VAT. Is it entirely pointless for a service company?

JasonLVC

heathcote123 wrote: »

VAT isn't really related to profits, so I don't think thats quite right. It can be a handy marker though - I generally know a good quarter just from looking at the vat bill.

But, yes we do end up handing over a fair chunk - but this then gets entirely claimed back by the companies we are charging it to.

This is why it all feels a bit pointless. I'm not sure I have a solution, just sure someone must b able to think of a better way to do this that doesn't involve so much wasted effort!

Some countries have a form of VAT but also exempt certain industries from it (usually the banking/financial sector). In these cases, the bank pays an annual fee to the government based on their turnover and it then allows other businesses to not charge VAT to the bank....but good luck to the PM that brings in that rule.

Banks remember are exempt from VAT meaning they do not charge it on their services, however, it also means they cannot reclaim any VAT charged to them. So every purchase a bank makes will likely be subject to VAT which is not reclaimed from the government and so the VAT 'sticks' with the bank and the Treasury benefits as a result. So you can imagine what a big banks expenditure costs would be and how much of that will be VATable?

If B2B did not charge VAT on then it would push the final cost onto the consumer alone which would see a much reduced revenue into the coffers whereas the current system, the VAT sticks with banks, insurers, non-registered traders and of course foreign businesses so the income from VAT is greater. if the income was less then the VAT rate would have to go up again!

If there was no VAT, traders would buy from cheaper overseas countries where VAT wasn't charged, so a VAT system removes the incentive to buy off-shore and thus keep the money circulating internally within the UK.

More and more countries are adopting VAT as it is simple (for most people), cheap to operate (from the governments perspective), difficult to defraud and brings in almost as much cash as income tax (and isn't affected so much by recessions as income tax is when unemployment rises, people still need to buy stuff).

Most of Africa and India have VAT, the Middle East are introducing it in the next few years and even the Yanks are thinking about it.....

antrobus

JasonLVC wrote: »

Some countries have a form of VAT but also exempt certain industries from it (usually the banking/financial sector). In these cases, the bank pays an annual fee to the government based on their turnover and it then allows other businesses to not charge VAT to the bank....but good luck to the PM that brings in that rule.
....

You mean something like a banking levy?

http://www.bbc.co.uk/news/business-11586012
http://news.bbc.co.uk/today/hi/today/newsid_9390000/9390544.stm

Are you going to send Cameron a thank you postcard?

antrobus

heathcote123 wrote: »

VAT isn't really related to profits,..

Well no, there is a relationship between value added and profit. Take the value added by a business, subtract labour and financing costs, etc and you get its profit. Or loss, as the case may be.

System

I'm quite happy because I make a profit on VAT. Everything I do is VATable but I am on the Flat Rate scheme so pay HMRC less in VAT than I take in.

FTBFun

A._Badger wrote: »

Defenders of VAT, in my experience, tend either to be accountants or people who work in finance departments. I've never met a sole trader who didn't consider it just another way for government to waste his time.

Margaret Thatcher had a preference for indirect taxes, so you can add Tory politicians (and, really, most politicians) to that list.

chewmylegoff

heathcote123 wrote: »

VAT isn't really related to profits, so I don't think thats quite right. It can be a handy marker though - I generally know a good quarter just from looking at the vat bill.

But, yes we do end up handing over a fair chunk - but this then gets entirely claimed back by the companies we are charging it to.

This is why it all feels a bit pointless. I'm not sure I have a solution, just sure someone must b able to think of a better way to do this that doesn't involve so much wasted effort!

i don't think your assessment of how it works is quite right, at least not from the government's point of view.

take this simplified example:

Company 1 makes something at a cost of £100 and sells it to Company 2 for £200, Company 2 sells it to Retail Customer for £300. All figures ex-VAT.

With the VAT system as we have it, company 1 will pay over £20 of VAT, Company 2 will pay over £40 of VAT.

Whilst Company 2 theoretically reclaims all of the VAT that it was charged, the effect is still that the government collects £20 out of the total of £60 of VAT due on the end selling price of £300 from Company 1, not Company 2.

Given that the supply chain is usually much more complicated that this, the effect is that HMRC collects the tax earlier in the transaction.

Thus, it may feel pointless to you, but it accelerates the collection of tax by HMRC, and therefore benefits the government. If the system was shifted to one where the full tax is collected when the consumer at the end of the chain buys the item / service, then there would presumably be a lag effect whereby in the first year there was a big drop in receipts of the tax, leaving a black hole in the govt's finances.

chewmylegoff

FTBFun wrote: »

Margaret Thatcher had a preference for indirect taxes, so you can add Tory politicians (and, really, most politicians) to that list.

Gordon Brown loved nothing more than raising indirect taxation. Well that's not quite true, he also loved to "invest" money by spending it on stuff with no prospect of ever getting a return.

JasonLVC

antrobus wrote: »

You mean something like a banking levy?

http://www.bbc.co.uk/news/business-11586012
http://news.bbc.co.uk/today/hi/today/newsid_9390000/9390544.stm

Are you going to send Cameron a thank you postcard?

Its nothing like a banking levy.

A banking levy is a simple tax on the banks profits/turnover, the bank is still liable to pay for VAT on the things it buys in from other people (but cannot reclaim that VAT back).

The example I gave sees a bank excluded from the VAT system altogether, so that when a bank buys in a ream of paper or a lawyer, it waves its certificate and the supplier doesn't charge them any VAT at all (thus the banks incurs no VAT which is a massive saving, even after paying for the exemption certificate). The bank does pay a fee for this exemption certificate but would be less than the total VAT on purchases the bank would make thus the bank gains, treasury loses.

heathcote123

FTBFun wrote: »

Margaret Thatcher had a preference for indirect taxes, so you can add Tory politicians (and, really, most politicians) to that list.

I blame Thatcher.

System

All our sales are zero-rated (donated goods) so we can recover all the inputs. It means even large items like vehicles and building costs are effectively tax-free.

We use Quickbooks. The VAT return takes about 10 seconds.