What exactly is VAT?

Rich_T_2

Thanks very much for replies everyone. I never realised VAT could be so different for one person to the other depending how your business operates.

I see now it is definitely something to be approached with caution if I was nearing the threshold one day.

Is the general rule;
Input - (minus) output = It's better if this would be a positive figure (e.g. +£1000). That way you claim back £1000 from customs?

If it is a 'minus' figure then you owe customs money?

Thanks

martindow

If you end up claiming money back from HMCE you have a disastrous business as your tax on expenses is greater than your tax on sales! Once you are registered you will be paying out each quarter. It is just as has been said that VAT registered customers will not have minded paying you the VAT as it makes no difference to them and you can set off the VAT you have paid on items you buy for the business.

I found that being VAT registered forced me to be rigorous in keeping the books up to date which was no bad thing.

blue_monkey_2

Not necesarily a disastraous business. I have a 'set' price that I charge my customers and a lot of my sales go to Oz, the US and Canada and they pay the same price as UK customers (the displayed price is the buying price and those sales are then analysed and some will have VAT some will not and my return is filled in accordinally), so, for me, it is beneficial to be VAT registered because on those sales I make extra because I do not have to pay the VAT on the sale. I think the majority of my returns I get a refund because the goods I have bought to sell to the customers I pay VAT on but the sales I do not.

Is it extra work? Again, not neccesarily, I have Sage Instant Accounting, the figures get entered into a box and you click a link and it does it all for you. I personally think it is far better than a spreadsheet system. It does not take much time at all really and having this programme ensures all your records are kept in proper order also and you will know where ti find everything. The main thing for me is not leaving it all to the 3 month period and having to spend 4 days solid booke keeping. Nope, I'll never learn, LOL. That being said, it is easier now because it means my accounts are always, generally, up to date and my end of year takes no time at all - otherwise no doubt I'll be doing a years worth of book keeping. My Self Assessment is generally submitted around the end of April/beginning of May. Even if you are not VAT registered it is imperative that you keep all of your records in order anyway.

HOWEVER, I would suggest that as you have no idea of what you are doing you take a simple book keeping course (I think businesslink might do these for free but your local college will also offer them) so you know where your money is going and to what ledgers the money is being 'posted' for accounting reasons.

If you decide to buy Sage (it is around £130, a good investment IMO) I would also see about a short course in understanding how it works. It is all very well using it but you have to understand the basics about ledgers, debits, credits, nominal accounts and reconciliations so that you understand what you are doing.

cottager

blue_monkey wrote: »

The main thing for me is not leaving it all to the 3 month period and having to spend 4 days solid booke keeping. Nope, I'll never learn, LOL.

:rotfl::rotfl:
So right now you're maybe sittng there thinking you're definitely going to enter the quarter and get it out of the way 'at leisure' in the next couple of weeks and not leave it to the last minute, right? Just like last time. And the time before. And the time before that. And the... ouch, this is horribly familiar...!!
Yes, I use Sage Instant Accounts for OH's business and couldn't do without it.

Rich, maybe I confused you with outputs and inputs.
Outputs = your sales, so output tax is the VAT you charge your customers.
Inputs = what you buy, so input tax is what you can reclaim.

For most businesses their sales (and thus output tax to pay to HMRC) would be higher than their purchases (on which they're reclaiming input tax), so there is generally a net figure to pay to HMRC.

Sales/output tax minus purchases/input tax = net VAT to pay.

Buy something for £100 (+ VAT £17.50) and sell it for £150 (+ VAT (£26.25), and the net VAT to pay to HMRC is the figure applicable to the difference/profit of £50, i.e. £8.75. Both figures must be included on the return to demonstrate the calculation.

Charge a fee for your time/labour of £150 + VAT (£176.25) like my brother for instance, if he was registered, and the only thing to reclaim in the quarter is a pack of paper for £5 + VAT (£5.88), and the net VAT to pay to HMRC is £25.37 instead of £26.25, so it isn't worth it... although I suppose it depends on the value you place on being able to reclaim the 88p, i.e. it's 'something' rather than nothing.

But it isn't always this way round by any means. There are many like b_m who, because of what their business is, what it's dealing in, how it operates etc, consistently have more to legitimately reclaim than they must charge. They would be daft not to register, whether below the threshold or not.

GrumpyGit_3

martindow wrote: »

If you end up claiming money back from HMCE you have a disastrous business as your tax on expenses is greater than your tax on sales!

Not if you're a butcher, a green grocer or run a shop selling children's clothes. In most cases it's true that if your input VAT exceeds your output VAT then you're in trouble but there are some businesses that can 'profit' from voluntary registration.

Premier_2

Rich_T wrote: »

...Is the general rule;
Input - (minus) output = It's better if this would be a positive figure (e.g. +£1000). That way you claim back £1000 from customs?
...

It's good if you want to avoid paying VAT, but chances are you'll soon go bust :eek:

It only works if the items you buy (input tax) is rated at standard rate, whilst your output is for some reason rated at 0% VAT.
(but don't confuse zero rated goods with goods that fall outside the scheme, i.e. are not applicable to VAT)

moneypooh

It also depends on whether you export too. Being VAT registered and exporting really does make sense if all your purchases are in the UK.

blue_monkey_2

cottager wrote: »

:rotfl::rotfl:
So right now you're maybe sittng there thinking you're definitely going to enter the quarter and get it out of the way 'at leisure' in the next couple of weeks and not leave it to the last minute, right? Just like last time. And the time before. And the time before that. And the... ouch, this is horribly familiar...!!

:rolleyes: What me, no.... maybe... oh go on then yes of course I did . I looked in the cupboard the other day - I file it all in a folder so I know where it all is :cool: - and then counted how many weeks before my next return and thought... OK then, 'tomorrow' it is....

Have I done it yet.......?



:rotfl::rotfl:

cottager

blue_monkey wrote: »

:rolleyes: What me, no.... maybe... oh go on then yes of course I did . I looked in the cupboard the other day - I file it all in a folder so I know where it all is :cool: - and then counted how many weeks before my next return and thought... OK then, 'tomorrow' it is....

Have I done it yet.......?

Ummmm.... of course you have! Just like I have

Only one folder, in one cupboard? That's really impressive. I file ours in the dining room. Almost the whole dining room. We don't dine. We fall over filing

Rich_T_2

Guys a massive thanks for all your help. I'm going through this post, re-reading everything and I think I am getting it now

Cheers