Once your business is registered for VAT, you’ll have to adjust your prices to factor in this VAT element – find out more about Value-Added Tax (VAT) here
At this point, you have two main choices when it comes to your pricing.
- Option 1: Add the 20% VAT element to your prices – option 1 means charging your usual prices plus 20% VAT on top. So the customer (assuming they’re individuals and not VAT registered) would pay 20% more for the product and you would still get the same unit price per product net – in other words, the customer absorbs the price rise.
- Option 2: Leave your prices as they are – with option 2, you leave your prices as they are. If you’re not able to pass on the cost to the customer, the business will absorb the 20% VAT element within this price.
If you meet the requirements, you can join the flat-rate VAT scheme to reduce the amount of VAT you then pay to HM Revenue & Customs (HMRC).
Under the flat-rate scheme, you pay a reduced VAT rate (between 4% to 14.5%, depending on your industry) to HMRC, which helps you improve your profit margin – Find out more about the flat-rate scheme here
So, if you’re running a manufacturing business and using the flat-rate scheme, you’d pay 9% VAT to HMRC – instead of the full 20%. You can also get a further 1% discount on this in the first year of using the scheme, bringing your VAT rate down to 8%.
An example of the two options in action
Let’s see how this works in practice at the reduced flat-rate of 8%.
- Option 1 – You manufacture product A, which is priced at £10. If you opt to add 20% to this price, your customer will pay £10 plus VAT at 20% – so a total price of £12. You then pay HMRC 8% of the £10 = £0.80p (the difference is a flat-rate scheme surplus).
- Option 2 – If you absorb the VAT cost within the existing price, the customer still pays £10 (which is £8.33 net plus 20% VAT). Then you would pay HMRC 8% of £8.33 = £0.66p (but you don’t have the additional £2 from the customer).
Which option should I choose?
So should you choose put your prices up (option 1) or leave your prices as they are (option 2)?
The answer comes down to the kind of customer you usually sell to and whether they’ll willinging pay an increased price, without any additional perceived value for themselves.
- Business-to-business (B2B) companies – if you sell mainly to other businesses, and those businesses are VAT registered, your customers will be able to reclaim the extra 20% VAT element of your new increased price. So if you choose option 1, they won’t lose out and neither will you.
- Business-to-consumer (B2C) companies – if your main customers are individual consumers (not businesses), they may think twice about paying that extra 20%. Individual consumers won’t be VAT registered and won’t be able to reclaim the extra cost, so there’s no real incentive for them to pay your higher price – so option 2 is a better way to go with your prices, keeping customers happy and the business absorbing the additional VAT element (at a reduced rate, if you’ve signed up to the flat-rate scheme).
If you want to know more about VAT and pricing, give us a call on 01454 300 999, or drop an email to firstname.lastname@example.org