How is VAT input/output treated in accounts?

[CG2018]

Hello,

I am very new to the forum and just have a question regarding vat.

We are vat registered and i wondered how vat input and output is treated?

So when we charge our customers the vat and it is paid to us, i keep this aside for 3 months until we submit our vat return and pay our vat bill - how is the remaining money that is left treated? Is it treated as profit?

Thanks in advance

 

[TheCyclingProgrammer]

Assuming you’re on the standard VAT scheme it has no impact on your profits at all. You pay HMRC the balance of the VAT you’ve charged less what you’ve paid. There is no “remaining money” unless you’re on the flat rate scheme.

 

[CG2018]

Yes we are on an accrual scheme not a flat rate

 

[CG2018]

Sorry if i am sounding silly I am struggling to get my head around this.

So say for example after our overheads (phone, running costs) we claim back another £500 of vat - this is taken off our VAT bill and what we owe HMRC - what is that classed as?

 

[Anna Chandley]

Normally when you post your transactions the VAT element of the payment or invoice is posted to a VAT control account on the balance sheet so has no effect on your profit and loss.

Say for example you have sales of £10,000 plus £2,000 VAT and have purchases of £2500 plus £500 VAT.

Your accounts would show

Income £10,000
Expenses £2,500
Net profit ££7,500

The VAT control account on the balance sheet would have a balance of £1500. You pay £1500 to HMRC and post this payment to the VAT control account which will reduce the balance to 0

Do you use any accounting software?

 

[CG2018]

Normally when you post your transactions the VAT element of the payment or invoice is posted to a VAT control account on the balance sheet so has no effect on your profit and loss.

Say for example you have sales of £10,000 plus £2,000 VAT and have purchases of £2500 plus £500 VAT.

Your accounts would show

Income £10,000
Expenses £2,500
Net profit ££7,500

The VAT control account on the balance sheet would have a balance of £1500. You pay £1500 to HMRC and post this payment to the VAT control account which will reduce the balance to 0

Do you use any accounting software?

Thank you, yes we use Xero accounting software

 

[CG2018]

Say based on that example we owe HMRC £1500, but we have other running costs in the business for example rent:

Current vat balance £1500
We have an overhead cost of rent which is £350 per month plus vat £70
So £1500 minus £70 we claim back leaves a balance to pay of £1430.00
So after I have paid HMRC £1430 I have £70??

 

[Anna Chandley]

No, because when you post the rent to xero you will post £350 to rent in the P&L an £70 to VAT control. The VAT control balance is therefore £1430 which is the amount payable to HMRC.

You just need to make sure that you choose the correct VAT code when posting any entry into xero .

 

[CG2018]

No, because when you post the rent to xero you will post £350 to rent in the P&L an £70 to VAT control. The VAT control balance is therefore £1430 which is the amount payable to HMRC.

You just need to make sure that you choose the correct VAT code when posting any entry into xero .

Ok I think i finally understand it! Think I have picked the wrong day to get my head around finances but I will get there in the end. Thank you for your help!

 

[Lisa Thomas]

Perhaps it might be better to employ a bookkeeper or accountant to help you to ensure you do not get this wrong.

 

[STDFR33]

Day 1

Make a sale of £120.00


£100 gets posted to revenue.

£20 gets posted to VAT.


VAT account shows a £20.00 liability due to HMRC.


Day 2

Purchase a stapler £6.00

£5 gets posted stationery

£1.00 gets posted to VAT.


VAT account now shows a £19.00 liability.


Day 3

Make another sale of £600 (yay!!)

£500 gets posted to revenue.

£100 gets posted to VAT.


VAT account now shows a £119.00 liability.



And so on and so on.

 

[TheCyclingProgrammer]

Sorry if i am sounding silly I am struggling to get my head around this.

So say for example after our overheads (phone, running costs) we claim back another £500 of vat - this is taken off our VAT bill and what we owe HMRC - what is that classed as?

The input VAT reduces your VAT liability to HMRC. You haven't received £500 back - its just reduced the amount of VAT you have to pay. The £500 represents the output VAT you've already paid to the supplier.

As I said before, think about your sales and outgoings net of any VAT and VAT as a separate thing.