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Pricing – with or without VAT? You must consider these differences

When pricing the individual washes in your car wash, you need to consider many different points. However, start-ups are also faced with the question of whether they can or should make use of the small business regulation – i.e. whether they should carry out the pricing with or without VAT.

What does the small business regulation say?

If you are just starting your own business, you need to acquire extensive knowledge. The small business regulation simplifies the start-up process for start-ups by exempting them from VAT. This means that small businesses do not have to submit an advance return for VAT and therefore do not have to charge it. Customers are happy and accounting is greatly simplified. One disadvantage, on the other hand, is that you cannot deduct the sometimes relatively high costs of setting up a company from your tax bill.

The small business regulation applies in principle only to those companies which do not make more than 17,500 euros in turnover in the first year and not more than 50,000 euros in the following year. Attention, this is often formulated misleadingly. The longer-term exemption from turnover tax is only possible if the annual turnover is less than 17,500 euros. If you expect a turnover of more than 50,000 euros already in the second year, the regulation is altogether not suitable, since you would have to change over the entire bookkeeping again after a short period. By the way, the 17,500 refer to a whole year. If you set up your company in the middle of the year and have a turnover of 12,000 euros by the end of the year, the regulation no longer applies as you make a turnover of 24,000 euros extrapolated over a whole year.

Pricing using the example of different types of car washes

If you buy a site and a car wash, which you operate with two or more employees, of course there can be no question of an annual turnover of less than 17,500 euros. The wages or salaries including fringe costs alone exceed this sum by far, not to mention the start-up costs. In this case, you must of course calculate your pricing with VAT.

The situation is different if you lease an already existing self-service facility and carry out your self-employment almost alongside your main occupation. Either you collect the money yourself every day to deposit it and check that everything is in order, or you hire someone on an hourly basis. This will keep your costs within limits, presumably your income as well. In this case, the small business regulation may well be a good idea.

Why it is not advisable to exclude VAT when calculating prices

If the small business regulation is initially suitable for you, you should carefully consider whether you wish to make use of it. This means that you can start by setting your prices lower than your competitors who pay VAT. Your car wash will attract a correspondingly high volume of customers. Once the small business regulation then no longer applies to you, you will have to pay VAT and, of course, pass this on to your customers. In everyday life, this means that you have to raise your prices.

If customers have become accustomed to your low prices, they can react with displeasure and migrate to the competition – nobody is interested in the fact that you have good reasons for increasing the price of your services. If you would like to make the car wash your only source of income in the long term, it is therefore advisable to include VAT in your pricing from the outset.

The pricing formula for the service falls short in the case of the car wash

Operating a car wash is more a service than a trade. Nevertheless, you cannot use the formula for services for the pricing, since this works on an hourly basis (total costs: number of working hours + profit margin = hourly price). However, car washing is not paid per hour, but according to the type of wash. In the detailed calculation, you must take into account whether you grant discounts to loyal customers or offer special promotions.  Also sales in the shop, if you have one, make this calculation impossible, as well as the running costs for cleaning chemicals, necessary spare parts and maintenance. Furthermore, you must calculate in such a way that the acquisition costs are amortised over the years. And your own livelihood must also be guaranteed. Don't forget to include VAT in the calculation as well! 

Summary: VAT must be taken into account in almost every price calculation

Only persons whose turnover in the first year does not exceed 17,500 euros may be exempt from VAT. In the vast majority of cases, this is not the case for car washes, either because the start-up costs are too high, which are not tax-deductible under the small business regulation, or because the earnings are too high, from which employees must also be paid. The results of the price calculation are lower for small businesses as they can pass on the exemption from VAT to their customers. Nevertheless, it is not generally advisable to refrain from charging VAT. If the small business regulation no longer applies to you, you will be forced to increase your prices by the value added tax – and existing customers may not take too kindly to that.