Understanding VAT

[Farley93]

As far as I know, you can reclaim vat on purchases if you're charging it on sales. Is this right? I don't quite understand why? I'm paying the same amount as the price. If I see something for £120 which includes VAT, I'll basically paying £100 but I have to charge £20 in VAT to my customers so I'm still paying the original £120 price in the end. Why do people make a big deal about reclaiming the VAT then as if it's just money you have been given from nowhere when actually you are having to charge it too. Am I missing something or am I wrong? Also what is the reason for voluntary VAT registration because them you're paying the £120 for the product and still having to charge £20 without getting it back.

Sorry if I sound like a complete fool who doesn't know what he's talking about but that's why I'm here, to learn. Plus I'm 18 and haven't been taught any of this despite thousands of hours of business lessons. Thanks in advance to all those who reply, it'll help me out considerably. *

 

[dagr]

There are two distinct worlds for companies/traders:
- Those that are not VAT registered
- Those that are VAT registered

If you are not VAT registered, then you can basically forget all about VAT. That is, your company buys stuff just like an individual shopper on the High Street. When you sell anything, you don't add VAT onto the price. This is only possible for companies/traders with a small turnover (less than around £75K/year).

If you are VAT registered, then you become a surrogate tax collector for the government (HMRC). When you buy anything, you pay the full price up front (net cost + VAT), but you claim the VAT back from HMRC later. When you sell anything, HMRC will come along and ask for 20%* on the bill you gave your customer, hence the reason VAT-registered companies add VAT to the bill.

VAT doesn't affect your bottom line (balance sheet, Profits&Loss), but has a big effect on your cash-flow. On the downside you have extra admin to handle and possibly cashflow hits if your suppliers demand short payment terms and your customers pay late. On the upside, even the purchase of any non-stock items like a PC for admin or office furniture will be 20% cheaper for the business as HMRC doesn't care why you buy items (for resale or as assets).

* - some specific types of items have less than 20% VAT rate.

 

[Blood Lust]

As far as I know, you can reclaim vat on purchases if you're charging it on sales. Is this right? I don't quite understand why? I'm paying the same amount as the price. If I see something for £120 which includes VAT, I'll basically paying £100 but I have to charge £20 in VAT to my customers so I'm still paying the original £120 price in the end. Why do people make a big deal about reclaiming the VAT then as if it's just money you have been given from nowhere when actually you are having to charge it too. Am I missing something or am I wrong? Also what is the reason for voluntary VAT registration because them you're paying the £120 for the product and still having to charge £20 without getting it back.

Sorry if I sound like a complete fool who doesn't know what he's talking about but that's why I'm here, to learn. Plus I'm 18 and haven't been taught any of this despite thousands of hours of business lessons. Thanks in advance to all those who reply, it'll help me out considerably. *

1. A factory makes a pen and applies VAT.
2. The supplier buys the pen then adds value to it such as priniting a logo. He then sells the pen with the factory VAT + the VAT on the value he added to it.
3. The customer pays the full VAT.
4. The VAT you pay to the taxman is that VAT that relates to just the value you added.

 

[thomastheplank]

1. A factory makes a pen and applies VAT.
2. The supplier buys the pen then adds value to it such as priniting a logo. He then sells the pen with the factory VAT + the VAT on the value he added to it.
3. The customer pays the full VAT.
4. The VAT you pay to the taxman is that VAT that relates to just the value you added.

NO, That is wrong. The supplier will have claimed the VAT back from the factory VAT inclusive price. So he only sells at the price he purchased it for without the VAT, adds his margin, then adds his VAT liability.

VAT only actually gets paid to HMRC at the final point of sale, supposing every one in the chain is VAT registered. HMRC doesn't get VAT at every point in the chain.

 

[Blood Lust]

NO, That is wrong. The supplier will have claimed the VAT back from the factory VAT inclusive price. So he only sells at the price he purchased it for without the VAT, adds his margin, then adds his VAT liability.

VAT only actually gets paid to HMRC at the final point of sale, supposing every one in the chain is VAT registered. HMRC doesn't get VAT at every point in the chain.

The amount he owes HMRC is the difference between input VAT and output VAT on the product.

Or as I stated the VAT on the value he added.

 

[thomastheplank]

You didn't say that at all.

He then sells the pen with the factory VAT + the VAT on the value he added to it.

 

[Blood Lust]

You didn't say that at all.

Ehh?

Think through what is written.

 

[thomastheplank]

Ehh?

Think through what is written.

I have, you are wrong. Be big enough to admit it.

You said "Factory VAT plus the VAT on the value he added". That is wrong because the factory VAT is reclaimed and not included. I'll repeat it for you, HMRC only get the VAT on the end sale presuming everyone in the chain is VAT registered. Keep in mind the end selling price in a shop's "January" sale, for example, may well be below the factory price, so the end amount of VAT paid is less than what was originally charged by the factory.

Perhaps you should think about what you write before giving out incorrect information?

 

[internetspaceships]

VAT only actually gets paid to HMRC at the final point of sale, supposing every one in the chain is VAT registered. HMRC doesn't get VAT at every point in the chain.

This is incorrect.

Assume each sale in the chain below is a higher value than the previous sale as below.

When the factory sells to a distributor, HMRC get VAT on this.
When the distributor sells to a reseller, then HMRC get VAT on this.
When the reseller sells to and end user, then HMRC get VAT on this sale too.

Yes it's based upon the incremental margin between each sale but they get VAT every step of the way. Apologies Thomas but you're a little off base here Sir.

 

[thomastheplank]

This is incorrect.

Assume each sale in the chain below is a higher value than the previous sale as below.

When the factory sells to a distributor, HMRC get VAT on this.
When the distributor sells to a reseller, then HMRC get VAT on this.
When the reseller sells to and end user, then HMRC get VAT on this sale too.

Yes it's based upon the incremental margin between each sale but they get VAT every step of the way. Apologies Thomas but you're a little off base here Sir.

Wrong, because at every stage the VAT is reclaimed.

HMRC only get the VAT on the end sale - providing every one is VAT registered.

I buy for £100 plus VAT, I only pay £100 as I claim the VAT back.

If I then sell for £200 then HMRC get 16.666% of £200 in VAT.
If instead I then sell for £50 and make a loss HMRC get 16.666% of £50.
HMRC never get the £20 VAT charged on my purchase price of £100 as I claimed it back.

 

[internetspaceships]

HMRC get the VAT based upon the profit made at every stage of the sales process. Through from Manufacturer to end user.

Otherwise I wouldn't be paying out VAT to HMRC on my reseller or trade sales' profits would I?

I'm sorry Sir but you are incorrect. If everyone is making a profit then everyone pays HMRC a little extra VAT along the sales path.

 

[thomastheplank]

HMRC get the VAT based upon the profit made at every stage of the sales process. Through from Manufacturer to end user.

Otherwise I wouldn't be paying out VAT to HMRC on my reseller or trade sales' profits would I?

I'm sorry Sir but you are incorrect. If everyone is making a profit then everyone pays HMRC a little extra VAT along the sales path.

I see that, but VAT is only ever paid to HMRC on the end sale price. This can be below the manufacture price. Not often granted.

My point was that you will never pay VAT on VAT as BloodLust said. Unless the chain is broken by someone not VAT registered.

VAT isn't paid on profit - it's paid on the end consumer sale price. You pay VAT on sales that make you a loss as well.

 

[Deleted member 59730]

VAT is not a value added tax. It should be called CAT; a cost added tax. Adding tax to an invoice does not increase its value.

 

[thomastheplank]

So to finish and be clear:-

On a original sale of £100 that attracted 20% VAT, if that product is sold to the end consumer for £50 plus VAT HMRC only get £10 rather than the original £20 at the start of the chain.

 

[internetspaceships]

I see that, but VAT is only ever paid to HMRC on the end sale price. This can be below the manufacture price. Not often granted.

My point was that you will never pay VAT on VAT as BloodLust said. Unless the chain is broken by someone not VAT registered.

VAT isn't paid on profit - it's paid on the end consumer sale price. You pay VAT on sales that make you a loss as well.

I'm sorry but you're now making this more complicated than it was originally. Your original comments were incorrect. I'm not going to be as rude to you as you were to Bloodlust but you need to re-visit your perceptions of the VAT payments as you are wrong.

You stated categorically that VAT is not paid at every step of the chain. It is.

HMRC also do get the VAT you paid out on your purchase because the person who sold it to you pays it. LESS the VAT due on the price HE paid for it.

 

[thomastheplank]

I'm sorry but you're now making this more complicated than it was originally. Your original comments were incorrect. I'm not going to be as rude to you as you were to Bloodlust but you need to re-visit your perceptions of the VAT payments as you are wrong.

You stated categorically that VAT is not paid at every step of the chain. It is.

HMRC also do get the VAT you paid out on your purchase because the person who sold it to you pays it. LESS the VAT due on the price HE paid for it.

How far we going back!

Lets talk retail, my supplier buys for £50 plus VAT from the manufacturer. They only pay £50 as they claim the VAT back. I buy from them at £100 plus VAT and claim the VAT back so only pay £100.

How much VAT at this point do HMRC have - nil as the original manufacturer won't have paid VAT on his basic goods as at the very first point (say cutting a tree down to end up with a £20k table, or £10 worth of coco powder to make £1,000 of chocolates) no VAT would be due on raw goods, and every one else in the chain has claimed the VAT back.

The only time HMRC get any VAT is when an end consumer is found. Providing everyone in the chain is VAT registered.

You never pay VAT on VAT unless you are not VAT registered then it turns the whole example on it's head!

Basically the VAT "value" increases at every stage if the value increases, but it's not until the final end purchase is made that the VAT value can be determined, and in some cases that can be less than the original value of VAT on the very fist invoice in the chain.

Bloodlust is still wrong, and I don't apologies for pointing that out.

He then sells the pen with the factory VAT + the VAT on the value he added to it.

 

[internetspaceships]

Ok, step by step.

Manufacturer sells a widget to distributer For £100 plus VAT

It costs manufacturer £50 to make said widget so the manufacturer pays VAT to HMRC as follows:

Sale price £100 + VAT = £20 gross VAT.
LESS the VAT on production which is £50 + VAT i.e £10

As such the HMRC is already £10 to the good on VAT.

Reseller sells the item for £150 + VAT

He pays the HMRC the VAT on £150 - i.e. £30 but LESS the VAT on £100 purchase price i.e £20. Yet again HMRC are £10 to the good.

From these two steps in the chain the HMRC have already received £20 worth of VAT.

Add another one or five people into the chain before you get to the end sale and the principle is the same.

 

[Scalloway]

The only time HMRC get any VAT is when an end consumer is found. Providing everyone in the chain is VAT registered.

Do you mean all my clients shouldn't have paid the VAT to HMRC they collected on their onward sales?

 

[SuffolkDesigns]

Manufacturer makes and sells a product for £100 + VAT = £120
Distributor buys product and sells if for £200 + VAT = £240
Retailer buys product and sells for £400 + VAT = £480

Now, VAT charged has been £20, £40 & £80 = £140
VAT reclaimed has been £20 & £40 = £60
Total VAT Paid = £80

Therefore the end user has apparently paid all the VAT

But
The manufacturer has collected £20 VAT which has to be paid
The Distributor has collected £40 from sales and reclaimed £20 from purchase price so has £20 to pay
The Retailer has collected £80 from sales and reclaimed £40 from their purchase price, so has £40 to pay

 

[thomastheplank]

Ok, step by step.

Manufacturer sells a widget to distributer For £100 plus VAT

It costs manufacturer £50 to make said widget so the manufacturer pays VAT to HMRC as follows:

Sale price £100 + VAT = £20 gross VAT.
LESS the VAT on production which is £50 + VAT i.e £10

As such the HMRC is already £10 to the good on VAT.

Reseller sells the item for £150 + VAT

He pays the HMRC the VAT on £150 - i.e. £30 but LESS the VAT on £100 purchase price i.e £20. Yet again HMRC are £10 to the good.

From these two steps in the chain the HMRC have already received £20 worth of VAT.

Add another one or five people into the chain before you get to the end sale and the principle is the same.

Sorry, but you simply don't understand VAT on sales. No point going further. I presume you are in the service, non-physical goods industry which would explain your reasoning. Or your accountant deals with all your VAT issues.

Simply, one last time.

Stage one of manufacture pay no VAT on raw goods.

At every stage thereafter VAT is claimed back until eventually a end consumer is found only then do HMRC get their VAT, not before, it really is that simple.

 

[thomastheplank]

Do you mean all my clients shouldn't have paid the VAT to HMRC they collected on their onward sales?

Retail, I buy at "plus vat", I claim that VAT back and pay the higher VAT on the end sale (or lower if sell at a loss).

HMRC DO NOT get invoice 1 20% vat plus invoice 2 20% vat plus invoice 3 20% vat. THE ONLY VAT they actually get is the end sale price and all the other VAT is claimed back.

If I have a supplier invoice for £100 plus VAT for goods that I resell are you saying I pay the VAT on that invoice plus the VAT on my selling price. I claim back the VAT on the invoice and pay VAT on the price I sell for, HMRC don't get both amounts.

 

[SuffolkDesigns]

Retail, I buy at "plus vat", I claim that VAT back and pay the higher VAT on the end sale (or lower if sell at a loss).

HMRC DO NOT get invoice 1 20% vat plus invoice 2 20% vat plus invoice 3 20% vat. THE ONLY VAT they actually get is the end sale price and all the other VAT is claimed back.

If I have a supplier invoice for £100 plus VAT for goods that I resell are you saying I pay the VAT on that invoice plus the VAT on my selling price. I claim back the VAT on the invoice and pay VAT on the price I sell for, HMRC don't get both amounts.

You reclaim the VAT on items you buy and charge VAT on the price you sell it for therefore paying VAT on the difference between your buying and selling price.

I would suggest getting a good accountant to do your books for you!

 

[thomastheplank]

You reclaim the VAT on items you buy and charge VAT on the price you sell it for therefore paying VAT on the difference between your buying and selling price.

That's exactly what I'm saying. And it means the only point at which HMRC actually get their money is at the very last point of sale as all the in-between points are claimed back.

If I buy from you and re-sell I claim the VAT on your invoice back, so HMRC don't get that, they only get the VAT I charge the end consumer (presuming I sell to the end consumer).

 

[Scalloway]

Retail, I buy at "plus vat", I claim that VAT back and pay the higher VAT on the end sale (or lower if sell at a loss).

HMRC DO NOT get invoice 1 20% vat plus invoice 2 20% vat plus invoice 3 20% vat. THE ONLY VAT they actually get is the end sale price and all the other VAT is claimed back.

If I have a supplier invoice for £100 plus VAT for goods that I resell are you saying I pay the VAT on that invoice plus the VAT on my selling price. I claim back the VAT on the invoice and pay VAT on the price I sell for, HMRC don't get both amounts.

I see what you're driving at now. HMRC get 100% of the VAT paid by the end consumer. Inbetween initial manufacture and final sale the VAT goes round in a circle of being charged and reclaimed by each succesive trader until it comes to a stop with the ultimate non registered consumer.

 

[JamieM]

Ok, step by step.

Manufacturer sells a widget to distributer For £100 plus VAT

It costs manufacturer £50 to make said widget so the manufacturer pays VAT to HMRC as follows:

Sale price £100 + VAT = £20 gross VAT.
LESS the VAT on production which is £50 + VAT i.e £10

As such the HMRC is already £10 to the good on VAT.

No it's not. Manufacturer reclaims his £10 VAT on production cost and buyer reclaims his £20 VAT on purchase cost.

Thomas is correct if we are talking about standard VAT accounting. VAT is a consumer tax and is ultimately paid by the end customer who is not registered for VAT.

 

[thomastheplank]

Thanks Scalloway and JamieM I think you explained my reasoning better than I did!

 

[thomastheplank]

So can we agree the below doesn't happen?

He then sells the pen with the factory VAT + the VAT on the value he added to it.

 

[SuffolkDesigns]

If I buy from you and re-sell I claim the VAT on your invoice back, so HMRC don't get that, they only get the VAT I charge the end consumer (presuming I sell to the end consumer).

But if I bought the product, increased the price and sold it to you then they do get the difference in the VAT I claimed back and the VAT I charged you.

And when you sell the product they get the difference in VAT that you charged you client and claimed back from my invoice.

And this will continue each time the product is sold

 

[internetspaceships]

I see what you're driving at now. HMRC get 100% of the VAT paid by the end consumer. Inbetween initial manufacture and final sale the VAT goes round in a circle of being charged and reclaimed by each succesive trader until it comes to a stop with the ultimate non registered consumer.

No Scalloway, he categorically said that NO VAT is paid until the product is bought by an end user. Please read the quote in post 9.

 

[thomastheplank]

But if I bought the product, increased the price and sold it to you then they do get the difference in the VAT I claimed back and the VAT I charged you.

And when you sell the product they get the difference in VAT that you charged you client and claimed back from my invoice.

And this will continue each time the product is sold

But the price is never increased with VAT, it's increased without VAT as you don't pay the VAT on the invoice.

Yes the VAT amount increases, but if a shop has a sale the end VAT value can be a lot less than the first stage of manufacture VAT invoiced.

Margins are added ex VAT.

 

[thomastheplank]

No Scalloway, he categorically said that NO VAT is paid until the product is bought by an end user. Please read the quote in post 9.

And it's not.

Raw goods are VAT free.

HMRC get no VAT until a end consumer has purchased the goods.

 

[SuffolkDesigns]

No Scalloway, he categorically said that NO VAT is paid until the product is bought by an end user.

Which would be correct only if we did not charge VAT when invoicing a VAT registered company,
but as we have to charge VAT regardless of whether the buyer is VAT registered or not then we all have to pay to HMRC the VAT we collect minus the VAT we claim back.
Therefore (as we have both mentioned) VAT is collected along every step of it's journey where it is sold for more than it was purchased.

If it was only the end user paying VAT it would make life a lot easier Especially for wholesalers

 

[internetspaceships]

Sorry, but you simply don't understand VAT on sales. No point going further. I presume you are in the service, non-physical goods industry which would explain your reasoning. Or your accountant deals with all your VAT issues.

I can assure you that I deal in stock and I pay an awful lot of VAT, and I have people in house who do our VAT workings. Before I was large enough to employ people to do this, I did it myself.

If you're another guy who's joined the forum that gets personal with people and slags them off when you don't agree with them I strongly recommend that you find another forum to use.

I've been unfailingly polite with you on this matter and think I deserve the same from you.

 

[thomastheplank]

Which would be correct only if we did not charge VAT when invoicing a VAT registered company,
but as we have to charge VAT regardless of whether the buyer is VAT registered or not then we all have to pay to HMRC the VAT we collect minus the VAT we claim back.
Therefore (as we have both mentioned) VAT is collected along every step of it's journey where it is sold for more than it was purchased.

If it was only the end user paying VAT it would make life a lot easier Especially for wholesalers

It's what the end user pays that determines what HMRC get paid in VAT, I think that simplifies my point, hopefully.

 

[thomastheplank]

I can assure you that I deal in stock and I pay an awful lot of VAT, and I have people in house who do our VAT workings. Before I was large enough to employ people to do this, I did it myself.

If you're another guy who's joined the forum that gets personal with people and slags them off when you don't agree with them I strongly recommend that you find another forum to use.

I've been unfailingly polite with you on this matter and think I deserve the same from you.

So you don't claim VAT back on your invoices?

Do you pay VAT on your stock - no you don't. Unless your accountant is really rubbish.

 

[JamieM]

So can we agree the below doesn't happen?

I'm not sure what Blood Lust meant. He wasn't very clear.

But if I bought the product, increased the price and sold it to you then they do get the difference in the VAT I claimed back and the VAT I charged you.

And when you sell the product they get the difference in VAT that you charged you client and claimed back from my invoice.

And this will continue each time the product is sold

Exactly. Everyone keeps claiming it back until it is sold to someone not registered for VAT. i.e. the end customer is the only one who actually pays the VAT.

No Scalloway, he categorically said that NO VAT is paid until the product is bought by an end user. Please read the quote in post 9.

I thought it was clear he didn't mean it literally. It is paid but the full amount paid is also reclaimed so HMRC do not actually retain a VAT payment until a purchase is finally made by an end customer who is not VAT registered.

 

[internetspaceships]

It is paid but the full amount paid is also reclaimed so HMRC do not actually retain a VAT payment until a purchase is finally made by an end customer who is not VAT registered.

This is not correct. The HMRC take a piece of VAT from the profit achieved by each person in the chain.

If you make a profit buying and selling something (assuming you're VAT registered of course which is the premise being used here) then you pay the residual VAT to HMRC.

As such when a product is bought and sold through a chain, the HMRC receives VAT before the product hits an end user.

 

[Blood Lust]

I'm sorry but you're now making this more complicated than it was originally. Your original comments were incorrect. I'm not going to be as rude to you as you were to Bloodlust but you need to re-visit your perceptions of the VAT payments as you are wrong.

You stated categorically that VAT is not paid at every step of the chain. It is.

HMRC also do get the VAT you paid out on your purchase because the person who sold it to you pays it. LESS the VAT due on the price HE paid for it.

Thanks

In my example -
1. The supplier buys the pen from the factory and pays them VAT. The factory sends this VAT sum to HRMC as its VAT liability.
2. The supplier prints the logo (adding value). The product is now worth more so the cost of the product and its VAT to be charged are higher.
3. The customer buys the pen from the supplier paying the new price + VAT.
4. The supplier takes the VAT received from the customer, deducts the VAT they paid to the factory and the remainder is their VAT liability to be paid to HRMC.

Or to keep things simple VAT is paid on the value added.

 

[internetspaceships]

Raw goods are VAT free.

HMRC get no VAT until a end consumer has purchased the goods.

What exactly are you basing this upon? Raw goods are VAT free?

 

[SuffolkDesigns]

Lets say I buy for £100+VAT and sell to you for £200+ VAT
I have to pay £20 VAT (the £40 collected from you - the £20 that I paid when I bought it)

If you then sell the item for cost price as it has been on your shelf for 2 years and you cant sell it then I have still paid £20 VAT, I cannot refuse to pay it because you don't make a profit. Whilst you have claimed back and collected the same amount of VAT leaving you with a balance of zero.

VAT is collected and reclaimed each step of the way, however there is normally more being collected that reclaimed as each step normally involves making a profit. Thus some has to be paid each step.