Meet Bob, An Entrepreneur Who Has Seen A Great Social Media Video!
Bob is an entrepreneur running several small unconnected businesses.
One of his smaller businesses has been doing well selling Bobgits, which have a RRP of £500.
He is anticipating that his will sell 170 Bogbits next year generating £85,000 of sales.
With £35,000 of expenditure the Bobgits make Bob £50,000 before tax (£40,500 after tax).
Although his sales are not at the threshold for VAT he has seen on social media some great videos saying that he can claim back VAT on his expenses. For every £100 he spends he gets £17 back from HMRC. Cool right?
Sorry Bob, no it isn’t!
If Bob registers for VAT he will be able to claim back VAT on his expenditure but only of the amounts where VAT has been charged. In Bob’s case this is only £15,000 of the £35,000. Which would be £2,500. Still sounds cool though right?
Sorry Bob, no it isn’t!
Luckly Bob decides to get some advice from a Finance Management professional. He discovers that by registering he will have to pay HMRC VAT on the sales he makes because the Bobgit is a VATable good.
Bob knows that the Bobgit sells well at £500, and customers know that is the RRP.
Bob has two options, he either keeps the price of the Bobgit at £500 and gives up the VAT on that of £83, lowering his profit, or he increases the price by 20% to £600 and gives HMRC the additional £100.
Bob does some market research and discovers his sales would fall if he increased the price to £600 ☹ because people can go elsewhere. So he decides he will keep the price the same.
The FM professional helps Bob with projections based on his new knowledge.
By registering for VAT he would be worse off because:
1) Bob is giving away £14k of his sales in VAT, so net sales reduce by 17%
2) Bob is only able to reclaim £2.5k in VAT on expenses.
The conclusion: Bob would be working just as hard for less profit!
Bob still thinks it will be a good idea to register for VAT because the social media video was so convincing!
So the FM professional demonstrates Bob what it would take to achieve the same original profit after tax of £40.5k, if sales were the only lever.
Factoring in that variable costs will go up in line with sales he will need to sell 52 more Bobgits (an increase of 25%):
In other words he will have to work 25% harder to obtain just a 4% increase in net sales, to end up where he originally started:
His FM professional points out that the real winners would be 1) HMRC who would receive a net of £14.549 in VAT, 2) his suppliers would now make an extra 25% because they are already VAT registered and 3) his Accountant Firm charging him more for VAT returns.
Bob has a better idea!
Plus, Bob doesn’t think there is a market for more than 180 Bobgits in his catchment area and so trying to sell 212 would saturate the market.
Thanks to the FM professional Bob decides to move on and look at better ways to make a profit 😊
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