Part-time trader, should I avoid becoming VAT registered?
Discussion
Hi folks, looking for some advice on my predicament!
Im in the motor-trade full time as an MOT tester and mechanic and self-employed in my spare time as a trader as Id like to get off the tools in the future.
I tend to deal in £3-5K cars (specialising in 3-4 different but similar style cars) and after 9 months trading Ive found myself nearly at the VAT threshold. After doing some sums I really cant see how its worth me continuing and going VAT registered.
I have my cars prepared to a top level and the margins just now are near enough acceptable, I recently decided I need to reduce my spending per car on things that probably arent making any difference (tailor fitted, embroidered car mats being one example) to try and increase margins, but by going VAT registered it just pushes it to being not worth while!
For example I sold 4 cars last month and profit on them was £2000, then I have £500 overheads (I actually have more I will only put through at end of year) so I end up with a £1500 before tax and NI. Say 20% off that £300 so roughly end up with £1200 or £300 per car. Just about acceptable even though theres come-back risk on top of that and every spare minute of my life is taken up with it. Doing this has me at the VAT threshold within 9 months though and the difference in becoming VAT registered would then mean Id also be paying nearly £500 of VAT (after also claiming back what I could) in that month too, meaning net profit would be down to £1000 pre tax and therefore around £200 per car!! Nowhere near worth all the time, efforts and risk!?
Id love to continue and as a legitimate business unlike what seems like everyone else on Gumtree and the likes, but how can that be worthwhile?
I feel like its make or break for it, either;
1. bite the bullet and go VAT registered, try and cut my overheads and cost-per-car to compensate a little and try not let it stop any momentum Ive got.
2. Stop trading until the 12months rolling period is up and stay under the VAT limit from then on, somewhat restricting the possible potential.
3. Realise it simply isnt worth it, call it a day, make less money but be more stress-free and have my spare time back and maybe turn-over the occasional car privately!?
Id love some advice from you guys!
Im in the motor-trade full time as an MOT tester and mechanic and self-employed in my spare time as a trader as Id like to get off the tools in the future.
I tend to deal in £3-5K cars (specialising in 3-4 different but similar style cars) and after 9 months trading Ive found myself nearly at the VAT threshold. After doing some sums I really cant see how its worth me continuing and going VAT registered.
I have my cars prepared to a top level and the margins just now are near enough acceptable, I recently decided I need to reduce my spending per car on things that probably arent making any difference (tailor fitted, embroidered car mats being one example) to try and increase margins, but by going VAT registered it just pushes it to being not worth while!
For example I sold 4 cars last month and profit on them was £2000, then I have £500 overheads (I actually have more I will only put through at end of year) so I end up with a £1500 before tax and NI. Say 20% off that £300 so roughly end up with £1200 or £300 per car. Just about acceptable even though theres come-back risk on top of that and every spare minute of my life is taken up with it. Doing this has me at the VAT threshold within 9 months though and the difference in becoming VAT registered would then mean Id also be paying nearly £500 of VAT (after also claiming back what I could) in that month too, meaning net profit would be down to £1000 pre tax and therefore around £200 per car!! Nowhere near worth all the time, efforts and risk!?
Id love to continue and as a legitimate business unlike what seems like everyone else on Gumtree and the likes, but how can that be worthwhile?
I feel like its make or break for it, either;
1. bite the bullet and go VAT registered, try and cut my overheads and cost-per-car to compensate a little and try not let it stop any momentum Ive got.
2. Stop trading until the 12months rolling period is up and stay under the VAT limit from then on, somewhat restricting the possible potential.
3. Realise it simply isnt worth it, call it a day, make less money but be more stress-free and have my spare time back and maybe turn-over the occasional car privately!?
Id love some advice from you guys!
Edited by PetrolHeed on Wednesday 3rd January 19:01
Check your sums. Assuming the difference between purchase and sales price of the 4 cars was £2,000, then you would owe 1/6 of this in VAT, or £333. If your costs of £500 include VAT, there is £83 you can claim back, so you end up paying £250 VAT.
Edited by RM on Wednesday 3rd January 20:52
RM said:
Check your sums. Assuming the difference between purchase and sales price of the 4 cars was £2,000, then you would owe 1/6 of this in VAT, or £333. If your costs of £500 include VAT, there is £83 you can claim back, so you end up paying £250 VAT.
I assume "overheads" = workshop / bills / autotrader / etc not prep costs. I took his profit to be sale price minus the price he bought the vehicles for + prep costs.Edited by RM on Wednesday 3rd January 20:52
Hi RM, thanks but I understand how the margin scheme works.
The profit I made on the cars was £2000, IE after I had the outlays of doing the work to them. So I had spent £1500 across the 4 cars getting them to my standard, so I pay VAT on £3500 (the difference between purchase price and sale price of them) which is £585, and then on my expenses I only had around £125 VAT to claim back as my mechanic and valeter etc arent VAT registered, no VAT on insurance etc, leaving me with £460 of VAT to pay! So I pay VAT on £3500 even though there was only a ‘true’ £1500 profit!
Selling cars legitimately part-time (and no dif full-time?), a £2000 profit per month is £1500 after overheads of a legitimate business (and i dont even need to rent premises etc), then £800 after VAT and tax! So the government practically gets 50% of my profits, for a second job I get off my ars@ to do. Its unbelievable.
The profit I made on the cars was £2000, IE after I had the outlays of doing the work to them. So I had spent £1500 across the 4 cars getting them to my standard, so I pay VAT on £3500 (the difference between purchase price and sale price of them) which is £585, and then on my expenses I only had around £125 VAT to claim back as my mechanic and valeter etc arent VAT registered, no VAT on insurance etc, leaving me with £460 of VAT to pay! So I pay VAT on £3500 even though there was only a ‘true’ £1500 profit!
Selling cars legitimately part-time (and no dif full-time?), a £2000 profit per month is £1500 after overheads of a legitimate business (and i dont even need to rent premises etc), then £800 after VAT and tax! So the government practically gets 50% of my profits, for a second job I get off my ars@ to do. Its unbelievable.
Edited by PetrolHeed on Wednesday 3rd January 22:57
It is crap in fairness when your starting out and get to what i call the middle ground of VAT. I'm not in the car trade but I had a similar headache as my business grew. There was a bit in the middle where once I had to register the VAT then left nowhere near enough on the bone to make it worthwhile.
That being said, I bit the bullet and went for it and now I have 2 businesses that are my full-time jobs. Once I was past that "middle ground" so to speak then obviously it becomes a lot better and profitable. As you ramp up costs also then become lower as you buy in bulk or make contacts within the industry that give you a helping hand.
If your not looking at going into car sales full time then I can only recommend that you stay below the threshold and just do it for part of the year or slow it down so to speak.
That being said, I bit the bullet and went for it and now I have 2 businesses that are my full-time jobs. Once I was past that "middle ground" so to speak then obviously it becomes a lot better and profitable. As you ramp up costs also then become lower as you buy in bulk or make contacts within the industry that give you a helping hand.
If your not looking at going into car sales full time then I can only recommend that you stay below the threshold and just do it for part of the year or slow it down so to speak.
In my experience, you're doing well making the money you are on it.
If you interested in selling cars,sell 2 a month not 4 a month,and get some life back.
If you're short of money, do some mechanicing on the side.
I would never recommend being VAT registered unless you can absolutely help it. It's a PITA.
If you interested in selling cars,sell 2 a month not 4 a month,and get some life back.
If you're short of money, do some mechanicing on the side.
I would never recommend being VAT registered unless you can absolutely help it. It's a PITA.
Thanks for the replies.
The problem with even 2 companies is firstly that im self employed so it would need to be set up as LTD company to be seperste or maybe have my Mrs look like shes also self employed- but for the 3 months itll be over, all that extra effort will probably only be to the effect of £3600 maximum in profit after tax if you base it on a good 3 months!
The other problem is that even going VAT registered, its not like im then going to be turning over £200k, Ill probably be in the region of £100k so not much over the threshold but taking the pain and costs of VAT registration.
Based on last month I can;
-Become VAT registered and make approx £1000 pre-tax 12 months of the year along with much more hassle- £12000 annual pre tax.
-Stay under the threshold and make approx £1500 pre-tax 9 months of year (obv spread it out over year if pos)- £13500 annual pre tax.
That isnt including cost of accountant etc which Id need involved with VAT, currently do paperwork, spreadsheets etc myself.
I really wanted to continue on, I dont want to ‘take a break’ or ‘stop trading’ for 3 months, it seems crazy and I enjoy it and like doing it all legitimately. But looks like the government once again is punishing those who work hard and because I will only just be over the threshold its just not worth it, I would actually make less money by working the next 3 months of my year and becoming VAT registered!
Hmmm!!
The problem with even 2 companies is firstly that im self employed so it would need to be set up as LTD company to be seperste or maybe have my Mrs look like shes also self employed- but for the 3 months itll be over, all that extra effort will probably only be to the effect of £3600 maximum in profit after tax if you base it on a good 3 months!
The other problem is that even going VAT registered, its not like im then going to be turning over £200k, Ill probably be in the region of £100k so not much over the threshold but taking the pain and costs of VAT registration.
Based on last month I can;
-Become VAT registered and make approx £1000 pre-tax 12 months of the year along with much more hassle- £12000 annual pre tax.
-Stay under the threshold and make approx £1500 pre-tax 9 months of year (obv spread it out over year if pos)- £13500 annual pre tax.
That isnt including cost of accountant etc which Id need involved with VAT, currently do paperwork, spreadsheets etc myself.
I really wanted to continue on, I dont want to ‘take a break’ or ‘stop trading’ for 3 months, it seems crazy and I enjoy it and like doing it all legitimately. But looks like the government once again is punishing those who work hard and because I will only just be over the threshold its just not worth it, I would actually make less money by working the next 3 months of my year and becoming VAT registered!
Hmmm!!
PetrolHeed said:
That’ll make my situation worse!?
Any more details?
It was mooted that this would happen in the November Budget (based on a recommendation by the Office of Tax Simplification).Any more details?
The Chancellor commented on this in his Budget Speech but said that he would not be reducing the compulsory registration threshold THIS year. But it does look like it is something they are seriously considering. I reckon it will happen around 2020.
PetrolHeed said:
Hi RM, thanks but I understand how the margin scheme works.
The profit I made on the cars was £2000, IE after I had the outlays of doing the work to them. So I had spent £1500 across the 4 cars getting them to my standard, so I pay VAT on £3500 (the difference between purchase price and sale price of them) which is £585, and then on my expenses I only had around £125 VAT to claim back as my mechanic and valeter etc arent VAT registered, no VAT on insurance etc, leaving me with £460 of VAT to pay! So I pay VAT on £3500 even though there was only a ‘true’ £1500 profit!
Selling cars legitimately part-time (and no dif full-time?), a £2000 profit per month is £1500 after overheads of a legitimate business (and i dont even need to rent premises etc), then £800 after VAT and tax! So the government practically gets 50% of my profits, for a second job I get off my ars@ to do. Its unbelievable.
Cool. If you are in the position where it is all output VAT and no input VAT to claim back then it is a killer.The profit I made on the cars was £2000, IE after I had the outlays of doing the work to them. So I had spent £1500 across the 4 cars getting them to my standard, so I pay VAT on £3500 (the difference between purchase price and sale price of them) which is £585, and then on my expenses I only had around £125 VAT to claim back as my mechanic and valeter etc arent VAT registered, no VAT on insurance etc, leaving me with £460 of VAT to pay! So I pay VAT on £3500 even though there was only a ‘true’ £1500 profit!
Selling cars legitimately part-time (and no dif full-time?), a £2000 profit per month is £1500 after overheads of a legitimate business (and i dont even need to rent premises etc), then £800 after VAT and tax! So the government practically gets 50% of my profits, for a second job I get off my ars@ to do. Its unbelievable.
Edited by PetrolHeed on Wednesday 3rd January 22:57
The other thing is to look again at your suppliers. When not VAT registered you obviously compare VAT inclusive prices, and so those that aren't VAT registered are often the cheapest. When registered that can change, and you may find VAT registered suppliers can now beat them.
On a general level though, I would say go for it (been there, though not in the motor trade). Otherwise you will always have the artificial ceiling that stops you growing. As Eric stated, it is likely that the VAT threshold will be reduced, or even abolished, in the near future - for exactly the reasons you have described.
I think for small car sales outfits like myself you should be able to be in the flat rate scheme aswell as the margin scheme. I dont see how its fair that they decide to put VAT on used cars by using the margin scheme to suit HMRC (not us!) becuase they could never make them fully VAT payable obviously, but then that means you cant be in the flat rate which would suit my situation of too much VAT output and not much VAT input!
As you say, if I go on to register for VAT, I will have to look at everything differently to try best suit my new circumstances. The problem is you can get a small self-employed mechanic to work for £20P/H but obviously not VAT registered, a VAT registered garage is probably more likely £35+VAT per hour. Much the same with my small self employed Valeter. Another big overhead is insurance, and typical that has IPT on it and not VAT!
I kind of feel the same way as you about the ceiling with the threshold, but on the other hand doing it part-time I will only be turning over around £100K and in that circumstance Im actually better off staying under the threshold and taking 3 months off. Haha, sounds good but thats madness!
As you say, if I go on to register for VAT, I will have to look at everything differently to try best suit my new circumstances. The problem is you can get a small self-employed mechanic to work for £20P/H but obviously not VAT registered, a VAT registered garage is probably more likely £35+VAT per hour. Much the same with my small self employed Valeter. Another big overhead is insurance, and typical that has IPT on it and not VAT!
I kind of feel the same way as you about the ceiling with the threshold, but on the other hand doing it part-time I will only be turning over around £100K and in that circumstance Im actually better off staying under the threshold and taking 3 months off. Haha, sounds good but thats madness!
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