Bonkers Q about VAT

Section62

https://forums.moneysavingexpert.com/discussion/comment/81898538#Comment_81898538

So long as he understands when he is the "original supplier" (e.g. doing work for a VAT registered business) he won't be giving HMRC £20 directly, only the balance between the £20 and the amount he has paid out in VAT himself.

The VAT rules are relatively simple, but there's a danger in creating your own simplifications - which causes the kind of confusion there seems to be between your friend and the accountant. VAT inspectors had a reputation for being particularly punctilious… there's a reason for that. If the rules are followed to the letter the system works. If people don't follow the rules they end up in a mess (at best) or being prosecuted for VAT fraud (at worst). This is why the accountant's comments still seem odd, even allowing for misinterpretation.

WIAWSNB

https://forums.moneysavingexpert.com/discussion/comment/81898596#Comment_81898596

Thanks.

I explained the difference between him buying an item for £200+VAT and invoicing this VAT-included sum - £240 - to his customer, where the VAT has already been taken by the shop, and if he received a 50% discount at the shop, so paid £100+VAT (£120) there, and then invoiced his customer the full £240. He'd then still owe HMRC the VAT balance of £20. I added that I didn't know who would sort that out, but presumed his accountant.

And, of course, that he must add VAT to his labour. And, in general, that he can reclaim VAT on things needed to run his business.

That was all he really wanted - just to make sense of the confusion created by the accountant.

The real big difference is, he is now 20% more expensive in labour, which he hates.

Section62

I added that I didn't know who would sort that out, but presumed his accountant.

He'd need to ask the accountant to do his VAT work, and be willing to pay a not insignificant amount for it. Generally traders do their own VAT because i) ultimately they are the ones liable for mistakes and ii) the extra cost of getting someone to do it for you. It isn't uncommon for builders to get their significant other to do the books (including VAT) because as a sweeping statement, builders are not the best at keeping records and doing the maths. (you'll know from many threads past the problems with getting timely invoices and reluctance to amend them once issued)

Once you know how VAT works it isn't that difficult to do - so long as you keep your records up to date. Which is why I suggested the possibility of him doing an (online?) course rather than relying on helpful advice from people who may not have a full understanding themselves.

And, in general, that he can reclaim VAT on things needed to run his business.

Worth emphasising "in general" and "needed" there…. a rookie error is to start 'claiming' for everything, including things which are really for personal use. There are some greyish areas, but he needs to be able to justify the purchase and account for it. So no massive OLED TV's. There are also rules on selling business assets (like a van or equipment) and also rules when you de-register for VAT - the assets you've 'reclaimed the VAT on' can result in a VAT charge at de-registration. If he thinks he is likely to de-register he'd need advice on what he would owe, and make sure he has access to the money needed to pay the final bill. There's a reason why many trader bankruptcies involve significant amounts owed to HMRC.

The real big difference is, he is now 20% more expensive in labour, which he hates.

Also the extra time involved in doing his VAT calculations/returns (or paying someone else to do it) means he personally earns less overall per hour from his basic labour charge, unless he puts that up as well to cover the increased overheads.

There's a reason why VAT registered traders and businesses quote higher than shady traders, and why VAT registered traders seem expensive to keen DIYers.