Tax & VAT sole car trader
Discussion
Hi
If someone is set up as a sole trader selling used cars, as I understand it, income tax is payable on all profit @ 20% up to 50k.
VAT is paid at 20% of profit if turnover exceeds 85k.
Is this correct?
If someone therefore sold just 5 cars in 12 months but the turnover exceeds 85k, 40% of all profit would be paid in tax?
If someone is set up as a sole trader selling used cars, as I understand it, income tax is payable on all profit @ 20% up to 50k.
VAT is paid at 20% of profit if turnover exceeds 85k.
Is this correct?
If someone therefore sold just 5 cars in 12 months but the turnover exceeds 85k, 40% of all profit would be paid in tax?
Simpo Two said:
Used car dealers may not always be loved but are they not entitled to the personal income tax allowance (currently £12,500)?
Car dealers may have special VAT rules but normally you add it on top of what you want so it cancels out, and you can reclaim VAT on purchases.
Thanks, hoping an accountant on here can clarify.Car dealers may have special VAT rules but normally you add it on top of what you want so it cancels out, and you can reclaim VAT on purchases.
Do you mean 'add it on top of what you sell' not 'what you want'?
The output vat is based on a margin scheme, so if you buy for £10k sell for £12k the £2k profit is subject to vat of £333.33, leaving a profit of £1,667, which is subject to income tax at the appropriate rate.
Vat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
Vat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
wattsm666 said:
The output vat is based on a margin scheme, so if you buy for £10k sell for £12k the £2k profit is subject to vat of £333.33, leaving a profit of £1,667, which is subject to income tax at the appropriate rate.
Vat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
ThanksVat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
So pretty much precisely what I said.
If one exceeds 85k turnover and then buys a car for 10k and sells for 12k, they would pay circa £400 VAT and £320 tax.
A 2k profit is now £1280?
Yes, I understand that you can claim the VAT back on business expenses.
I dread to think how the above looks if you pay the higher tax rate
TROOPER88 said:
wattsm666 said:
The output vat is based on a margin scheme, so if you buy for £10k sell for £12k the £2k profit is subject to vat of £333.33, leaving a profit of £1,667, which is subject to income tax at the appropriate rate.
Vat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
ThanksVat registration threshold is based on turnover not profit, that is often missed by some people.
If you get charged vat on repairs etc, that can be claimed back.
So pretty much precisely what I said.
If one exceeds 85k turnover and then buys a car for 10k and sells for 12k, they would pay circa £400 VAT and £320 tax.
A 2k profit is now £1280?
Yes, I understand that you can claim the VAT back on business expenses.
I dread to think how the above looks if you pay the higher tax rate
Buy at £10k, spend £1k on repairs (ignore the VAT on those for a moment) and sell at £12k.
You still pay the VAT on the £2k margin (£333) which leaves you a stonking £666 profit to then pay tax on.
The Rotrex Kid said:
Don’t forget your reconditioning costs. You can’t claim those back.
Buy at £10k, spend £1k on repairs (ignore the VAT on those for a moment) and sell at £12k.
You still pay the VAT on the £2k margin (£333) which leaves you a stonking £666 profit to then pay tax on.
So you clear 1k profit which you pay VAT and tax on but you also have to pay VAT on the 1k repair bill but would claim this back?Buy at £10k, spend £1k on repairs (ignore the VAT on those for a moment) and sell at £12k.
You still pay the VAT on the £2k margin (£333) which leaves you a stonking £666 profit to then pay tax on.
TROOPER88 said:
Thanks
So pretty much precisely what I said.
If one exceeds 85k turnover and then buys a car for 10k and sells for 12k, they would pay circa £400 VAT and £320 tax.
A 2k profit is now £1280?
Yes, I understand that you can claim the VAT back on business expenses.
I dread to think how the above looks if you pay the higher tax rate
No the vat on the £2k is £333, it is not 20% if the £2k but that is the vat inclusive figure so figure x 20/120So pretty much precisely what I said.
If one exceeds 85k turnover and then buys a car for 10k and sells for 12k, they would pay circa £400 VAT and £320 tax.
A 2k profit is now £1280?
Yes, I understand that you can claim the VAT back on business expenses.
I dread to think how the above looks if you pay the higher tax rate
Your initial statement contains an error in every sentence.
An individual pays Income Tax on all of their income that exceeds (currently) £12,500. Therefore, if you made a profit from your trading activity of (say) £62,500, Income Tax would be calculated on £50,000.
Sole traders also pay National Insurance. At the moment, this consists of Class 4 National Insurance charged at 9% on profits between £9,000 and £50,000. Class 4 NI is charged at 2% on profits over £50,000.
In addition to Class 4 NI, sole traders pay Class 2 NI. This is a fixed amount of £158.60 per annum.
Nobody has to register for VAT as long as their turnover (sales) stays below £85,000 over a rolling 12 month period. Second hand car dealers usually operate under "The Second Hand Car Dealers' Margin Scheme).
In this system, VAT is payable to HMRC on the difference between the VAT Inclusive purchase price and the sale price of the vehicle.
An individual pays Income Tax on all of their income that exceeds (currently) £12,500. Therefore, if you made a profit from your trading activity of (say) £62,500, Income Tax would be calculated on £50,000.
Sole traders also pay National Insurance. At the moment, this consists of Class 4 National Insurance charged at 9% on profits between £9,000 and £50,000. Class 4 NI is charged at 2% on profits over £50,000.
In addition to Class 4 NI, sole traders pay Class 2 NI. This is a fixed amount of £158.60 per annum.
Nobody has to register for VAT as long as their turnover (sales) stays below £85,000 over a rolling 12 month period. Second hand car dealers usually operate under "The Second Hand Car Dealers' Margin Scheme).
In this system, VAT is payable to HMRC on the difference between the VAT Inclusive purchase price and the sale price of the vehicle.
Eric Mc said:
Your initial statement contains an error in every sentence.
An individual pays Income Tax on all of their income that exceeds (currently) £12,500. Therefore, if you made a profit from your trading activity of (say) £62,500, Income Tax would be calculated on £50,000.
Sole traders also pay National Insurance. At the moment, this consists of Class 4 National Insurance charged at 9% on profits between £9,000 and £50,000. Class 4 NI is charged at 2% on profits over £50,000.
In addition to Class 4 NI, sole traders pay Class 2 NI. This is a fixed amount of £158.60 per annum.
Nobody has to register for VAT as long as their turnover (sales) stays below £85,000 over a rolling 12 month period. Second hand car dealers usually operate under "The Second Hand Car Dealers' Margin Scheme).
In this system, VAT is payable to HMRC on the difference between the VAT Inclusive purchase price and the sale price of the vehicle.
Thank you Eric for taking the time to reply.An individual pays Income Tax on all of their income that exceeds (currently) £12,500. Therefore, if you made a profit from your trading activity of (say) £62,500, Income Tax would be calculated on £50,000.
Sole traders also pay National Insurance. At the moment, this consists of Class 4 National Insurance charged at 9% on profits between £9,000 and £50,000. Class 4 NI is charged at 2% on profits over £50,000.
In addition to Class 4 NI, sole traders pay Class 2 NI. This is a fixed amount of £158.60 per annum.
Nobody has to register for VAT as long as their turnover (sales) stays below £85,000 over a rolling 12 month period. Second hand car dealers usually operate under "The Second Hand Car Dealers' Margin Scheme).
In this system, VAT is payable to HMRC on the difference between the VAT Inclusive purchase price and the sale price of the vehicle.
Even as a part time business, with it being second hand cars, one would not have to do a high number of cars to break the 85k VAT threshold.
Let us keep it simple and forget the 12.5 allowance as this is used from the main employment which is circa 20k per annum.
12 cars sold in 1 year
Each car was purchased for 10k with 1k spent on repairs and a clear 1k profit.
VAT is paid on the 24k (margin)
Income tax is paid @ 20% of the 12k profit
NI is paid @ 9% of the 12k profit
VAT can be claimed back on the 12k repairs
Is this correct?
VAT £4800 (20%)
NI: £1080
Tax: £2184
VAT claimed back: £2400
£12,000 profit is actually £6336 after paying vat, tax and NI?
Thank you
TROOPER88 said:
Thank you Eric for taking the time to reply.
Even as a part time business, with it being second hand cars, one would not have to do a high number of cars to break the 85k VAT threshold.
Let us keep it simple and forget the 12.5 allowance as this is used from the main employment which is circa 20k per annum.
12 cars sold in 1 year
Each car was purchased for 10k with 1k spent on repairs and a clear 1k profit.
VAT is paid on the 24k (margin)
Income tax is paid @ 20% of the 12k profit
NI is paid @ 9% of the 12k profit
VAT can be claimed back on the 12k repairs
Is this correct?
VAT £4800 (20%)
NI: £1080
Tax: £2184
VAT claimed back: £2400
£12,000 profit is actually £6336 after paying vat, tax and NI?
Thank you
If the margin is £24000, the VAT will be £4000Even as a part time business, with it being second hand cars, one would not have to do a high number of cars to break the 85k VAT threshold.
Let us keep it simple and forget the 12.5 allowance as this is used from the main employment which is circa 20k per annum.
12 cars sold in 1 year
Each car was purchased for 10k with 1k spent on repairs and a clear 1k profit.
VAT is paid on the 24k (margin)
Income tax is paid @ 20% of the 12k profit
NI is paid @ 9% of the 12k profit
VAT can be claimed back on the 12k repairs
Is this correct?
VAT £4800 (20%)
NI: £1080
Tax: £2184
VAT claimed back: £2400
£12,000 profit is actually £6336 after paying vat, tax and NI?
Thank you
The VAT on the repairs will be £2000
I don't number crunch (much) on these forums. If you want me to do calculations for you, you'll need to pay me - after all, that's what I do for a living 
I'll only give general advice and outline the basic rules and principles.
By the way, it wasn't me who mentioned anything about claiming back Input VAT on "repairs".
The basic rule is that any VAT included in costs incurred in the running of the business, including costs to prepare goods for resale (such as repairs) - is reclaimable.
For example - if you had to spend £2,400 (VAT Inclusive) on getting a car ready and roadworthy for resale, you could reclaim the VAT element contained in that £2,400.
The VAT content of £2,400 would be £400 (i.e. £2,000 plus 20% VAT of £400) so you would reclaim £400.
I'll only give general advice and outline the basic rules and principles.
By the way, it wasn't me who mentioned anything about claiming back Input VAT on "repairs".
The basic rule is that any VAT included in costs incurred in the running of the business, including costs to prepare goods for resale (such as repairs) - is reclaimable.
For example - if you had to spend £2,400 (VAT Inclusive) on getting a car ready and roadworthy for resale, you could reclaim the VAT element contained in that £2,400.
The VAT content of £2,400 would be £400 (i.e. £2,000 plus 20% VAT of £400) so you would reclaim £400.
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