VAT reclaim - does the amount get taxed ?

Dan22

I have created a spreadsheet for all my expenses and one thing doesn't make sence.

If I pay VAT on goods and then claim it back then my overall profit is higher than if I buy goods without paying VAT on them in the first place.

As I understand, this is because I added the reclaimed VAT to the profit but didn't apply income tax to it.

Question 1:
When declaring my expences, can I claim "VAT paid" as expence if I will claim it back ?
Question 2:
If I have not claimed back my VAT yet, but will do, do I have to add the claimback amount to the profit when submiting tax return ?

Thanks.

4Chickens

As I understand it, VAT has no impact on profit unless you are on a flat rate vat scheme. Are you on a standard scheme or a flat rate scheme?

Dan22

I am on flat rate 15%

Ok so from what I understand, if I will reclaim £1000 of VAT spent and it will go into my pocket, then it is subject to 20% income tax.

In this case it won't make a difference.

Is this correct ?

4Chickens

Dan

I think you misunderstood me.
A flat rate vat scheme is where you charge VAT @ 15 % on your sales and only pay a percentage of your gross sales over to the HMRC. You do not claim vat on any purchases unless it is for an asset over £2k. For example, my husband charges 15% vat on his sales and only pays 6.5% of his gross sales to HMRC. We make a profit from the vat collected and therefore pay income tax on it.

A standard rate VAT scheme is the one that most vat registered people use. You charge vat on your sales and claim vat on your expenses. So £1000 sales vat less £500 purchase vat leaves you with a Vat liability of £500. If the amounts were the other way around and the HMRC owed you £500, it would we a current asset to you. Not taxable either way.
You might want to give me some more info on the business and I might be ablet o help a bit more. I am a qualified book keeper and do vat returns all the time, both flat rate and standard.
Hope this helps a bit

4Chickens

Also Dan

The figures you use on your tax return should be net of vat thus taking vat out of the equation for tax purposes completely. Remember this rule: VAT is a TAX therefore you cannot TAX a TAX (unless like my hubby you are on a flat rate scheme)

Dan22

That's very interesting information. I am not actually VAT registered yet, just trying to register, and was thinking of the standard rate VAT.

I build and sell PCs, from what I read, reduced rate VAT only applies to certain business type. Can I do flat rate here ?
I also started a second business selling e-books, this is VAT exempt right ?

The question that bothers me the most, if I register for VAT now, will I have to pay VAT on the sales I made before the registration ?

Also HMRC says that adding VAT per invoice will save you money compared to adding VAT on the annual turnover, is this right ?

4Chickens

Hi Dan

Have you registered for standard rate or flat rate? If you go on hmrc website and look up flat rate you should find a page that lists trades under the flat rate scheme and what percentage of gross sales is payable to hmrc. Personally, I think the flat rate scheme is simper to administer because you are only concerned with sales vat. For example, if my hubby invoices £6000 gross, the vat element is £782.61. We pay hmrc 6.5% of the gross sales, which is £390. We make a profit of £392.61 on the vat element. Not bad for just adding vat eh?
Vat can only be charged or reclaimed from the date of registration. So, supposing your registration date is 1 September then any sales before that date should not have vat on them. You cannot claim the vat element back on any purchases before this date.
With regards to ebooks, I would talk to someone at hmrc. I know that regular hard copy books are exempt from vat but I am not sure about ebooks.
I hope that this helps, if you need any more info then just ask.
Cheers:beer: