[Question] VAT,profit calculation

[league_of_ordinary_men]

I am a little confused about how my competitor makes money can someone please help with this calculation.Lets say the cost price I get a product for from my supplier is R100 excluding 14% VAT so the total for the product from the supplier is R114 now + 5% profit = R119.7 now I am not registered for VAT yet so I don't charge my clients VAT but he is registered,so now if the price is R114 from the supplier how can he make profit(5%) when the total he charges is R119.7 when the VAT(14%) he charges is more then the (5%)profit he makes?I know I am just missing something.

[Blurock]

There is a difference between MARK UP and profit. Get to understand that before you start losing money.

[Dave A]

Blurock is right - what you're describing is markup, not profit margin which is a percentage of turnover. But let's stick to the numbers you're working with to explain how your competitor is still making a profit.

As an unregistered vendor your position is simple - you buy the product at R114 and sell it at R119.70 - you make R5.70.

Your competitor does the same, except he/she is VAT registered. Your competitor will make R5.00 and will have to pay over 70c for VAT to SARS - the value add portion.

	Gross	Nett (ex VAT)	VAT
Output (Sales)	119.70	105.00	14.70
Input (Costs)	114.00	100.00	14.00
VAT owed			0.70
Profit		5.00

[league_of_ordinary_men]

Hi blurock and Dave A.Thanks for the input.Blurock,I am not trading yet that's why I am asking these questions to clear up some stuff.We all have to learn some how and that's why I am thank full for people like you on a this form.Dave A,thank you for your example,it put me on the right track.

[league_of_ordinary_men]

Dave A,so in your example my competitor only pays VAT on the profit he makes and not on the mark up?

So he/she only charges VAT on his profit?
What happens to the VAT he payed for the product to start with?

As I under stand it he/she is registered for VAT so he/she can clam that VAT(R114-14% VAT=R100 so he/she get's R14 back?)?
Now that brings me to another question do you think I should register for VAT because if I have allot of sales I can clam back that VAT(Right or wrong)?

[Dave A]

So he/she only charges VAT on his profit?

Not quite. He deducts the VAT he's been charged by his suppliers. If his supplier was not a registered VAT vendor, he'd have nothing to deduct and would have to pay SARS R14.70.

What happens to the VAT he payed for the product to start with?

That was paid to SARS by his supplier (less any VAT the supplier was charged on his inputs).

Now that brings me to another question do you think I should register for VAT because if I have allot of sales I can clam back that VAT(Right or wrong)?

That's where things get interesting. When you have the choice as to whether to be VAT registered or not, I suggest the biggest factor is whether your clients are VAT registered or not.

From the original example, the non-registered vendor is making R5.70 whereas the registered vendor is only making R5.00, so at first glance being non-registered is an advantage. However, if your client is VAT registered and can claim the VAT portion back, effectively the purchase would only be costing them R105.00 instead of R119.70 - which means being a VAT registered supplier to a VAT registered client gives you a price advantage.

You could even sell the product at a 15% markup and still be beating the unregistered vendor's effective price by a nice little margin

You need to understand your market and play with the numbers.

[IMHO]

It is never in your interest to be VAT registered. If you have a choice, do not register. As others have said, the market can force you to register, while SARS is not. This happens when your customers is registered as well and they want to claim their input VAT. This is the only time that you should consider registering, because registered customers simply will not buy from you, if you are not registered. Even then, do a calculation on the portion of customers that is registered. If it is a very small percentage of your business, you can afford to lose them and still make more money.

However, if your customer do not want to claim back, you charge the same price or slightly less than your competitor who is registered and still make more money. You can use this advantage of not being registered to make more profit, or, cut your price to be more competitive.

Also keep in mind, to be registered puts a lot more administration on your plate. Actually, it is a pain in the 'backside'.

To come back to Gross and Markup. It is important to understand the difference.

Cost R100
Sell R120
Markup = 20%
Gross = 16.667%

Formula Markup: (Sell-cost)/cost*100
Formula Gross: (Sell-cost)/Sell*100

Why is it important?
Say you work out your expenses is 15% of your turnover. You want to make 5% more as profit. So, you must make 20% profit to achieve your goal. Is this 20% Markup, or 20% gross?

Let us put it another way.
Sales R120 000
COS R100 000 ( COS=cost of sales. You marked up your stock you sold by 20% MARKUP)
Gross Profit R20 000 ( 16.6%) (R120 000 minus 16.667% = R99 999.60)

Expenses R15 000 (Energy, wages, rent etc)

Nett Profit (R20000-R15000) = R5000 (4.17%)

The danger is that you fall into the trap of starting to mark up your goods by 16.6%, thinking that that is what you need. You will then just make R116 667 sales and have a shortfall on your goal, with nett profit of R 1 667.

Also, when speaking to other people and you hear their strategy on profit and percentages, make sure you understand what they mean, as there is as you can see, a huge difference. At the end of the day, it is easier to use markup to set prices, as long as this markup is high enough to cover the difference of gross and you understand what you are doing.

[league_of_ordinary_men]

IMHO, awesome reply thanks for the calculation I think I am starting to get it.Dave A,thanks for answering my questions.Ok now something I don't get let's take my first example

"As an unregistered vendor your position is simple - you buy the product at R114 and sell it at R119.70 - you make R5.70.
Your competitor does the same, except he/she is VAT registered. Your competitor will make R5.00 and will have to pay over 70c for VAT to SARS - the value add portion."

Now I hope this doesn't sound like a repeat post.Just to clarify how does it work when my supplier is registered for VAT so he/she add's 14% to his price R100 + 14% VAT so R114 is what I pay.I think I know where my problem lies,I don't understand fully how the whole VAT system work's I understand you need to add 14% VAT to the product you sell but if my competitor who is VAT registered buys a product from my supplier who is also VAT registered what can he do about the 14% VAT the supplier add's to the product and what can I do who is not VAT registered?Like can he deduct the 14% VAT because he is VAT registered(and how)?And what do I do who is not VAT registered?And how do I add VAT to a product properly(like when I asked you Dave A if he only pays VAT on his profit because of the 70c VAT he pays to SARS)? Maybe you can lay it out for me please.

Thank you very much for sticking it out with me and explaining it to me almost there.

[IMHO]

I will attempt to answer your questions after explaining the VAT collection system, with this image. If it is not readable on your screen, right click on it, save to desktop and view it from there, as you will be able to zoom in on it.

[IMHO]

When you are VAT registered, you have to report to SARS on a two monthly cycle what happened in your business, show your Output vat, show your input VAT, calculate what you owe them and pay it immediately. They then have checks and balances and will query you on everything that looks suspicious, upon which you must prove to them with documentation that your calculations is correct. So, forget about cheating. Many a professional is sitting in jail, doing time, because he thought he can outsmart SARS.

On the form, you first declare you Output VAT. That is a summary of all your sales. Does not matter to whom you sold and if they are VAT registered or not. In other words, your total turnover. 14% Vat is then calculated on this and that is what you owe them before you deduct what you are allowed to claim.

Next portion of the form, part B, deals with what you may claim and is called Input VAT. This is a summary of the VAT that you paid. This you get from all VAT invoices made out to you. A vat invoice has very specific rules and can only be made out by someone who is VAT registered. That is why companies and business that is VAT registered, will not buy from someone who is not registered, because they will not get a legal VAT invoice. The rules on a legal VAT invoice is very specific and every single thing in it, must be complied with. Therefore, make sure you know the rules and insist on getting legal VAT invoices. If you claim VAT paid on an Invoice that does not comply, does not matter how small the deviance is, SARS will not allow the claim and you will have to pay it back. If SARS audit you after a few years, the amount of claims they disallow can be substantial. It must be paid back immediately plus interest and needless to say, this can bankrupt you, if not landing you in jail. So make sure you know the rules and comply.

Input VAT is like I said, a summary of the VAT that you paid on legal VAT Invoices. It can be your Municipal account, your telephone account, bank charges, stock for resell purchased, Rent paid, anything you paid to an entity that is VAT registered. Some invoices will be for things that is exempt, like petrol. The invoice will show no VAT, so you will not claim VAT.

So now you take your Output Vat in Part A and deduct your Input Vat in Part B. This is declared in Part C and can be a positive or negative amount. If positive, you pay it immediately, if negative, you wait for SARS to pay you. Before paying you, they might first query you and ask for documentation to prove the claim.


That in a nutshell. Now you can ask again what you do not understand.

[league_of_ordinary_men]

IMHO,thanks for the help.Can you please help me with this calculation.My competitor sells a product for R629 I get it at cost price for R525 can you please help me calculate for an example how much his VAT,profit,markup.....etc is please.

[league_of_ordinary_men]

IMHO,I for got to add the R525 cost price is exclusive of VAT.

[IMHO]

Your question force me to make the following assumptions:
You both buy from the same supplier that is VAT registered.
Your competitor is VAT registered.
You are not VAT registered.
Competitor pays the same price as you.
You both get a VAT invoice.

Competitor:
Cost R598.50 incl R525 excl
Sell R629 incl R551.75 excl

Output VAT R77.25
Input VAT R73.50
VAT paid R3.75

Profit: R 26.75 4.85% Gross 5.09% Markup

You:
Cost R598.50
Sell R629

Output VAT NIL
Input VAT NIL
VAT paid NIL

Profit: R 30.50 4.85% Gross 5.09% Markup

Percentages is the same, but you made R3.75 more.

Remember one thing, his Input VAT is slightly more, as he is allowed to claim other input vat on his other expenses.
Therefore he will probably pay R3.70 vat instead of R3.75. This is different for all business, as the nature of expenses is different.

[league_of_ordinary_men]

How did you do that calculation please.

[IMHO]

I do not know what you are revering to. To go from excl to incl, multiply by 1.14.
From inclusive to exclusive, divide by 1.14.

Output VAT is the difference between incl. sell and excl. sell.
Input VAT is the difference between incl cost and excl cost.

Gross and Markup I have shown before.

Profit is the difference between excl sell and excl cost.

If you take incl sell minus incl cost, you get an incl profit, divide that by 1.14 and you have excl profit.

Profit can only be excl.