Where has the VAT gone?

DanC5

Hi All,


I have a small business turning over well under the VAT threshold and I'm not VAT registered. I have a problem with working out whether I owe VAT and if I have been charging enough for my services.


I noticed that I charge £5,000 for my services (flat rate - no mention of VAT) and my client then charges his client £5,000 + VAT (£5,000 + £1,000). If my client's client pays £6,000 to my client, who then pays £5,000 to me - where has that £1,000 gone? Does my client have to pay it to HMRC and I am absolved of any responsibility?


I am worried that the price I have been receiving includes some kind of VAT payment that I should be paying HMRC and I should have charged £6,000 (with no mention of VAT) from the start. I haven't paid, or been asked to pay, HMRC any VAT so I am worried I am going to get a big bill and/or I have been doing this all wrong!


Has anyone got any advice for me?

paddyrg

If my client's client pays £6,000 to my client, who then pays £5,000 to me - where has that £1,000 gone? Does my client have to pay it to HMRC and I am absolved of any responsibility?

Yes, exactly this. And amazing that your client hasn't been marking you up - I certainly would ;-)

bearcat16

I think you've misunderstood how VAT works.

Put simply;

If you are not VAT registered, you simply charge whatever you're going to charge and your responsibility ends there.

If you are VAT registered (like your customers are) then you must charge VAT on any sales, and that amount must be paid over to HMRC every quarter.

However, if you are VAT registered, you may also reclaim any VAT on purchases you make, which has the effect of reducing what you owe on the sales VAT.

If you make a purchase from someone who does not charge VAT (as your customers are doing from you) then there's nothing to reclaim, so it makes no difference. But you still have to charge the final customer VAT.

To give an example:

Mr Boggs makes toilet brushes. He is VAT registered.

He buys in the materials needed, plastic, paper packaging etc, from big companies, who are all VAT registered themselves.

He sells his finished goods to supermarkets, also vat registered.

He buys £1,000 of plastic from Plastics-r-us, and pays £1,000+vat= £1,200

He then makes his brushes, and sells them to Asda Plc for 5,000+vat=£6,000.

When he comes to complete his vat return, he must pay £800 to HMRC. (£1,000 he charged asda, less £200 he was charged by the plastics-r-us supplier)

If plastics-r-us were not vat registered, he would have only been charged £1,000 for the plastic (no vat) and so would make no deduction from his sales VAT. He'd need to pay £1,000 to HMRC. But that makes no difference at all to him.

So basically, if your customers are all vat registered they won't care whether you are or not. If you are (and charge them vat) they simply reclaim it on their own vat return. If you're not, they don't need to.

However from you're point of view, there might be good reasons for you to be vat registered, as you would be able to claim back any VAT you were charged. So say you went and bought paper for the printer, or printer ink etc, you could reclaim the vat on it. You'd also have to charge vat to your customers, but if they too are vat registered it will make no difference to them.

If your customers are NOT vat registered (for example, joe public) then being VAT registered simply means they get charged 20% more. They cannot claim it back from anywhere, it is a tax on them. That might make you uncompetitive so if you're under the threshold then there's no reason to simply make yourself more expensive.

There are certain things that are exempt from VAT (eg education) and some things are zero rated (eg magazines and books) and some of the rules can be extremely complicated, but in essence it's a tax on the consumer, but collected by the businesses they purchase from.

isplumm

bearcat16 wrote: »

However from you're point of view, there might be good reasons for you to be vat registered, as you would be able to claim back any VAT you were charged. So say you went and bought paper for the printer, or printer ink etc, you could reclaim the vat on it. You'd also have to charge vat to your customers, but if they too are vat registered it will make no difference to them.

If most of your customers are VAT registered and you are mainly a service company ie. you don't buy much - then investigate the Flat Rate Scheme - you don't claim VAT back, but you charge 20% on NET but pay 12-14% on GROSS - you make between £2-3 per £100 - no need to keep receipts etc.

Mark

Suarez

You will still need to keep receipts!

Aquamania

Suarez wrote: »

You will still need to keep receipts!

You may need to keep them to support your general accounts, but you don't need them for VAT purposes.
You VAT is based on a flat rate scheme, and is unconnected with any purchases (except a few special cases, typically capital purchases e.g. a company vehicle which can be handled outside the flat rate scheme)

You do need to keep records of the VAT invoices you issued.

Suarez

Yes that's what I meant. The way it was worded could mean the OP throws all their expense receipts away.

isplumm

Aquamania wrote: »

You may need to keep them to support your general accounts, but you don't need them for VAT purposes.
You VAT is based on a flat rate scheme, and is unconnected with any purchases (except a few special cases, typically capital purchases e.g. a company vehicle which can be handled outside the flat rate scheme)

You do need to keep records of the VAT invoices you issued.

I meant to come back & say exactly the same - but you have managed to say it better than me!

By the way - you claim VAT on items over £2k.

Mark

Pennywise

isplumm wrote: »

By the way - you claim VAT on items over £2k.

"Items" is a very loose word so needs clarification.

You can only claim on equipment purchased that costs more than £2,000 in a single transaction. You can't claim if you spend over £2k from two different suppliers, and can't claim if it's for services, goods that aren't equipment for you own business use, or goods/services recharged to customers. It's in fact very restrictive.