What exactly is VAT?

Rich_T_2

Hi all!

This may sound a silly question but I really do not know what VAT is or its purpose.
I'm a self-employed trader and all the items I buy for resell have VAT attached. I'm not VAT registered (obviosuly after asking a question like this ) but wondered what, if any, are the benifits of being registered VAT?

I know you can claim back VAT but from my understanding you then have to include VAT on any items you have for sell ('+VAT')? I see no benefits?

Any help appreciated,

Hollysan

Hello Rich T,

VAT is a sales tax levied on most goods and services with some exceptions (food, children's clothes) and at a reduced rate on some items (e.g heating costs).

You can register for VAT voluntarily, or if your turnover (sales) exceed the VAT threshold (£68,000 in current tax year), you are required to do so by law.

Some people do register voluntarily, and if you deal mainly with other VAT registered customers who can claim the VAT back which you charge them, it does mean that you can claim VAT back on your purchases, which is a bonus, but if you are a sole trader dealing mainly with individuals who are not themselves registered, you will have to add 17.% to your invoices and they will have to bear that cost.

If you think you are nearing the VAT threshold, go on the HMRC website and find the helpsheets which tell you how to check whether you need to register. Much better than going over the threshold without realising it, which can be very problematic and expensive.

Otherwise, if you are thinking of registering, bear in mind the extra admin and the effect it might have on your customers before you do so! Also, depending on your business, you might have some supplies which are vatable, and some which are not - this makes life very complicated! Hope this helps.

Hollysan

TM1976

VAT is a tax on individuals at the point of sale.

Companies that are registered for VAT can claim back the VAT on their purchases, however they must add to their sales.

For you if you sell to VAT registered companies it may be beneficial for you to register for VAT as they won't mind this because they can claim it back. In addition you will be able to claim the VAT back on the stuff you buy, so you'll make a saving.

If you sell to the general public you will loose out as they cannot claim the VAT back so your sales will cost them more (or you will make less profit out of the sales you make depending on how you set your sale price).

If your turnover is > £68k you have to register anyway by law.

Rich_T_2

Many thanks for your help guys, i think i am getting a better understanding of it. But the more I think on it the more I get confused . I can see it causing a bit of a headache too with all the extra paperwork. Still, if one day I need to become VAT registered it'll be good to have an understanding of it.

if you sell to VAT registered companies it may be beneficial for you to register for VAT as they won't mind this because they can claim it back. In addition you will be able to claim the VAT back on the stuff you buy, so you'll make a saving.

I can see no benefit in being VAT registered when trading with non-vat customers. I would not be out of pocket as I can add the VAT cost I incurred when I purchased goods onto the buyer.

I'm struggling to see how it would work selling to VAT people though. Is the general thinking that they would save 17.5% on goods overall if buying from me?

PlutoinCapricorn

No! You would need to charge them 17.5% extra, and they would not be able to claim it back. Not charging VAT makes you more competitive.

PlutoinCapricorn

Surely you have bought a laptop, CDs etc and seen a line for VAT on the bill?

It means Value Added Tax.

TM1976

If you sell something for £1,000 and you are VAT registered you have to add on £175 of VAT. If your customer is VAT registered they don't care because they can claim that back so it's effectively like you weren't VAT registered and you charged £1,000.

Say you buy that item for £117.50 if you weren't registered for VAT you pay the full amount. If you were VAT registered you could claim the £17.50 back on that so you would be better off, that is providing you are buying something with VAT on it in the 1st place.

Rich_T_2

Cheers for help guys, doing some reading up on it now and watching a few youtube VAT learning videos. Think i'm understanding it a bit more now.

PlutoinCapricorn wrote: »

Surely you have bought a laptop, CDs etc and seen a line for VAT on the bill?

It means Value Added Tax.

Yep See it quite often. Nearly all the items I buy to sell on have VAT attached but I've never understood who benefits from it and what it's purpose is.

Is the general feeling then of being vat registered:

Selling to non-vat registered: bad as you're having to charge them 17.5% (in most cases) more then being non-vat registered.

Selling to VAT-registered: Good. They won't care about the extra expense as they can claim it back?

Thanks

Moosk

Is the general feeling then of being vat registered:

Selling to non-vat registered: bad as you're having to charge them 17.5% (in most cases) more then being non-vat registered.

Selling to VAT-registered: Good. They won't care about the extra expense as they can claim it back?

Not quite. It makes very little difference if you are VAT registered or not to non-VAT regisitered customers. (OK if you are looking at the figures very closely there is a slight price advantage to not being VAT registered). If you are not VAT registered you will pay an extra 17.5% for goods but don't to add VAT to your prices. If you are VAT registered you will cliam back 17.5% on the cost price of your goods (effectivly paying 17.5% less for your goods) but have to add 17.5% VAT to your prices.

Of course you are right that there is a big advantage to being VAT registered if your customers are VAT registered themselves.

blue_monkey_2

Also, it has not been mentioned that for VAT purposes if you turnover more tha68k in any rolling 12 month period then you HAVE to register. It does not go on your company or tax year but each month you have to check whether your turnover has exceeded 68k in the last 12 months.

Hope that makes sense.

cottager

Assuming you're below the VAT threshold and don't have to register, whether you do or not and how much of an advantage it is can depend on your trade, profession or type of business. Some businesses whose only commodity for sale is basically their time would find they had an awful lot of VAT to pay (output tax) relative to the amount they could reclaim (input tax), so wouldn't register unless they had to.

For example my brother is a freelance proofreader working from home: an entirely fee-based little business, well under the threshold. The only things he could reclaim VAT for are things like stationery and a few other odds and ends; so he'd have to charge VAT on all his fees with virtually nothing to offset against it. No advantage for him in registering. It means he has to stand the VAT on the few supplies he needs to buy, and this might involve more than usual occasionally if he has to replace his computer or printer, upgrade software etc, but these are not regular outgoings so overall it's not worth the hassle which registering and having to account for VAT would entail.

But if your business involves buying in goods and supplies to do whatever it is you do, and maybe you have a fair amount of overheads and legitimate expenses you could also reclaim VAT for, then it could be a very different story. In these circumstances, if you weren't registered, all the VAT you pay and cannot reclaim becomes a cost in itself which is essentially coming out of your profit. But even then it needs to be weighed up, as you still may be worse off, relatively speaking, by registering (if you don't have to be) than if you don't.

Bear in mind once registered you're also subject to the rules and regulations this brings with it -- and the time/effort it involves. Like keeping the relevant records to be able to calculate and submit your returns, never missing the deadline and always paying on the nail (believe me, you mess HMRC around at your peril!), knowing how the different VAT categories (standard/zero/exempt) apply to what you buy (and also possibly sell/charge for), what you can and can't reclaim VAT on, fuel scale charges if applicable, and so it goes on. Your business may be very straightforward and never involve these things, but Hollysan's right: it can get complicated depending on the outputs and particularly the inputs you have.