Bonkers Q about VAT

silvercar

I’d guess the accountant is looking at the cost of the WM before VAT has been added.

Section62

https://forums.moneysavingexpert.com/discussion/comment/81889285#Comment_81889285

It could be miscommunication between the accountant and your friend.

But VAT isn't arbitrary - there's a system based on rules. If your builder friend adds VAT onto a VAT inclusive price then they risk being accused of VAT fraud. Likewise if 'charging VAT' results in them personally gaining extra money.

Everything they charge under the line 'VAT' should be paid to HMRC, minus the VAT on their eligible inputs.

Getting your VAT wrong can be expensive, and there are complexities in building which make VAT mistakes more likely (in addition to needing to be totally on top of his record-keeping all the time).

Maybe it would be an idea for him to pay for an online VAT course to make sure he knows what he is doing?

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/81889386#Comment_81889386

Not disagreeing but actually maybe it would be a good idea to ask the accountant to produce a VAT receipt for a theoretical client inline with this example as having it in writing will show what they are talking about.

I know from a previous life that some people dont listen too well and some technical staff arent too good at explain stuff in layman's terms so add the two together people can get very confused and the totally wrong end of the stick. A properly laid out invoice with distinct net, vat and gross figures will clear things up a lot.

saajan_12

https://forums.moneysavingexpert.com/discussion/comment/81888745#Comment_81888745

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;

Scenario 1 numbers incorrect here, he passes the £60 VAT to HMRC and recoups the £40, so net he ends up with £100 not £140.

The setup is correct though, if he's charging £100 for labour and £0 margin, then that's what he should end up with.

FFHillbilly

https://forums.moneysavingexpert.com/discussion/comment/81888745#Comment_81888745

VAT is a 20% charge on stuff. tradesmen don't recoup all the VAT and not pay anything, they gather the VAT from the customer and pay it to HMRC. they are (unpaid) tax collectors

If a VAT reg tradesperson buys something for their business, i.e a new Van, work clothes, tools etc they can claim the VAT back.

but they are not charging VAT from the customers for all items and then claiming it back….if hat were the case I'd be in on it!

IMO, the ideal tradesperson for a domestic customer is not going to be VAT reg, because their labour won't be subject to VAT so it will be cheaper for them. VAT on products and services is always paid for by the end user

Grumpy_chap

"

VAT is a 20% charge on stuff

"

And in this context "stuff" includes labour or services.

(The rate is sometimes not 20%.)

Section62

IMO, the ideal tradesperson for a domestic customer is not going to be VAT reg, because their labour won't be subject to VAT so it will be cheaper for them.

Registration is compulsory when your turnover is at £90k for a rolling 12-month period, which isn't a great amount in a trade like building.

Someone working as a builder with turnover below £90k probably isn't doing very much, or is getting their customers to buy materials directly, or is subbing work out to workers being paid direct by the client, or is doing something dodgy.

There are some good traders who will have a genuine turnover below £90k… but an awful lot who won't be the ideal tradesperson if the client wants everything 100% above board.

WIAWSNB

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

This is weird.

An item costing £200+VAT = £240. And installation costing £100.

1 - He charges the customer £200+£100+VAT so £300 + VAT in total, which is £360. He pays the £40 VAT on the item when he buys it, but then reclaims this back from HMRC = zero. He pays VAT on his labour of £20.

So, he earns £100 from this, as intended. (Ie, for simplicity's sakes this is with no mark-up, no collection charge, just a straightforward transaction.)

His customer pays a total of £360. HMRC ends up with a total of £20. The builder has earned £100.

2 - Or, the bonkers method. He charges his customer £200+VAT=£240. He adds his labour charge of £100 to make £340, to which he then adds overall VAT; £340+VAT = £408. He pays the £40 VAT on the item when he buys it, and reclaims this back from HMRC = zero. But then what?! He's added a further VAT content to the item - does he hand this over to HMRC? He either has to - but that's double VAT so clearly wrong, or he doesn't, in which case he has added a premium to his takings under false pretences?

In short, what the accountant told him to do is just weird - it cannot possibly be a correct process?

Section62

In short, what the accountant told him to do is just weird - it cannot possibly be a correct process?

Method 2 is wrong, probably illegal, as per my previous posts.

But it could be that there is a misunderstanding between the accountant and the builder and when you say "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". What the accountant meant is the full amount net of VAT.

For the accountant it might be obvious that you add up the net amounts, and this was too obvious to need explaining. Or it could be they don't understand VAT as well as they should do.

Worth noting where you say in method 1 "…but then reclaims this back from HMRC = zero" that strictly isn't correct. The VAT he pays on his inputs isn't 'reclaimed' as such, rather it is treated as a credit in his VAT calculation for the period. The £40 VAT paid on the washing machine will be paid to HMRC by the supplier, and it is the end customer (on whom VAT liability ultimately falls) who is effectively reimbursing the builder for that £40 of VAT he has already paid out. He shouldn't be 'reclaiming' the £40 from HMRC (other than in exceptional circumstances).

Reclaiming VAT from HMRC is a slightly different thing - it is where the total VAT paid out on inputs in the VAT accounting period exceeds the VAT charged on outputs (to customers). In which case the difference can be claimed back as a refund for that period. In the normal course of events most businesses would have a net VAT bill (i.e. will owe HMRC money) so 'reclaiming VAT from HMRC' is something generally done on an exceptional basis - for example where there has been a significant business expense. A business which is regularly reclaiming VAT is likely to come under scrutiny from HMRC, so best he avoids using terminology which could lead to misunderstandings.

WIAWSNB

Thanks, S62.

I've had an update…

From the account;

It's entirely up to you how you charge your customer. Think of it this way; if you did not have VAT registration, then you would charge £750 and your earning would be £750 - materials. But now because you are VAT registered, you will claim back the VAT on materials purchased. So if you charge your client £900 (£750+VAT), then your earnings will be £750 - materials purchased - VAT paid on materials. And the VAT you will pay to HMRC on this sale will be would be £150 minus the VAT paid on the materials purchased.

I'd like to say this helped…