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  • FIRST POST
    • UgurS
    • By UgurS 12th Oct 16, 10:14 PM
    • 1Posts
    • 0Thanks
    UgurS
    Can you get taxed on tax?
    • #1
    • 12th Oct 16, 10:14 PM
    Can you get taxed on tax? 12th Oct 16 at 10:14 PM
    Hi all,

    I would to apologies in advance if I have misplaced this thread or if I have stated anything that is incorrect, please bare in mind I am new to this forum and the world of accountancy.

    What I am having a great deal of trouble getting my head around is Income Tax on VAT.

    So, if I was a business with an income of £8500/week that was VAT bound totalling at £1415 (rounded), paying wages at £1700, with expenditure of £2700 (including VAT £180) and hiring professionals for £2100 (including VAT £350).

    Output VAT - £1415 Input VAT - £530

    My totals become:
    Income - £8500
    Outgoings - £7915 (including Output VAT and VAT I paid on purchases etc.)

    Using these figures does this mean I would get taxed on profits with the figure £585/week (Income Tax: 115) or £1115/week which includes Input VAT (Income Tax: £305) second figure includes the Input Tax??? So this means in my case that my Input VAT has now basically dropped to £340 from £530 is this how it works out???

    Why I had trouble understanding this part of the equation is because surely you can't get taxed on tax, I didn't use the Input VAT to gain profit and I'm only claiming back what was mine as a business in the first place.

    Thanks to whoever takes the time to explain this to me and how it actually all comes together. Hope it made sense.

    Kind regards,
    US
Page 1
    • Pennywise
    • By Pennywise 13th Oct 16, 7:55 AM
    • 8,187 Posts
    • 14,278 Thanks
    Pennywise
    • #2
    • 13th Oct 16, 7:55 AM
    • #2
    • 13th Oct 16, 7:55 AM
    First point is don't try to merge IT and VAT. Keep them separate in your mind.

    If you make a profit by being VAT registered, i.e. able to add vat to your customers but able to reclaim on your purchases, then of course there'll be more IT as you've made more profit due to being VAT registered.

    But it's not IT on VAT. Look at it the other way, because you can reclaim the VAT on your expenses, your costs are now lower. Because your costs are lower, your profits are higher.
    • badmemory
    • By badmemory 13th Oct 16, 11:38 AM
    • 229 Posts
    • 202 Thanks
    badmemory
    • #3
    • 13th Oct 16, 11:38 AM
    • #3
    • 13th Oct 16, 11:38 AM
    Basically if you are VAT registered in your income & expenditure VAT cancels itself out. The money you receive from the VAT on sales equals the VAT you pay on goods you have purchased plus the VAT payment to HMRC. If you are filing self assessment then VAT does not appear in the filing.
    • laticsforlife
    • By laticsforlife 14th Oct 16, 2:49 PM
    • 1,136 Posts
    • 1,432 Thanks
    laticsforlife
    • #4
    • 14th Oct 16, 2:49 PM
    • #4
    • 14th Oct 16, 2:49 PM
    If I read it right this is what I get;

    For VAT;
    Outputs £8,500 (£1,415 Output tax)
    Inputs £4,800 (£530 Input tax)
    VAT to pay on your return £885 p/w

    For IT;
    Turnover £7,085
    Expenditure;
    Wages £1,700
    Costs £2,520
    Professionals £1,750
    Net profit for tax purposes, £1,115

    True cash profit £230, although tax on the £1,115 might be £223 making you real profit of £7.

    Also bear in mind the PAYE costs of employing someone (including not only their deductions but Employers NIC, which is a cost to your business @ about 12% of wages).

    You're now making a loss!
    I didn't do it, nobody saw me do it, you can't prove a thing!
    Quidco, £1,985
    Shopandscan, £2,300
    Tesco DTD, £2,700
    TopCashback,£1,392
    Thomson 261/04 Claim, £1,700
    • polymaff
    • By polymaff 15th Oct 16, 12:42 PM
    • 1,283 Posts
    • 516 Thanks
    polymaff
    • #5
    • 15th Oct 16, 12:42 PM
    • #5
    • 15th Oct 16, 12:42 PM
    You don't pay Income Tax on the VAT - not the least because the VAT is never yours. Like Pennywise says, keep them separate in your mind.
    • xnoxxnox
    • By xnoxxnox 15th Oct 16, 9:40 PM
    • 61 Posts
    • 13 Thanks
    xnoxxnox
    • #6
    • 15th Oct 16, 9:40 PM
    • #6
    • 15th Oct 16, 9:40 PM
    In a way, yes it is charged twice. VAT - Value added tax, is a tax on the added value. If one generates profits by adding value, one is also liable for the income tax. E.g.

    Bought something for 5 quid, and sold it for 10.
    Added value is 5 quid, and thus HMRC will want to see 1 quid from you.
    And if there are no other expenses/income, there is 5 quid of profit and 20% corporation tax is due as well, another quid. Thus net return is only 3 quid.

    However, in most countries one does not pay VAT out of their pocket, but pass it along because both purchase and sale charge VAT. Meaning, one buys something for 5 quid + VAT (total invoice 6 quid) and sell for 10 quid + VAT (total invoice/receipt 12 quid). Such that 5 quid of profit is generated, and 2 quid generated to pay VAT to HMRC. This is how vat works, and in the UK VAT-registered entities must charge VAT and may reclaim VAT they paid on business-related goods or services. So above there is still 5 quid of profit, which is taxed. And thus net return now is 4 quid.

    Unfortunately if one generates a lot of sales with VAT, and has little expenses with VAT, one does end up paying a large VAT bill. And if one did not set aside money to pay for vat, a cashflow crisis can arise. (e.g. if total proceeds from sales including vat were used up to buy more stock)

    Sad reality is that yes one can generate tax liability larger than profits, resulting in net loss. This is why cashflow management is important. Tracking tax liability on ongoing basis is important. And one must project when and how much one will have to all taxes.
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