Curious VAT Question

Junior_2

Hi, I was just curious as to what stops a low profit margin business which is registering for VAT from lowering their prices such that they get a tax rebate.

For example if a product is purchased for £100 and sold for £105 the sale price could be lowered to £89.50 + VAT = £105, the same as before.

When VAT is calculated the amount claimable on the purchase is £17.50 (0.175*100), and the amount payable on the sale is £15.70 (0.175*£89.50) giving a VAT rebate of £1.80

Does the VAT man really let this happen??

Thanks,
James

rosysparkle

You haven't worked the VAT out correctly, I'm afraid.

If you have the gross amount, you don't multiply by 0.175 to get the VAT, you multiply by the VAT fraction of 7/47 to get the VAT.

Purchase price of the item £100 is £85.11 plus £14.89 VAT
Sale price of the item £105 is £89.36 plus £15.64 VAT

Input tax 14.89, output tax 15.64. Tax payable to HMRC 0.75p

If you are working out the VAT on the net amount, then you multiply by 0.175 so net £100, gross £117.50.

Hope that makes sense!