How much VAT do I actually owe?

Jamesg2011

I am currently a silent partner of a business, my father being the other partner.

We agreed that I will take charge of the VAT and payments thereof. Although we have an accountant he seems incapable of explaining in basic terms how to calculate VAT.

Turnover for this year went above the threshold (73k) to around circa 95k. The business itself is a salon/spa, which as far as I know is taxed at the 13% VAT flat rate.

Is it a simple case of 13% on 102k or 13% on all the income over 73k?

Any advice would be much appreciated.

Owain_Moneysaver

If you are already registered for VAT and are on the flat rate scheme

You charge your customers 20% VAT.

You pay HMRC 13% of the turnover including VAT.

You cannot claim input tax (VAT on purchases) because this has been taken into account in the flat rate scheme.

So turnover including VAT of £100,000 = Turnover excluding VAT of £83,333.33 plus VAT of £16,666.67

You pay to HMRC 13% of £100,000 = £13,000

The difference between the two VAT rates (20% - 13% or £16,666.67 - £13,000 which gives you a 'profit' on the VAT reflects the fact that you cannot claim input tax on your purchases.

If you were not on the flat rate scheme, your VAT accounts would look something like:

Output tax (sales) 20% of £100,000 = £20,000
less
Input tax (purchases) 20% of £21,000 = £7,000
Total VAT to pay = £13,000

This assumes you would buy £21,000 of purchases including 20% input tax.

Owain_Moneysaver

This leaflet tells you about the scheme, including s. 7.5 how to fill in the VAT return.

sarahk100574

Jamesg2011 wrote: »

I am currently a silent partner of a business, my father being the other partner.

We agreed that I will take charge of the VAT and payments thereof. Although we have an accountant he seems incapable of explaining in basic terms how to calculate VAT.

Turnover for this year went above the threshold (73k) to around circa 95k. The business itself is a salon/spa, which as far as I know is taxed at the 13% VAT flat rate.

Is it a simple case of 13% on 102k or 13% on all the income over 73k?

Any advice would be much appreciated.

Although Owains post is correct, it should be pointed out that certain purchases can have the output vat reclaimed under FRS rules. Check out HMRC website for full info regarding your own circs, call the Vat line for help if necessary, and talk to your accountant.

HMRC are not very forgiving towards errors made on FRS vat from my experience... FRS is supposed to make vat calcs easier, but doesn't always work out that way.... which may be why your accountant hasn't been clear in explaining to you :beer:

Dal_Whinnie

It is also worth noting that the rate you pay to HMRC is dependant on the nature of your supplies. You should therefore review the list of rates published by HMRC. Based on what you have said it looks as if it will fall within the category of "Hairdressing or other beauty treatment services" which would currently be 13% as you state.

In addition, if you have only just registered then you can get an additional 1% reduction for the first year of registration, Thus, if your appropriate rate is 13% you only need to pay 12%. As has been said previously that does not impact what you charge your customers.

Dal_Whinnie

Owain_Moneysaver wrote: »

If you were not on the flat rate scheme, your VAT accounts would look something like:

Output tax (sales) 20% of £100,000 = £20,000
less
Input tax (purchases) 20% of £21,000 = £7,000
Total VAT to pay = £13,000

This assumes you would buy £21,000 of purchases including 20% input tax.

To make this consistent with the example if business is on flat rate scheme may I suggest using following figures

Sales £83,333 - output VAT 16,667 (i.e £100,000 turnover incl VAT)

Purchases £21,000 incl VAT would give inputs of £17,500 and input tax of £3,500.

This would therefore mean paying HMRC £13,167 (16,667 - 3,500)

In order to be in a better position than under the flat rate scheme the business would have to suffer input tax of more than £3,667 so that net payment to HMRC was less than £13,000. If the normal expenditure on VATable supplies is therefore more than £22,002 (incl VAT) per year it is probably not worth applying to join flat rate scheme