# Regulatory Compliance Category > Tax Forum > [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. :Hmmm:

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## Blurock

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

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## 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

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Blurock (21-Jul-12), league_of_ordinary_men (21-Jul-12)

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## 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. :Wink:

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## 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)?

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## 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  :Wink: 

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

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## 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.

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league_of_ordinary_men (22-Jul-12)

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## 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 :Thumbup:  almost there.

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## 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.

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league_of_ordinary_men (22-Jul-12)

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## 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.  :Cool:

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league_of_ordinary_men (22-Jul-12)

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## 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.

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## league_of_ordinary_men

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

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## 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.

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## league_of_ordinary_men

How did you do that calculation please.

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## 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.

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## league_of_ordinary_men

IMHO,Thank God I think I got it,you are the best I think I finally get it.I took the information you gave me and reviewed it with Dave A's information and did some calculations and I think I understand it now.The thing was I first needed to understand input and output VAT to answer my question.

Let's say I am VAT registered and I buy a product from my supplier for R100 + 14% VAT = R114 for the product,now that R14 I pay VAT on the product is there(the suppliers output VAT)but that R14 VAT I pay on the product is my input VAT that I can deduct from the VAT I owe SARS.So that product cost me R114 from the supplier including VAT,now I add my 5% markup to get R119.70 at which I sell the product.So I take R119.70 I divide it by 1.14 to get R105 markup it excludes VAT now I take R119.70 minus R105 markup = my VAT of R14.70 but now I deduct my input VAT of R14 I payed for the product and I get R0.70 cents VAT i owe to SARS?

What do you think?Am I on the right trake?

Let's take the R629 question I asked you.My competitor sell's the product at R629 including VAT so I divide it by 1.14 to get R551.75 excluding VAT so now I take R629 - R551.75 to get my output VAT of R77.25 then to get my input VAT I take the cost price of R525 X 1.14 =R598.5 then take R598.5 - the cost price of R525 and then get my input VAT of R73.50 then just subtract to get the VAT owed to SARS.And you say I should use markup to determine my prices?

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## IMHO

You have one thing right and that is that his output vat is your input vat. But somewhere you are losing it, because you get two different amounts in your calculations. I will have to go to a spreadsheet to try and see where you are making your mistake. (Or where I make my mistake, hehe... remember, I am not an accountant! and IMHO stands for 'in my humble opinion'.)

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## IMHO

You are 100% right, I could just not make sense of how it was explained, but once I put it on the spreadsheet as you go, it is all correct. You have got it. You will soon learn that all that calculations is not necessary on a day to day basis.

Next question, how to set your prices.

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## IMHO

To make it easier on yourself, decide whether you are going to work with inclusive or exclusive costs. Most suppliers quote exclusive, so that is probably the way to go. (Reading my last part, this is not crucial)

Next thing is decide if you are going to use markup or gross.

Markup is easier, so go with that, but make sure your markup is big enough to achieve your goal. You should also work out a realistic budget for your expected turnover, your expected expenses and the gross and nett profit you want to make.

So your life now turns around budgets, hehe.
You have a sales (turnover) budget. (Realistic thumb-suck)
You have a gross Budget. (Sales minus COS)
You have an expenses budget.

Say, with this info you decide that you need to markup by 25% as your gross budget is 20%.

To set your selling, you just multiply your cost by 1.25. If it was exclusive cost, the result is an exclusive selling. If it was an inclusive cost, the result is an inclusive selling. If the result was an exclusive selling, you need to multiply that by 1.14, to get an inclusive selling.

As easy as that. But remember, there is a thing called gross mix. We can come back to that when you confirm you understand so far.

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## league_of_ordinary_men

Hi IMHO,sorry for taking so long to reply been busy.Can you please explane Say, with this info you decide that you need to markup by 25% as your gross budget is 20%. to me a little more please.Thanks for sticking with me :Thumbup:

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## IMHO

Which part? How to get the info or how to get the 25% from 20%

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## league_of_ordinary_men

How to get the 25% from 20% please.

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## IMHO

Remember the formulas of earlier post.

Gross
(Sell-Cost)/Sell x 100

Markup
(Sell-Cost)/Cost x 100

L_O_O_M, give a bit more info on the type and size of business you are in. Otherwise I give too much or too little info, confusing you. Do you sell one line from your garage or do you sell hundreds of lines in a shop?

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## league_of_ordinary_men

I am starting an online store with +- 8000 and adding we are almost live so due to being on probation with a supplier.So even thou I get I little confused some time I need to learn this ASAP.And without your help if wouldn't be possible.

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## bjsteyn

> How to get the 25% from 20% please.




But to get to your selling price you marked up your product by 25%.  

Once you have worked out your GP budget, you can calculate what your markup needs to be.

GP is worked out on selling price, where as markup is worked out on cost price.

Just my two cents.

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## IMHO

Well put, bjsteyn. Do you get it L_O_O_M ?

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## IMHO

*Incl.*
*Excl.* (ex VAT)
*VAT*

Sales
119.70
105.00
14.70

Costs of Sales
114.00
100.00


Output VAT


14.70

Gross Profit

5.00 (4.76%)(5% MU)


Expenses

4.00 (3.8%)


Input VAT on COS


14.00

Input VAT on Exp.
2.28
2.00
0.28

VAT Due


0.42

Nett Profit

1.00 (0.95%)




Dave A, I have butchered your table a bit!  :Stick Out Tongue:

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## Dave A

> Dave A, I have butchered your table a bit!


Well done. Not everyone grasps how to use tables (it is a bit fiddly, isn't it).

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## IMHO

> Well done. Not everyone grasps how to use tables (it is a bit fiddly, isn't it).


Yes, I was intrigued by how you did it, so replied to your post with quote, to see what you did and use it as a template! Cheated!

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## league_of_ordinary_men

Thanks for the explanation bjsteyn.IMHO I think I get it now awesome table.What's next?

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## IMHO

Have you decided yet whether you are going to register for VAT or not? What is the reasons for your decision?

What accounting software are you going to use? You must use something. Keeping track of stock, invoices, payments, purchases pricing etc. is impossible to do without it. Some people think they can track it all on spreadsheets. Don't! 

Do your budget by completing the above table with your expectations. You can do it top down or bottom up. Use a spreadsheet like Excel. 

*Gross Mix:*
When doing your gross profit, remember gross mix. It means you sell different things at different profit levels. Blind lines is lines where people do not really care and do not compare prices. Even if they do, chances is that your opposition will also make a bigger profit on these lines. It is also called 'bread and butter' lines, where you make your profit. Then there is very sensitive lines, called 'lost leaders'. On these you make very little or no profit. To stay in business, you must balance the proportion of lost leaders to bread and butter lines. Sell too many lost leaders, and you will not make your gross budget. Selling too many bread and butter lines, is good for your gross budget, but means you can be more aggressive on your lost leaders, to attract customers.

Say you sell R1000 high gross lines and R3000 low gross.
High gross you decided to sell at 40% gross, as your opposition is allowing you to do so.
Low gross you decided to sell at 5% gross, to come in under your opposition.
Your gross mix is now R400 profit plus R150 = R550.00, being 13.75% of R4000.
So, although you have a gross budget of 13.75%, you must have a strategy of how you are going to mix your markups to achieve it.
Without a history of sales, this is going to be a thumb suck at best, but you will have to give it a go and change things as you are going along and monitoring your actuals.

*Expenses:*
 Neglect to do a proper budget and stick to it, will be a sure recipe for failure. List each and every line of expense that will be applicable to your business and budget a realistic amount for it. Google is your friend. Use it to research what type of expenses can come along without you anticipating it. Take a thing like SAMRO. Nobody talks about it, but if you play 'music on hold' on your telephone, or have a radio in the office, you are supposed to pay royalties. You might get away, because you are under the radar, I just use it as an example. If you are a 'visible' business, Dept of Labor is going to be on your case, so is TV inspectors and all types of 'inspectors'. A few things I can think of off the cuff for an on-line business, is obviously all the Internet related services, Telephone, Water and Lights, Rent or equivalent, advertising, petrol, stationery, repairs and maintenance of equipment, insurance, postage and delivery charges, wages, uif, workers compensation, TV licenses, legal fees, accounting fees, staff benefits like snacks or events, training, vehicles and maintenance. The list goes on and on... Some things you can claim, some not. But whether you can claim it or not, if you are going to use or do it, you better budget for it! Condition yourself to have the discipline to say, if it is not in the budget, live without it. See my signature.

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league_of_ordinary_men (26-Jul-12)

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## league_of_ordinary_men

IMHO,you are the best thanks for you help so far.I don't have any accounting software in mind do you have any suggestions(if possible can you include prices)?If you don't mind me asking what type of business are you in(you can pm me the answer if you don't want everyone to know)?

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## IMHO

l_o_o_m, i do not know if you are having me on. Go slow on the praises. This is basic stuff. Makes me think you are making fun of me. In any case, some might laugh at it, some might find value.

I use TurboCash. But I have accounting background from my days in retail and subject at school, matric. If you do not have a basic knowledge, get an accountant, or help from someone. Pastel is widely used and understood, so it might be a better choice. Speak to http://www.theforumsa.co.za/forums/m...Neville-Bailey. He is an advisor on Pastel. Pastel is not free, like TurboCash. But if you need support from TurboCash, it is going to cost you. I use the old version, which I understand and do not need support. So Neville is your man!

The forum knows I am in Hospitality and my profile shows I am ex retail.

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## Neville Bailey

> Pastel is widely used and understood, so it might be a better choice. Speak to http://www.theforumsa.co.za/forums/m...Neville-Bailey. He is an advisor on Pastel. Pastel is not free, like TurboCash. But if you need support from TurboCash, it is going to cost you. I use the old version, which I understand and do not need support. So Neville is your man!


Thanks for the mention, IMHO! 

l_o_o_m, drop me a line if you would like to chat about the various Pastel options. The great thing about having a proper accounting system is that all of the calculations (including VAT, breakeven, gross profit, etc) can easily be derived using the generally accepted formulae.

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## IMHO

> Thanks for the mention, IMHO!


And who says photography is not worth it? hehe, its a pleasure!

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## league_of_ordinary_men

Hi IMHO,I am not having you on in any way just appreciate you helping me out,I find value in the information you give me and I believe give credit were credit is due.Some people on a form usually reply one's or twice and then say search or google it.This might be basic stuff but it has value and finding this information on your own is not easy.And thanks for the suggestion.

Hi Neville Bailey,thank for the reply and I will send you a PM if you don't mind.

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## IMHO

OK, great. Shout if you have a problem.

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## bjsteyn

league_of_ordinary_men, here is a little program so that you can calculate markup and selling price based on GP.

http://www.theforumsa.co.za/forums/s...3800#post73800

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## wynn

My 2c
to get a 10% mark up is different to a 10% markup

eg 100+10%= 110
110-10%= 99

to arrive at a figure that gives you a 10% markup you need to divide by .9
so
100/.9= 111.11
111.11-10%= 100 (allowing for decimal points)

so if you want to show a 10% profit you need to divide by .9 to calculate your selling price otherwise if you just mark up by 10% you will show a 9% profit

The idea is that you do all these calculations excluding, that is before you add VAT or calculate your input and output vat because that is not going to affect your profit at the end of the day.

so

100/.9= 111.11+14%VAT=SP126.67 (rounding decimal point up) Vat is 15.56

SP126.67-VAT= 111.11 (rounding decimal point down)

profit=111.11-100=11.11 or 10% of selling price before vat came into it.

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## league_of_ordinary_men

Hi bjsteyn and wynn,bjsteyn the program looks good still need to test don't have time at the moment back it looks very us full thanks and wynn nifty little calculation I will add that to my new bag of tricks thanke you. :Wink:

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## dellatjie

It doesn't make sense though that customers would want you to register for VAT just to be able to claim that amount back from SARS?

Why just NOT pay it in the first place?

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## IMHO

dellatjie, it is to keep their bookkeeping systems uncomplicated. They ensure all their suppliers is vat registered, then they claim vat on all purchases and do not have to worry who is registered and who not and whether they can get the same price from a vendor that is registered. It is like working with apples and not to worry whether one is a pear. If they get audited later by SARS, they have no risk of some claims being rejected, which could cost them a lot of money.

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dellatjie (04-Sep-12)

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## CLIVE-TRIANGLE

If you are not registered for VAT, then it means your input vat becomes a cost to you and it's recovery is included in your price to your customer, thus making you more expensive than Joe who is registered.

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dellatjie (04-Sep-12)

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## dellatjie

@IMHO, thanks for the explanation, I think because accountants / auditors are not that involved in the day-to-day activities of a business, they tend to miss these obvious practical workings of businesses.

@Clive-Triangle - Makes more sense now, thank you for helping me think further!

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