Bonkers Q about VAT

Section62

https://forums.moneysavingexpert.com/discussion/comment/81893859#Comment_81893859

It probably helps clarify the builder needs to get his VAT advice elsewhere…

"It's entirely up to you how you charge your customer."

The customer has to be charged in accordance with the applicable VAT rules. The business can't just wing it.

The rest of that paragraph is roughly right, but isn't explained in a way which is easy to comprehend. It sounds like the answer to "How do I work out my earnings?" rather than "How do I correctly charge and account for VAT?".

Say the £750 figure was for materials worth £500 (exVAT) plus labour of £250. It means the materials supplier invoiced the builder £600, of which £100 was VAT.

The builder invoices £500 for materials + £250 for labour, giving a total of £750. He then adds VAT (say 20%) which gives the £900, which is what the customer pays.

The builder has received £150 VAT from the customer, and paid £100 VAT to his supplier. So £150 - £100 = £50 which is the VAT he owes to HMRC.

Which is why the accountant is correct with the last sentence "And the VAT you will pay to HMRC on this sale will be would be £150 minus the VAT paid on the materials purchased [£100]."

FFHillbilly

"He charges the customer £200+£100+VAT so £300 + VAT in total, which is 

. 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."

you keep saying the builder can claim back all VAT "from HMRC", they can't. they simply pass on the VAT to the customer. the washing machine has £40 VAT on it, the builder pays this initially, then charges the customer for it, so the customer is paying the VAT

also "he pays VAT on his Labour", To be clear the builder charges the customer 20% VAT on his labour, collects this and pays it to HMRC.

Customer pays £360, HMRC end up with £60, Builder gets £100

WIAWSNB

https://forums.moneysavingexpert.com/discussion/comment/81894102#Comment_81894102

Sorry, I completely misunderstood the VAT recovery part.

Ta.

Jumblebumble

https://forums.moneysavingexpert.com/discussion/comment/81893927#Comment_81893927

I think the accountant means that it is up to the builder if they want to make a margin on the goods or sell at cost

I am assuming no regulated professional is going to mean your interpretation

WIAWSNB

"I think the accountant means that it is up to the builder if they want to make a margin on the goods or sell at cost."

Ah, I wonder?

How does this work, then? Say it's a toilet/cistern - it costs £200+VAT = £240. That is what the customer expects to pay.

The builder goes to the merchants, and gets it (for simplicity's sakes) for 50% discount, so £100+VAT. He pays the £120, and HMRC gets their £20 VAT cut.

The builder charges his customer the full £240, as the difference will cover his transport costs, and the effective warranty - if the toilet goes faulty within a year, the builder will be the one to come out and fix or replace.

How does the VAT content get affected when he charges the customer £240, but only gave HMRC £20?

Section62

https://forums.moneysavingexpert.com/discussion/comment/81896063#Comment_81896063

He didn't give HMRC £20. He paid the supplier £20 of VAT, which would be the correct amount on a sale of an item costing £100 with a 20% VAT rate. The supplier pays HMRC the £20 (minus the VAT the supplier paid on their inputs, exactly the same as "*" below)

The builder charges the customer £200, plus £40 VAT.

The builder completes his VAT return showing £40 VAT received (assuming this is the only thing he did in this VAT accouting period). He also shows that he paid £20 VAT to the supplier (his input VAT). He calculates his VAT position for the accounting period which would be £40 (outputs) - £20 (inputs) = £20 (balance). In other words he owes HMRC £20. (*The supplier is following this same process for his inputs and sales).

The outcome is the customer paid £40 VAT on an item with a VAT exclusive price of £200.

HMRC have received £40 of VAT.

Everyone is happy, nobody has received more than they were entitled to, nor paid more than they were liable to pay.

If you follow the VAT chain further back the supplier's supplier will have charged a VAT inclusive price and passed their share of the VAT onto HMRC. And you can keep going back to the importer or raw materials manufacturer(s) who at each step of the chain would have added some value to the product and collected the VAT due at that stage. It is the adding of value in each step of the chain which leads to the name of the tax.

The end customer's £40 of VAT will reach HMRC in fractions by however many VAT registered companies handled the product through the import/manufacture/distribution steps.

WIAWSNB

Cool - thanks.

Jumblebumble

https://forums.moneysavingexpert.com/discussion/comment/81896063#Comment_81896063

To keep this really simple

The Builder gives HMRC £20.00 and the original supplier gives HMRC £20.00

Heedtheadvice

Surely the clue to the answer is in Value Added tax?

WIAWSNB

https://forums.moneysavingexpert.com/discussion/comment/81897852#Comment_81897852

Thanks.

That was the bit that explained it.

I've passed this info on, and it was appreciated and understood.

Cheers everyone.