Should my product cost include the VAT I paid the supplier or not?

Why the question matters

Cost is the base of every pricing decision. Record it too high and you price above what you need to and lose to competitors. Record it too low and you sell on a margin you think you have but do not. The tax paid to suppliers is exactly where that confusion creeps in.

Case one: you reclaim purchase tax

If you are registered and deduct the tax on your purchases from the tax you collect, the tax you paid effectively comes back to you. Your real cost is the amount before tax.

1. In the VAT calculator, choose extract and enter the supplier invoice of 57.5 with the rate printed on it, here 15.
2. Result: net 50, tax 7.5.
3. In the Profit margin calculator, enter a cost of 50 and a net selling price of 100: profit 50, margin 50%.

Case two: you do not reclaim it

If you are not registered, or these purchases are ones whose tax cannot be deducted, the whole amount left your pocket and will not come back. Your cost here is 57.5.

At the same selling price of 100, profit falls to 42.5 and the margin to 42.5%. Seven and a half points of margin on the very same product, purely because the tax treatment differs.

Which case applies to you? Neither the calculator nor this article can say. Your tax registration and the type of purchase decide it, and your accountant confirms it.

Keep both sides on the same basis

The repeat mistake: a net cost against a tax-inclusive selling price, or the reverse. In case one, where you reclaim tax, use net on both sides: net cost and net selling price. If your shelf price includes tax, extract it first before it goes into the margin calculator.

• Keep two columns in your product sheet: net cost and gross cost.
• Use the column that matches your position in every pricing calculation.
• Revisit it if your tax registration changes, because your cost can change without the supplier's price moving.