Non-VAT-registered trader, supplying VAT-registered customer

I'm a small trader, not registered for VAT. Sometimes my customers ask
me to purchase IT equipment for them. I understand that this means they
can't reclaim the VAT on those purchases, as the accounting 'chain' is
broken, but does it matter? Surely those purchases can be written down
as business expenses anyway? I'm sure this is a naive question, but I
don't know the answer!

 

Oops - I meant to post this in uk.finance, which is a little busier than
uk.business.accountancy. Hope this comment spares me the outrage
applied to multi-posters!

 

Well, you can just simply run an example through the maths to demonstrate
that the addition of the VAT element *does* affect their bottom line.

Or just apply reductio ad absurdum:
If tax-deductibility (or capital allowances, if that's what you mean)
renders the price paid for something irrelevant to the financial health of
the business, then businesses (whether VAT-registered or not) wouldn't care
how much they paid for stuff.

But they certainly do care.

So it isn't irrelevant!

 

Ah - I think I get it. Tax takes only a proportion of profit, so
reducing your overheads by reclaiming VAT does increase your profit.

 

I'm aware that some builders sometimes act as agents for their customers
so that their customer can claim their VAT (if VAT registered). As long
as the customer's name is on the receipt or invoice, then you can pass
on the VAT invoice for them, obviously retaining a copy, to reclaim the VAT.

It's also a ruse to keep turnover below the magic threshold, as payments
as an agent, on behalf of a customer, doesn't count towards the VAT
turnover threshold.

 

A VAT Registered business is VAT neutral - purely a collector of
taxes. Any VAT charged is repaid to HMRC, and VAT paid is claimed
back from HMRC, and thus VAT does not come into P&L.

If you (non-VAT) buy a £100 vatable item then it will have cost you
£100 + VAT. To not make a loss you will have to sell that at £120
plus any markup. Your VAT business competitor can sell it for £100 +
markup + VAT and the client will get the VAT back. I don't see why
any VAT registered business would buy from a non-VAT registered
supplier if the same item was available from a VAT registered
supplier. Presumably you add some service.

Of course the extra £20 becomes a business expense reducing your
client's profits and hence tax liability.

 

Most interesting - thank you!

 

I recently picked a tree surgeon on that basis - he would have been
significantly more expensive if he'd been VAT registered. I get it now
- I was overlooking the fact that tax liability is only a proportion of
profit, and the 'loss' to VAT does cost the customer money. I'm a bit
wary of presenting some businesses with a Vat receipt from a supplier
made out in their name and marked as 'paid' - best to reach a good
understanding about this first, I think!

 

Thanks, David and Adrian. I do get it now; it seems very straightforward
now you've explained it to me!

 

Right on both counts! (use in house, and the convenience of a single
bill).

 

Just so!