VAT help for a newbie

[disco_very]

Hi guys, im wondering if someone in the know can help me get me head around claiming back VAT. Ive tried a few searches but im none the wiser! We are a recently set up comany who is vat registered. what i dont get is this -

If we buy a product for £100 ex vat

it is £117.50 inc vat

If we then sell the product for £150 including vat

is the profit 150-100 so £50?

:|

do we then pay vat for the £150 price we sold the product at of £22.34 and the take that away from the £50 profit from before?

 

[David Griffiths]

If you are VAT registered, then the £150 sale price includes VAT of £22.34 - that is your Output Tax. The £17.50 suffered on the purchase is your Input Tax.

At the end of the VAT quarter you add up all Output Tax, and deduct Input Tax (barring certain items such as entertainment) and account for the balance to HMRC

That means that on this transaction you owe £22.34 - £17.50 = £4.84

Your profit on the deal is £127.66 (price net of VAT) less £100 = £27.66

 

[MyAccountantOnline]

Hi guys, im wondering if someone in the know can help me get me head around claiming back VAT. Ive tried a few searches but im none the wiser! We are a recently set up comany who is vat registered. what i dont get is this -

If we buy a product for £100 ex vat

it is £117.50 inc vat

If we then sell the product for £150 including vat

is the profit 150-100 so £50?

:|

No - the profit is 27.66, ie the sales price excl VAT of 127.66 less £100.

Once you are VAT registered your income and costs are exclusive of VAT.

 

[Ray Coman]

Accounting for VAT can be cumbersome. As a way of keeping your administrative costs down and in some cases saving tax, you might consider joining the flat rate scheme. Let me know if you would like more information about this.

 

[progeniga]

Could you post more information on the flat rate scheme please?

Many thanks

 

[Ray Coman]

The flat rate scheme is a simplified method of accounting for Vat which can be used by most businesses with a turnover below £150,000

 

[Zeno]

Details here:-
http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

(Not trying to step on your toes here Ray but you can't post links until 15 posts)

 

[Ray Coman]

Zeno,

I have paid to have my link displayed in my signature. This is perfectly correct as far as I am concerned.

Ray

 

[KidsBeeHappy]

The secret is as David shows, not to think about VAT on the profit on a transaction. VAT isn't a profit tax it's a sales tax, so firstly get it in your head as such.

If everything you sell is standard rated, then think of yourself as the government's personal tax collector, and it is your job to collect 17.5% tax ontop of your sales price for everything you sell.

Then because the government as such lovely people, they very graciously allow you to deduct the VAT that you've incurred on your vatable expenses and cost of sales, (as a kind of thank you!).

So what you pay over each quarter is all the sales (output) tax you've collected, less all the input vat on your costs of sales and expenses that the government have allowed you to deduct from your payover.

A bit over simplfied i know, but the point is, you have to think of it as a sales tax on all your transactions, not as a profit tax on the individual items you sell.

 

[Zeno]

Zeno,

I have paid to have my link displayed in my signature. This is perfectly correct as far as I am concerned.

Ray

Wind your neck in Mate, I meant that you can't post links like the one to the HMRC site until you have made 15 posts.

 

[Ray Coman]

OK, now I understand, thanks

 

[progeniga]

Thanks for the link Zeno

 

[JohnNash]

Hi disco_very,

I had many hours of fruitless searching when I set up, in the end a free 20 minute chat with an accountant sorted it for me.

If you're looking for an easy way to manage VAT returns (and all other book-keeping needs), I use on-line software called Kashflow (about £12 per month) and enter all my purchases / sales in here. At the end of the quarter it generates a report and you can submit directly to HMRC.

Couldn't believe how simple the VAT return was and I ended up with a VAT refund within 2 weeks. When I make some money it will just be the other way round, so not as satisfying but just as simple!

However, definitely worth chatting to an accountant anyway to see which scheme is best for your business.

All the best,

John

 

[mr. mischief]

One tip - if you do go on to the flat rate scheme, get any big spends on equipment, marketing and so on done first!

You need to spend £2,000 per ITEM once you are in the scheme if you're going to claim the VAT.

 

[QuickHomeBuyers]

One tip - if you do go on to the flat rate scheme, get any big spends on equipment, marketing and so on done first!

You need to spend £2,000 per ITEM once you are in the scheme if you're going to claim the VAT.

Please can you explain the £2000 per item bit.

 

[elaine@cheapaccounting]

see here for explanation:

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#8

 

[disco_very]

Cheers for clearing that up!

Do you use excel to work out price before vat, after sale price, profit etc, ive attempted to this but my excel knowledge is virtually nil!

 

[helpful accountant]

When I worked for a retailer we had a Excel designed matrix. This took the ex VAT product cost and showed what multiple was required to achieve a paticular margin i.e.

Product Cost exc VAT100100100100100Margin Required42%44%46%48%50%Mark up factor 2.03 2.10 2.18 2.26 2.35 Sales Value (inc VAT) 203 210 218 226 235


I hope the maths is ok here as I've quickly knocked it up. The buyers etc would know for instance that to achieve a margin of 50% (last column) they would need to multiply the cost price by 2.35 to achieve this margin. We had many varied lines and sometimes it would be done manually, sometimes in Excel. There are always price points to consider £1.49, £1.99 etc and of course competitor's pricing and customer's attitude towards price.

If I've not explained it well please email or PM and I can expand.

 

[helpful accountant]

That has not come out very well as pasted from Excel. I can email if required.

Tony

 

[disco_very]

Thanks for all the help guys,

Final question.....

If we sell to a company that is VAT registered, can we claim back the vat we pay to sell to them? Thanks

 

[David Griffiths]

Thanks for all the help guys,

Final question.....

If we sell to a company that is VAT registered, can we claim back the vat we pay to sell to them? Thanks

No!

They will claim it back as their input tax, but you have to pay it to HMRC (less your input tax)

 

[Ray Coman]

The transfer of a business as a going concern is outside the scope of VAT

 

[David Griffiths]

The transfer of a business as a going concern is outside the scope of VAT

One of us has wildly missed the point.

 

[disco_very]

Im rellying on your wealth on knowledge again here.......

In terms of cash purchases, I presume there is not VAT to pay there? Is it possible to claim vat back without a recipt?

This is in terms of part exchanges or buying things of people to sell on.

Im going to guess VAT still has to be paid on the sale price.

Thanks

 

[disco_very]

anyone.........please

 

[QuickHomeBuyers]

Im rellying on your wealth on knowledge again here.......

In terms of cash purchases, I presume there is not VAT to pay there? Is it possible to claim vat back without a recipt?

This is in terms of part exchanges or buying things of people to sell on.

Im going to guess VAT still has to be paid on the sale price.

Thanks

Any LEGIT sale you do must include VAT if you are registered for VAT. Zero rated products are exempt.

You cannot claim back VAT without a vaild VAT reciept.

I will give you an example to help you.

You buy a product for £50 + VAT(£8.75)

Now you decide to make £10 gross profit on this. Your selling price must inlcude VAT, therefore your selling price = £60 + VAT (£10.50)

You have now made a £10 profit but have a VAT liablity which you pay at the end of year, your net VAT liablity for this sale = £10.50 - £8.75 = £1.75

Therefore your profit = £10-£1.75 = £8.25 on which you pay your bills etc and on the bottom line you pay corporation tax or income tax whichever is your case.

Hope this helps.

 

[Jaydee]

Zero rated products are exempt.

Therefore your profit = £10-£1.75 = £8.25

You were doing fine other than these two parts!

1. Zero rated and exempt are not the same.

2. The VAT liability of £1.75 does not impact the profit, which remains at £10

 

[Ray Coman]

Im rellying on your wealth on knowledge again here.......

In terms of cash purchases, I presume there is not VAT to pay there? Is it possible to claim vat back without a recipt?

This is in terms of part exchanges or buying things of people to sell on.

Im going to guess VAT still has to be paid on the sale price.

Thanks

You must have a valid VAT invoice in order to be able to reclaim VAT. Part exchange is two separate transactions for VAT purposes. The value of capital assets such as equipment or cars is not included in your taxable turnover for determining whether you should register for VAT.

 

[David Griffiths]

If you take goods in part exchange, then you must account for VAT on the full selling price. If there is VAT on the goods accepted then you claim that as input tax in the normal way.

If you buy second hand goods from the public then there is no input tax to claim. However, provided you keep the correct records you do not pay VAT on the full sellling price - only on the margin.

Further details here

Abiding by the requirements of the notice is crucial, including record keeping

 

[disco_very]

im slowly getting the hang of it, thanks for all your help.

Hopefully the finaly question!

With regards to a part exchange -

If we take a car for example as part exchange for £300 and the vehical they are buying is £1000, theorectically they are only paying £700 for the car, so would vat only be applicable on the £700 price, or the original £1000 price?

 

[Ray Coman]

In most cases VAT is not recoverable on cars, unless a commercial vehicle, taxi or a car used for driving tuition.

 

[disco_very]

Hi ray,

i was just using the car as an example, would the same apply to an electrical appliance, for exapmple a TV?

 

[David Griffiths]

im slowly getting the hang of it, thanks for all your help.

Hopefully the finaly question!

With regards to a part exchange -

If we take a car for example as part exchange for £300 and the vehical they are buying is £1000, theorectically they are only paying £700 for the car, so would vat only be applicable on the £700 price, or the original £1000 price?

That's already been answered in my previous post.

 

[David Griffiths]

In most cases VAT is not recoverable on cars, unless a commercial vehicle, taxi or a car used for driving tuition.

Or if purchased for resale.