Help with VAT - What to do with the extra money?

KGriff

My son is a self employed parcel courier and has contracts with Parcel Force, City Link & Waitrose. He drives (mainly at night) all over the UK.


When the business first began he was not VAT registered and so had a weekly turnover similar to the following:

• £1250 income per week from his customers (Parcel Force etc)
• £250 outgoing per week for VAN Hire which includes insurance, No VAT is applied to this as the hire company is not VAT registered.
• £500 outgoing per week for fuel which includes VAT.

His total profit therefore was £500 per week from which he then went onto pay tax and national insurance class 2 & class 4.

This year my son volountary became VAT registered and so this means the VAT tax on his fuel is his INPUT tax and now he charges his customers, Parcel Force etc VAT on the jobs ... so now his turnover is as follows

• £1250 + VAT from his customer which equals £1500 (£250 OUTPUT VAT)
• £250 outgoing for Van Hire (No VAT here)
• £500 outgoing per week for fuel which is made up of £416.66 in actual fuel plus £83.34 VAT

When my son submits his vat return each quarter he pays HMRC the VAT OUTPUT less the VAT INPUT Tax in other words he hands over £250 minus £83.34p for each and every week. So for three months that works out to a VAT bill of 1999.92p (lets call that £2000 for simplicity)

However during the same 12 week period he has taken in 12 lots of £250 in actual collected VAT from his customers (Parcel Force) so that is actually £3000.

This means he has now gained a profit of £1000.

and here is my question...

VAT people at HMRC say he is paying them correctly as it is Output VAT minus Input VAT and he only has to pay the difference and the rest of the money is his to do with as he pleases.

The Self Assessment Help desk at HMRC tell him that when he does his self assessment form (online) he can choose himself whether he includes or excludes the VAT as the tax people have nothing to do with VAT and are not interested in VAT so he chooses not to include the VAT in his turnover figures ... which I am told is perfectly legal.

So what ought he to do with this extra £1000 he has gathered in the first three months ... surely he cannot be taxed on it as that would be like paying tax on gathered VAT even though the VAT have told him he can keep it.

Does he need to declare it somehow as income and pay tax - if so the self assessment form and all the help make no mention of where to put this extra money coming in or is it simply a case he has found a legal loophole and can choose to spend the money tax free (which of course would actually go back into the business)

If anyone can help us with the answer to this as I am intrigued - When we phone the help desk at VAT they do not want to know and when we phone the help desk at HMRC taxes they tell us it is a VAT issue.???

Meanwhile my son stands to make an extra £4000 per year for simply being VAT registered, albeit he is doing a great service to the UK by helping to raise more goverment taxes.

Many thanks to anyone who kindly sends in a response to this question. It is appreciated..!!:)

antrobus

OK I think I get this.

By registering for VAT your son is obliged to charge Output VAT to his customers, but because they are business customers they don't care. However since he is now VAT registered he can claim back the VAT input on many of his expenses and is therefore better off. And that's why people go for voluntary registration in the first place.

So I think the answer is, yes your son is making more profit, although your son will have to pay some more income tax and NIC on that profit. Normally the profit and loss account for a VAT registered business will show all the figures net of VAT e.g. your son can only claim back £416.66 per week for his fuel because that's what it's now costing him.

pipscot

antrobus wrote: »

OK I think I get this.

By registering for VAT your son is obliged to charge Output VAT to his customers, but because they are business customers they don't care. However since he is now VAT registered he can claim back the VAT input on many of his expenses and is therefore better off. And that's why people go for voluntary registration in the first place.

So I think the answer is, yes your son is making more profit, although your son will have to pay some more income tax and NIC on that profit. Normally the profit and loss account for a VAT registered business will show all the figures net of VAT e.g. your son can only claim back £416.66 per week for his fuel because that's what it's now costing him.

This is correct, the son is now making approx £583.33 profit per week on which he needs to pay tax and NI. As the OP says, this works out to be an extra £1000 per 3 month period. Per week, the turnover is still £1250, the expenses are £250 + £416.67 (£666.67) and the net profit is £583.33.

OP - there is no need to put this extra £1000 as a separate item on the SA form because it is already included in the above calculation.

KGriff

Just a very quick thankyou to both pipscot and antrobus for their replies... I was so amazed when I spoke to HMRC VAT help desk that all they were interested in was the payment of the VAT (Output minus Input) - they said what I did with the rest was not VAT and so they were not interested. In turn when I spoke to HMRC Tax Help Desk - all they wanted to see on the self assessment was the turnover and had no interest in the VAT side of things. It seems crazy to have two separate sets of technical people with neither side knowing what the other is doing.

Still honesty is the best policy and as I see it the input tax is a benefit and an extra income so we have declared it for tax purposes on the self assessment form.

We are usually the unlucky ones that would be subject to a tax inspection.

I really wonder how many people across the UK, do not declare their VAT input tax, as additional income.

I recently attended 'free' HMRC seminars on both Tax and VAT and a few other young attendees, starting a new VAT registered business, appeared to indicate that they did not think they had to declare the input tax as additional income.

I guess some things need to be simplified and made clearer. On that note I still do not understand why we need weekly/monthly tax tables to show tax free pay... surely one average week or one average month would suffice and any over/under payment at the end of the year can be adjusted by means of either a tax code alteration or a payment.

Having tax tables for each and every week and each and every month (even if the there are more days in one month and less in another) seems to make it more difficult particularly for the self-employed. I would prefer to be given an average weekly free pay amount to deduct from my profit, rather than use a tax code... i think it would simplify things - in fact it is probably having to do your own tax, national insurance & VAT that puts most people off starting their own business. And having two separate National Insurances (Class 2 & Class 4) is also an unnecessary complication.

Anyhow that's my pennies worth - so again thankyou for making things clearer and I hope that this small thread helps a few others out there who are starting out.

pipscot

Just to reiterate - VAT input tax is not an "additional income". What is really happening here is that the claimable expenses have been reduced (by the VAT amount) which causes the business to make more profit on which tax/NI must be paid. VAT do not need to know about the profit/loss and tax side of your business since they are only concerned with VAT inputs and outputs. The tax office do not need to know about VAT since the self-assessment form uses figures NET OF VAT.

The reason people starting a new VAT registered business do not realise they "have to declare the input tax as additional income" is because they DON'T have to do this as a separate calculation! This extra profit that the business made will be included in the calculation "profit = turnover - expenses" as long as you use "net of VAT" figures.

Incidentally - tax codes and tax tables for each week and month are NOT used for the self employed. Self employed tax (and class 4 NIC) is calculated following completion of the self assessment tax return which is done once a year. Class 2 NIC is easy to understand since it is a flat rate.

JasonLVC

Cannot really add anything, some tip top advice already given.

As an aside,when your son registrede for VAT - he is allowed to reclaim any input tax previously incurred prior to registration as follows :-

For goods such as laptop, desk, etc, he can go back 4 years from the date he was 1st registered provided the goods invoices are addressed to the business and are proper VAT invoices.

For services such as accountants, lawyers, marketing, web design, he can go back 6 months from the date he was 1st registered.

No scope to reclaim any VAT on 'consumed' items such as diesel/tolls, parking, etc becuase those goods have been consumed before the regitration date whereas things like laptop have not been consumed, they still exist today (if you know what I mean).

So son may be able to garner an extra few quid if he hasn't done that already.

KGriff

There are certainly more experts here in the forum than at HMRC, who between the two help desks (tax & vat) left me a little confused ... Thanks for all the info and the extra tips re being able to claim back input tax prior to registration, most helpful.

I have one issue that extends from my original post. When I amend the self assessment form could I simply add the fuel input vat as a separate additional income... So in other words I leave the original submission which was:

...Total earnings from parcel force etc. (not including vat)
...Less cost of van hire (no vat applicable here)
...Less cost of fuel (including vat)

...Then add the input vat profit as a separate additional income.

This would be the same as:

...Total earnings from parcel force (including vat)
...Less cost of van hire (no vat applicable here)
...Less cost of fuel (minus vat-where we have a vat receipt)

It is just easier for me to add one total of additional earnings rather than change the original earnings & fuel totals.

Obviously I would include a full explanatory note stating we missed off the reclaimed vat and so was now declaring it as an additional income item on the submission.

I would value your opinion if either method would suffice but, appreciate that the correct method would be the latter of the two.

Truth is I amended his form using the first method as it was simple to do but I am starting to have second thoughts about it albeit both produce the same outcome for tax calculation purposes.

I best give it a rest, as I am probably taxing people's brains asking all these questions, ha ha ... :rotfl:

Thanks again

KGriff

Oops I just realised my mistake the second method should have read:
...Total earnings from parcel force (minus vat)
...less cost of van hire (no vat applicable here)
...less cost of fuel (minus vat where we have a vat receipt)

closed

it must be a small van hire company?

JimmyTheWig

KGriff wrote: »

albeit he is doing a great service to the UK by helping to raise more goverment taxes.

Actually, by becoming VAT registered he is actually taking money away from government taxes.
The VAT that Parcelforce and the like will be paying your son will be claimed back by Parcelforce and the like in the same way that your son claims back the VAT he pays.
So the government miss out on the VAT on fuel that your son buys.

I'm not saying that he shouldn't be doing it this way as it benefits him. Just that helping the government isn't a reason to do it as it isn't helping!

KGriff

closed wrote: »

it must be a small van hire company?

It is a small intermediary van hire company but it remains the best offer we could find. Even going direct to a much larger vat registered hire company was far more expensive. Even losing out on the vat here still meant we were better off... so the son goes where the best offer is.

The son's turnover is likely to exceed the £73,000 VAT turnover threshold anyway this year (£19000+ in the first three months) not that he earns that much due to the extortionate fuel prices & other costs, so he may have had to become VAT registered eventually anyway. Best to learn these lessons now earlier on, rather than later and of course he is making a small 'profit' on the VAT.

Besides it is a good learning curve for him at the age of 24 and can only give him confidence as a young self employed man... there are quite a few others who do not go down that road at his age and I suspect the kids either find it daunting or off-load their problems onto an accountant... we prefer the challenge.

Not least the lad is managing his own fuel each month and has invested £3000 of his own money to pay for it all direct. He has to keep that going on a rolling basis - and that's because the fuel card companies wanted enormous deposits to start with in addition to charges.

There are also others (often older) in his line of work who choose to work cash in hand and declare little or nothing, which is completely wrong and only adds pressure on others to do the same. So he deserves some credit me thinks for doing things the right way. I am sorry to see that JimmyTheWig in his response earlier does not see it entirely our way, but like I said it is a learning curve.

I am retired myself and my motive is to get the lad independent enough to make his own way in the world before the wife finishes work in a couple of years... it is approaching 'our time' and we plan to enjoy it after 40 years of work.

The lad is only just beginning as a courier so best start him on the right road eh? (pardon the pun)... notwithstanding that the hours he spends on the road are totally unsociable, so it is not the type of business to stick with once you are married and settled down, but his experience maybe put to good use elsewhere later.