Limited Company Business VAT Help

chad888

Started trading in June, VAT cut off date is July so deadline for VAT payment is this Friday.

Trying to understand the VAT payment is really confusing me. I am on the flat rate scheme (16.5%).

The GOV website has the information, and how what you owe is worked out. It says that you earn an income e.g. £1000, and charge VAT on top of that at 20%. £1200. You then pay 16.5% of that = £198.

That seemed dubious to me, for example if i charge 20% VAT and had to then pay back 20% VAT would I not charge £200 but pay back £240???

Surely it should be you pay back the 20% VAT that you claimed were you paying 20% VAT and nothing more in to your wages on top...?

So in my case:

Income - £10,599.54
VAT 20% - £2,119.90
Total - £12,719.44

I would have assumed I would claim 20% VAT from the income, but pay back 16.5% of that as VAT, whilst the other 3.5% is mine. Equaling £1,748.92

According to the GOV website I need to pay 16.5% of the whole total though. Equaling £2,098.71.

Again, taking it back to if I had to pay back a 20% threshold as opposed to 16.5%, using the GOV method:
I earn £10,599.54, I charge £2119.90 VAT, I then pay back £2543.89 (over £400 more paying back than I claimed!!!)


Am I understanding it wrong or is the government taking more VAT than should be?

chrismac1

£2,098.71 is correct. Most businesses are now better off not in the flat rate scheme, as you have worked out it is now pretty costly.


If this is the first time you have ever dealt with HMRC and tax law, please do not look for logic or commonsense. Expect daft rules, complexity and mind-boggling slowness and inefficiency at all times, that way you'll never suffer this disappointment you've had again.

00ec25

so you are on the Limited Cost Trader flat rate of 16.5%


you charge your customers VAT at 20%, so as you say, your gross sales, incl £2,119.90 VAT is £12,719.44


you pay VAT to HMRC at the 16.5% rate on the value of your gross sales (*ie the VAT inclusive amount) so 12719.44 x 16.5% = 2098.70


you therefore have a flat rate surplus of 2,119.90 - 2,098.70 = £21.20 which will show as income on your profit and loss account


remember, if you leave the flat rate scheme you cannot re-join it for 12 months and moving over to the standard VAT scheme means your bookkeeping has to be correct. If you are used to inputting expenditure and ignoring VAT then many people are caught out by having to then pay great attention to whether there is or is not VAT on what they buy and, crucially, whether they hold a valid VAT invoice/receipt that allows them to claim in the first place. Don't leave the flat rate without considering the admin implications of the above and/or asking your accountant as the bookkeeping costs may rise.

TheCyclingProgrammer

The whole point of the flat-rate scheme is to simplify matters - instead of reclaiming your input VAT directly, HMRC lets you pay a flat rate percentage of your gross income and keep the difference between the VAT paid and the VAT charged, with the idea being that this "surplus" covers any input VAT you may incur. Different trades have different percentages on the basis that different trades may have different levels of input VAT.

What you are discovering however is that as you are a limited cost trader, the amount of surplus this gives you is in fact very little - a mere £2 for every £1000 ex. VAT that you invoice in fact or 0.02% of your VAT exclusive income. This is because - as the name suggests - your expected to have "limited costs".

This system was brought in to prevent businesses who incur very little in the way of expenses from using the flat-rate VAT scheme as a means of making money (somebody on an old flat-rate of 12-14% or so could potentially make thousands a year in VAT surplus, mostly profit if your input VAT is low). The system is flawed of course, because it only takes into account any costs incurred on goods and if as a business you have high service costs and low good costs you will undoubtedly be losing money by being on the flat-rate scheme as a limited cost trader.

So TLDR; limited cost flat-rate VAT is almost always going to lose you money and unless you think the slightly reduced paperwork makes it a price worth paying, you should come off the FRS and go onto the standard scheme but as noted above, make sure you understand what this involves. Under the current system you can treat your (small) flat-rate VAT surplus as income in your profit and loss and the full VAT inclusive cost of any business costs as an expense in your P&L. If you are on the normal scheme, your income and expense go through the P&L at net cost and the VAT is accounted for separately.

chad888

I am about to pay my VAT bill, through bank transfer.

I have my VAT registration 9 digit number, and i have the correct amount as we ascertained above. Question is, how do they know I am paying the right amount? i would have thought i'd have to input total earned or something along them lines so they know I am not ripping them off and then chasing me up and fining me....

00ec25

chad888 wrote: »

I am about to pay my VAT bill, through bank transfer.

I have my VAT registration 9 digit number, and i have the correct amount as we ascertained above. Question is, how do they know I am paying the right amount? i would have thought i'd have to input total earned or something along them lines so they know I am not ripping them off and then chasing me up and fining me....

"They" know how much is coming because you submit a VAT return stating your liability to the penny by the deadline, which is always the 7th of each month. Whether you are on a monthly, quarterly (or in set circumstances annual) VAT return cycle is the only variable. Even HMRC can make a computer match up money received with money owed using a VAT number as x ref. Log into your online account and check your VAT account if you want to be sure what balance they have against you.

If you misdeclare your "earnings" then you risk much higher penalties if you suffer a VAT inspection, because they will check at that time what you self declared is accurate.

BoGoF

Seriously, get an accountant as you don't know what you're doing.

tacpot12

Or at least pay an accountant to help you get started. VAT isn't difficult once you have a system in place to calculate and pay it. Make some notes as to how you calculate VAT, how you complete the form and how you pay the VAT owed so that next time it is easier.