How does VAT work?

[SK Tech]

Ive been reading about registering my business for VAT and want to get some understanding.

Say if im vat registered and a supplier is selling a laptop for 400£, i buy it for 333£ as ill be able to reclaim the vat. I sell it on ebay for a market price of 480. Leaving me with a net profit of 147. However the meanies at hmrc takes 20% of the total cost, so i have to send hmrc 20% of 480 - which is 96£. Leaving me with a profit of 51£ profit before ebay fees.

Is this correct?

 

[matlob]

If you are vat registered you will have to sell it + vat. Is the 480 figure inclusive of vat?

 

[Newchodge]

Ive been reading about registering my business for VAT and want to get some understanding.

Say if im vat registered and a supplier is selling a laptop for 400£, i buy it for 333£ as ill be able to reclaim the vat. I sell it on ebay for a market price of 480. Leaving me with a net profit of 147. However the meanies at hmrc takes 20% of the total cost, so i have to send hmrc 20% of 480 - which is 96£. Leaving me with a profit of 51£ profit before ebay fees.

Is this correct?

No.

You buy a laptop for £400. You pay £400. You sell it for £400 + £80 VAT. You receive £480.

You pay HMRC £80 and, if your supplier was VAT registered, you receive £66.67 from HMRC.

So you pay £480 and you receive £546.67, giving a profit of £66.67, IF your supplier was VAT registered. If they were not you make no profit.

 

[SK Tech]

If you are vat registered you will have to sell it + vat. Is the 480 figure inclusive of vat?

Yes, 480 incl vat at 20%

 

[John Hemming]

IF your supplier was VAT registered. If they were not you make no profit.

If you are buying a lot of stuff to resell from non-vat registered people you can use the margin scheme for vat which is a bit complicated (look on the website), but you only pay vat on the margin.

Hence if you buy something for 400 (no vat) and sell it for 520, the margin is 120 and the vat is 20.

This is important for traders in second hand goods. Its the sort of thing where it is worth having some advice from an accountant.

 

[Mr D]

Yes, 480 incl vat at 20%

480 inclusive of VAT - but VAT is 20% added tax. So £400 plus 20%. The VAT is 16.67% of the inclusive price.
So 1/6th of 480, the £80, would be the VAT you charge. The other 5/6ths are yours to pay costs with etc.

 

[ecommerce84]

Those blinking meanies at HMRC taking VAT to pay for roads, hospitals and social welfare.

They should hang their heads in shame

 

[TheCyclingProgrammer]

Those blinking meanies at HMRC taking VAT to pay for roads, hospitals and social welfare.

They should hang their heads in shame

Not only that, but as a rule VAT registered businesses don’t pay VAT, they just collect it.

 

[Mr D]

Not only that, but as a rule VAT registered businesses don’t pay VAT, they just collect it.

Though some businesses do pay it because they cannot think of increasing prices at all to get buyers to pay it. So paid out of company income.
They take a reduction in profit instead. Sad, but its their choice.

 

[MyAccountantOnline]

Ive been reading about registering my business for VAT and want to get some understanding.

Say if im vat registered and a supplier is selling a laptop for 400£, i buy it for 333£ as ill be able to reclaim the vat. I sell it on ebay for a market price of 480. Leaving me with a net profit of 147. However the meanies at hmrc takes 20% of the total cost, so i have to send hmrc 20% of 480 - which is 96£. Leaving me with a profit of 51£ profit before ebay fees.

Is this correct?

If you do have to register for VAT and are reading up on VAT take a look at the VAT flat rate scheme too https://www.gov.uk/vat-flat-rate-scheme

 

[SK Tech]

No.

You buy a laptop for £400. You pay £400. You sell it for £400 + £80 VAT. You receive £480.

You pay HMRC £80 and, if your supplier was VAT registered, you receive £66.67 from HMRC.

So you pay £480 and you receive £546.67, giving a profit of £66.67, IF your supplier was VAT registered. If they were not you make no profit.

So in this example, How much VAT would I sent to HMRC?

 

[Newchodge]

13.33

 

[SK Tech]

How did you get that number? So heres another example:

Cost of Item: 232.04
VAT: 46.42
Total: 278.40

I sell it for £250 + VAT - total of £300
Vat return: 46.42
Total I get: 346.42
I send HMRC £50 for VAT the customer paid.

I get back: 296.42
Profit: 64.36

If not then please use another example. Also, Im looking to sign up for the flat rate scheme and was wondering if you could give me an example of that? I understand I'll send over less VAT to HMRC, so say if an item is in the 8.5% category, I only need to send HMRC the 8.5% of the 20% VAT so I get the remaining 11.5%?

13.33

 

[obscure]

How did you get that number?

Take the VAT you owe and deduct the VAT you are reclaiming.
£80 owed to HMRC, £66.67 to be reclaimed = £13.33

 

[NicoJ]

Using your new example:
You pay £3.58 VAT to HMRC (50.00 less 46.42). Your profit is £17.96 (250.00 less 232.04).
On flat rate VAT you would pay 8.5% of £300 to HMRC - £25.50. This would see you making a loss on that sale. 300-25.50-278.40 = (3.90)

 

[Newchodge]

How did you get that number? So heres another example:

Cost of Item: 232.04
VAT: 46.42
Total: 278.40

I sell it for £250 + VAT - total of £300
Vat return: 46.42
Total I get: 346.42
I send HMRC £50 for VAT the customer paid.

I get back: 296.42
Profit: 64.36

If not then please use another example. Also, Im looking to sign up for the flat rate scheme and was wondering if you could give me an example of that? I understand I'll send over less VAT to HMRC, so say if an item is in the 8.5% category, I only need to send HMRC the 8.5% of the 20% VAT so I get the remaining 11.5%?

Your arithmetic needs a lot of work.
Also you have recovered the £46.42 twice.

You purchase at 232.04 , as whatever the Vat you get it back. You sell at 250, as, whatever the VAT you pay it to HMRC. Profit 17.96

 

[ecommerce84]

I think you’re overthinking this some what. If you are VAT registered and not on the flat rate scheme, then look at ALL prices EX VAT to work out your profit on the item.

so if you pay £232.04 ex VAT for an item and you sell it for £250 ex VAT, your profit on that item is £17.96.

The VAT on that particular sale is:
VAT the customer paid (£50) - the VAT you paid to your supplier (£46.42) meaning you owe HMRC the difference. In this case that is £3.58. This doesn’t affect your profit as you already collected it when you made the sale.

 

[Mike wells]

Do you have to send the invoices in to the vat man or just say how much it's for ?

 

[Mr D]

Do you have to send the invoices in to the vat man or just say how much it's for ?

Just give totals for the two figures and pay the difference.
For example vat paid 2000 vat collected 5000 you hand over 3000. Software can do all that for you.


You keep records so if there is a query or a vat inspector comes round you can prove your figures are right.

 

[Mike wells]

So in theory you could make up a number and hope they don't check

 

[TheCyclingProgrammer]

So in theory you could make up a number and hope they don't check

Yes, in theory you could commit VAT fraud.

 

[Mike wells]

Not that I'm considering it but what's the penalty for tax fraud ?

 

[TheCyclingProgrammer]

Fines, penalties and potentially prison.

 

[Mr D]

So in theory you could make up a number and hope they don't check

Expect them to have some methods of detecting fraud.
And if they do find problems then they apply penalties.

 

[Mike wells]

What about if you claimed back vat on something you shouldn't like personal legal expenses

 

[Mr D]

What about if you claimed back vat on something you shouldn't like personal legal expenses

Easily picked up by VAT inspector.