Bonkers Q about VAT

WIAWSNB

This is on behalf of a self-employed builder who has just become VAT-registered.

His accountant has given him an outline of how to write up his invoices, and it seems bonkers.

Just for example, let's say it's a washing machine that the customer has asked the fellow to buy and install. His account says he buys the WM, adds VAT on it, pays for it, takes it to the customer's house, fits it, and then adds up the full amount and adds VAT.

That means that VAT has been added to the WM twice.

This seems bonkers to the guy, and to me.

The item could, presumably, be a table, or worktop or whatevs. It costs £200 at the wholesaler, to which VAT is added, so the guy pays £240. He takes it to the customer's home, installs it, and charges £100 for the labour.

The guy reckons he should charge £240 for the item, and £120 (100+VAT) for the labour, so £360 in total. His accountant says, no - you paid £240 for the item including VAT, you add your labour of £100 to this = £340, and then add VAT on the whole lot = £408.

Thoughts? Ta.

MyRealNameToo

It's up to him if he wants to make a margin on the goods. As he's selling the goods to the customer its him that they will come to if its faulty and they'll have to repair/replace it at their own expense (subject to his terms with the firm he's buying from). Selling at cost is rarely an advisable approach though he may get rebates or other kick backs from the merchant which could be enough for this.

He ultimately will recover the £40 VAT, assuming he's not on the flat rate scheme, which will be offset from the VAT he has to pay over. Depending on credit terms he gets and he gives his customer there can be a cashflow consideration if he has to pay for the goods before his customer pays him for the goods.

For his P&L the purchase and sale will be recorded excluding VAT

WIAWSNB

Thanks for that.

But I'm trying to keep it simple, and leave out what he may, or may not wish in terms of margin.

The two scenarios appear to be (my head's already imploding);

1. He charges £200+VAT for the item, so £240. The customer pays this. He adds £100+VAT for labour, so £120. So the customer pays a total of £360. He'll recoup the £40 VAT on the WM, and provides HMRC with £20 from his labour cost. So, customer pays £360, and he ends up with £140? Or, according to his accountant;
2. He charges £200+VAT for the item, so £240. He adds £100 labour to this, so £340. He adds VAT of £68 to it all, so £408. The customer pays this total of £408. He pays HMRC the VAT content of £68, and he reclaims the item's £40 VAT, so HMRC get £28. So, customer now pays £408. He ends up with the same £140?

That doesn't work. I've tried 5 times, and I cannot make the sums in 2 add up. :-(

mwarby

1 - so he charges £300 + VAT in total, which is £360. He claims back £40 from HMRC, and pays them £60

2 - £408 Inc vat is £340 + VAT, he claims £40 from HMRC and pays them £68

In case 2, he's basically given himself a margin of £40 on the washing machine

In case 1 he makes £100

In case 2 he makes £140

Section62

Just for example, let's say it's a washing machine that the customer has asked the fellow to buy and install. His account says he buys the WM, adds VAT on it, pays for it, takes it to the customer's house, fits it, and then adds up the full amount and adds VAT.

Unless I've been doing it wrong, he needs a new accountant.

He buys a £200 washing machine, the supplier will invoice him £240, including VAT @20%.

When he invoices the client the washing machine is charged at £200 (he can add a margin if he wants to).

He adds 20% VAT to the items on the invoice which are VATable at that rate. So the client pays him £240 for the washing machine (assuming no margin).

In his accounting the client has paid him £40 VAT, and he has paid £40 VAT to the supplier. He gains nothing personally from the VAT, neither does it cost him anything.

mwarby

He can claim back the VAT for anything he buys for business purposes (tools, stationary or items to resell). He has to charge VAT on everything he sells, both services and physical goods.

He pays tax on the value he adds(value added tax), by claiming the VAT on what he buys, and charging it in what he sells

Section62

He can claim back the VAT for anything he buys for business purposes (tools, stationary or items to resell). He has to charge VAT on everything he sells, both services and physical goods.

Important to note that some work a builder might do could be zero rated, or VATable at a reduced rate. If zero-rated he would 'charge' no VAT (where applicable).

For someone not used to the system as a trader, it is easy to fall into thinking you have to charge 20% on everything.

mwarby

Yeah, the VAT isn't always 20%, but the trader has to follow the HMRC rules on what VAT rate applies, they can't just decide not to charge VAT on something, because they feel like it.

Lots of strange rules, like for food biscuits have a rate of 20%, but cakes are 0% etc

Eldi_Dos

https://forums.moneysavingexpert.com/discussion/comment/81888912#Comment_81888912

So it is better to offer your builders tea and cake rather than tea and biscuits ?

Section62

https://forums.moneysavingexpert.com/discussion/comment/81889025#Comment_81889025

Depends whether Jaffa Cakes are on the menu.

WIAWSNB

https://forums.moneysavingexpert.com/discussion/comment/81888787#Comment_81888787

Thanks everyone, especially nearby for the essential sums.

So his accountant is bonkers? Ie, what he suggested isn't 'the' way to work this out, it's just an arbitrary way amongst others?

It earns him 'more', but obviously at the direct expense of his customer. So, he's effectively just 'charging more', so will be less competitive?

Nuts.