior to registration by a person supplying services.

clarkey1980

http://www.revenue.ie/en/tax/vat/guide/registration.html#section10

malic

clarkey1980 wrote: »

15. Relief for stock-in-trade for newly registered traders

A person who has become liable for VAT may claim a credit, if any, for VAT suffered on the stock-in-trade

(i.e. goods for re-sale but not capital goods, tools) held at the beginning of the first taxable period for which he or she is registered. Where the rates actually charged at the time of purchase of the goods differ from the rates applying at the time the relief is being sought, the local Revenue District should be consulted in relation to the exact amount of VAT which can be reclaimed. No relief is available in respect of VAT on goods purchased prior to registration by a person supplying services.

Ah so my scenario might be covered after all. I'll pass this onto my accountant. Thanks clarkey.

y0ssar1an22

I have a slightly related question....

I will soon be registering as a sole trader but have incurred about 3000 pre-trading expenses (design, prototype, patent, etc). Can I elect to register for VAT and claim input credit of ~690, without having any sales and get that VAT refunded?

Thanks

The Pontiac

y0ssar1an22 wrote: »

I have a slightly related question....

I will soon be registering as a sole trader but have incurred about 3000 pre-trading expenses (design, prototype, patent, etc). Can I elect to register for VAT and claim input credit of ~690, without having any sales and get that VAT refunded?

Thanks

You can't register for VAT now and claim back VAT on purchases made prior to the date of registration.

I'd imagine there would be no problem putting down the €3k as businesses expenses though.

If you know a good accountant then s/he could have pre-dated the VAT registration for you (if they're 'connected'). But when were the services purchased? I doubt s/he could pre-date any further than the start of the present month (October).

My advice is to register now as a sole trader and for VAT, take the hit and move on. Find a good accountant too.

Best of luck!

y0ssar1an22

Is there not a provision whereby you can 'agree' with Revenue to backdate your registration, and thereby claim VAT on pre-trading expenses? I think I came across that somewhere.

DubTony

malic wrote: »

The problem is I have a lot of stock that I have built up over the last 5 years.
As I've already paid vat on that stock how can I be expected to charge vat again on it? 23% at purchase then another 23% at sale? My margins are typically 20-30% so I'd be up **** creek regarding my current stock.

My only other thought is to have a big sale and try and clear as much of the remaining stock and not buy any new stock until I've registered but Christmas is coming, I'm going to need a lot of stock

SO far the elephant in the room has been ignored. I'm sure you know your business but there is no way, in retail, you should be holding stock for that period of time. This stock is already paid for and so is killing your cash flow. It is money sitting on your shelves.
You've come up with the solution yourself. A Sale.
I suggest big monster signs in the windows advertising a "Pre-Christmas Sale" before you register for vat. That will enable you to get back as much as you can.

This old stock is money that is already gone. It's effectively lost, until you turn it into cash, so I wouldn't be too worried about losing anything on the VAT. Get rid of this stock as quickly as you can and get some money in.

BTW, the vat registering requirement is when you are on target to reach the threshold, not when you actually reach it. So when you hit €6250 in a month of regular trading, it's time to start the registration process.

The credit note idea is a good one, and as Peter said, it's only a paper exercise. But that doesn't change the fact that you need to get rid of this stuff ASAP. Look at it positively, it could provide you with a nice Christmas bonus.

sandin

I agree with above - I will never hold a product for more than 15 months. If it doesn't sell by end of the second season (eg xmas goods), clear it out at cost or below as its tying up money and fashions (in all types of retail) move on and your stock becomes tired.

Turn of stock is the single most important aspect of retail. Customers want to see new products often. Go with your first idea - clear out as much as possible, even below cost. Then manage your purchasing better and never hold a product for more than 2 seasons.

malic

Tony & Sandin, those rules apply to high street/mainstream product retail business but not mine.
I'm specialist and my market place is specialist. I have over 1000 product lines which are quite similar but with many variations. I would generally try to have 2 or 3 in stock at any one time and higher quantities for best sellers. Its taken me 5 years to build up my stock, my business depends on having the stock. To sell it all off at a loss would be throwing away years of hard work and growth.

DubTony

malic wrote: »

Tony & Sandin, those rules apply to high street/mainstream product retail business but not mine.
I'm specialist and my market place is specialist. I have over 1000 product lines which are quite similar but with many variations. I would generally try to have 2 or 3 in stock at any one time and higher quantities for best sellers. Its taken me 5 years to build up my stock, my business depends on having the stock. To sell it all off at a loss would be throwing away years of hard work and growth.

I'm not going to tell you how to run your business, and this has nothing to do with your original question, but if a product is sitting on a shelf, be it a widget or a wonka bar, it's costing money, and especially if you run an overdraft.
My background is in convenience store retailing. When I decided to drop a bunch of cigarette brands, as they were rarely restocked, I lost a few customers who shopped with me a few times a year. I'd been holding stock for people who could never have had an impact on my business if they didn't come in. So in that respect, all retail is specialised, or parts of every retail business are specialised.

Anyway, I've loads more i could say, but I won't go on. I do understand that specialist retailers need to carry stock, but I suppose my argument is that even specialists have to draw a line somewhere.

Any chance you'd like to share what business you're in?

malic

DubTony wrote: »

I'm not going to tell you how to run your business, and this has nothing to do with your original question, but if a product is sitting on a shelf, be it a widget or a wonka bar, it's costing money, and especially if you run an overdraft.
My background is in convenience store retailing. When I decided to drop a bunch of cigarette brands, as they were rarely restocked, I lost a few customers who shopped with me a few times a year. I'd been holding stock for people who could never have had an impact on my business if they didn't come in. So in that respect, all retail is specialised, or parts of every retail business are specialised.

Anyway, I've loads more i could say, but I won't go on. I do understand that specialist retailers need to carry stock, but I suppose my argument is that even specialists have to draw a line somewhere.

Any chance you'd like to share what business you're in?

I'd prefer not to be too specific as I've competitors in this board but its e commerce so while Ireland is a big chunk of my market, the EU is also my market, and indeed anywhere really. I totally agree, there is no point in stocking things that don't sell but if your entire business is a cigarette specialist you better have an extensive range, especially when you're competing with much bigger competitors.
When I say its taken me 5 years to build up my stock, what I mean is its taken me 5 years to grow my range of products, that doesn't mean I have stuff that's been gathering dust for 5 years but it does mean I have invested and reinvested in order to have the stock available to ship as soon as an order comes in.

Howjoe1

I agree with DubTony re holding stock.

Take a domestic appliance repair man. Keeping spare parts for every make and model would be costly as oppose to ordering up parts online with a 24hr delivery on a needs basis. Buy maybe your business model wouldn't suit a similar approach.

Peterdalkey

I know the OP was talking about his stock/VAT position, now the thread has morphed into the topic of stock rotation and age.

He says it is a specialised/niche area and I can think of a number of such operations where the fact that they are the only likely vendor to have a slow moving specialist item in stock, I would always try them first. It is their USP and they tend to work on a very tasty margin ( and need it too!) As a customer, the fact that they have it is the big point, not the price. Clearly it would not work if the products were in any way perishable or had a use by date. I would guess if he did not have these slow moving/hard to get items in stock, he might have no trade at all. The trick to grow this type of business is to leveage his advantage to secure more of the regular volume selling lines.

DubTony

Peterdalkey wrote: »

I know the OP was talking about his stock/VAT position, now the thread has morphed into the topic of stock rotation and age.

Yeah my fault. I dragged it OT. Apologies to all.

Peterdalkey wrote:

...the fact that they are the only likely vendor to have a slow moving specialist item in stock, I would always try them first. It is their USP and they tend to work on a very tasty margin ( and need it too!) As a customer, the fact that they have it is the big point, not the price.

I was thinking the same thing. But ...

malic wrote: »

As I've already paid vat on that stock how can I be expected to charge vat again on it? 23% at purchase then another 23% at sale? My margins are typically 20-30% so I'd be up **** creek regarding my current stock.

¯\_(ツ)_/¯

Peterdalkey

Oops!

Trojan

As a counterpoint to the "dragged off-topic", I've found the development of this discussion quite interesting actually. Some of these lead to useful insights.