VAT is a considerable cost to any hospitality business, with large amounts of 20% rated goods sold and lots of expenses that are 0% rated, the quarterly VAT bill can be daunting. Businesses in the UK must register for VAT when they hit £90,000 turnover. For coffee shops, this can dramatically affect how much profit you are making if you are just on the threshold of the VAT turnover requirement. It is vital from day one you factor in VAT on your sales. This will mean you will be tracking your net sales, which will be the money that is actually yours to take home, rather than the tax you are collecting.
Running a coffee shop can be a fulfilling yet challenging endeavour. Beyond brewing the perfect cup, there's the intricate web of finances that can make or break your success. One crucial aspect often overlooked is how to properly account for VAT in your coffee shop. In this guide, we'll delve into the nuances of VAT, its impact on your business, and how you can manage it effectively.
Understanding VAT and Its Impact
- VAT Registration: In the UK, businesses must register for VAT once they achieve a turnover of £90,000 or more. For coffee shops, this can be a pivotal moment. Crossing this threshold means you'll have to add VAT to your prices, which can affect your profit margins if not managed correctly.
- VAT on Sales and Expenses: Most of your sales will be VAT-rated at 20%, while some of your expenses might be 0% rated. This imbalance can make your quarterly VAT bill significant, so it's crucial to keep a close eye on your finances.
Strategies to Manage VAT
1. Track Your Turnover and Costs
Monitoring your turnover (the money received from sales) and categorising your costs are vital for identifying areas needing attention and recognising what’s working well.
2. Increase Sales of 0% Rated Items
Identifying how you can increase sales of 0% rated items, such as bags of retail coffee to your customers, is key. This upsell not only means you are selling a higher value item, but it is also 0% rated for VAT purposes. Planning your menu around these items can significantly reduce your VAT bill.
3. Develop a Robust Business Plan
Incorporate these essential ratios and guidelines into your business plan to ensure feasibility:
- Rent and Rates: Aim for these costs to be around 10% of your net turnover. For example, if your net turnover is £100,000 per year, your rent and rates should ideally be £10,000 per year.
- Staff: Staffing will be your largest expense, typically around 35% of your net turnover. If your staff costs are higher, consider optimising workflow and service efficiency.
- Cost Of Goods (COGS): The cost of your goods sold should ideally be around 25-30% of net turnover.
- Services and Utilities: These should constitute around 30% of your net turnover. With rising energy prices, finding good utility providers is essential.
4. Use Effective Tools
- VAT Calculation Tools: Use tools that help you calculate VAT and explore different VAT schemes. This will ensure you account for your actual revenue before hitting the sales tax threshold.
- Accounting Software: Consider accounting software that integrates with your sales system to automate VAT tracking and reporting.
FAQs
Q: Do I need to charge VAT on all my products?
A: Not necessarily. Some products, like retail coffee bags, may be 0% rated. It's essential to know which of your products are VAT-rated and which are not.
Q: How can I keep my VAT bill low?
A: Increase sales of 0% rated items, streamline expenses, and ensure all claimable expenses are accounted for.
Q: What if my turnover is close to the VAT threshold?
A: Plan strategically to either stay below the threshold with a controlled growth strategy or prepare to register and adjust your pricing to include VAT.
Conclusion
Properly accounting for VAT in your coffee shop is not just about compliance, but also about ensuring the financial health of your business. By understanding VAT, tracking your net sales, and strategically planning your offerings, you can navigate the complexities of VAT while keeping your coffee shop profitable and thriving. Remember, each business is unique, so tailor these strategies to fit your specific needs and goals.