VAT questions from a newbie!

[Caroline Geary]

Hi all! I've got some real rookie questions for you! I'd be really grateful of any advice! I'm in the process of becoming self employed. I'm a therapist who will charge clients for massage and similar therapies and I also have an e commerce website where I am selling bath products.

Okay from some research I have done on gov.uk I can see you don't have to register or charge VAT until you are turning over £83k per annum......

So initially I won't need to register for VAT or charge my clients VAT but once I'm over the threshold is massage something you would charge VAT on? I'm presuming it is!? How does that work exactly? How does the tax get paid?

With my online sales I can tick a box on each product if I want it to be "taxable" what does this mean and how will this work? How does the tax get paid?

if VAT is 20% then it is going to wipe my margin out???? Or do I pay the VAT on my sales and then claim it back on my purchases........?

I thought VAT receipts could be deducted from your profit to determine your rate of income tax.... it can't work both ways can it? I'm confused!!!

I hope that made sense I hope to hear from you guys soon!

 

[Newchodge]

If you are VAT registered:

1. Assess all of your products and services to see if they are:
VAT exempt
VAT zero rated
VAT standard rated
VAT reduced rated.

2. Everything you sell or supply or charge money for has to include VAT at the appropriate rate. Let's assume that everything is standard rated.

3. All of your bills to clients will be eg £15 plus VAT @20% = £3.00 so total cost to client is £18.00. Of this £15 is yours and £3.00 belongs to HMRC.

4. Everything that you buy will either be from VAT registered suppliers or non-VAT registered suppliers.

5. If they are not VAT registered you pay their bill, add your profit markup to their price, add VAT to the total and charge your customer.

6. If they are VAT registered they charge you eg £5.00 plus VAT @20% of £1.00, so you pay them £6.00

7. Repeat step 5 but you pay them £6.00, keep £1.00 for HMRC, add your markup to £5.00 add VAT to the total and charge your customer.

8. You keep very clear records of every transaction, including suppliers' VAT numbers, VAT rates and costs.

9. Every so often (quarterly) you complete a VAT return, showing how much VAT you have paid out and how much VAT you have received in. eg £1,000 VAT paid out, £1,500 VAT received in. You then send £500, plus the return to HMRC.

Alternatively you talk to an accountant who may suggest that the flat rate scheme is better for your business.

Income tax is something else again. Speak to that accountant.

 

[boring-friday]

If you're buying something for £6 and selling it for £12 you'd pay £2 vat on the £12 sale price and then you can reclaim the £1 you've already paid when you bought it so you're basically paying another £1 when you do your vat return every 3 months.
You'd then have £5 profit, £12 minus £2 vat and £5 cost price then you minus any overheads and thats what you'd pay income tax on

Having to charge vat on services (massages) is obviously really bad news as theres nothing to reclaim.
Best to speak to an accountant as you can probably split it into 2 businesses or you'd probably be better off having the bath products priced a lot higher so that you don't hit the vat threshold

 

[Talay]

Whichever way you go, you need to factor in the VAT from day one and if not paying it is a benefit initially, then all well and good.

You cannot have a business plan which goes into the red when you charge VAT !

 

[Clare@ClarityTaxation]

When you're calculating your profits you take the net values of everything. So:

Sales £10 plus VAT = £12
Purchases £5 plus VAT = £6

Your profit & loss account would show £10 less £5 = £5 profit. This is what you then pay income tax and NI on. The rate you pay depends on overall profit and whatever other income you have during the tax year (employment income, interest etc).

During the year you would have paid £1 to HMRC in VAT, being the difference between the £2 on your sales and the £1 on your purchases.

If you're thinking already that the business will exceed £83k in turnover then you should think about trading through a limited company, it'll give you more options in terms of how to pay yourself and therefore how much tax you'll end up paying.

Talk to an accountant and get advice early on. If you wait until after your first year you could end up losing out on things that cannot be backdated - expenses you could have claimed if you'd known about them, changing to a company, paying wages to yourself and your spouse etc. It's not cost effective in the long term to avoid paying for decent advice, and a good accountant will save you more than they cost you (plus many won't charge for an initial chat anyway).

 

[CoolHandCol]

If your margins are tight then becoming VAT registered will hurt you. So much so that you may have to sell 30% more just to stand still profit wise

 

[paulears]

Massage is a service, so if your clients are individuals, then you suddenly get more expensive. I doubt that you will have that much in stock or consumables that you purchase and could recover the VAT. Although with the usual caveat of "ask an accountant" on this one I suspect you will want to keep under the threshold to be competitive. I looked at the physio receipt I had recently and there is a VAT number on it, so it's certainly possible to exceed it.