Small Business VAT/Accounting Question
Small Business VAT/Accounting Question
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AC123

Original Poster:

1,287 posts

185 months

Saturday 2nd July 2016
quotequote all
Hi

I've started a small business and so can't afford an accountant at the moment. I currently record all the transactions myself on Excel.

Everything is bought and sold on a back to back basis.

One of the products I buy was VAT rated, but has now become zero rated. I now don't get charged for VAT on it - do I need to stop charging my customers VAT for this product?

And now perhaps an even more stupid question... to date the difference between the VAT paid and charged is about £70 (I told you it was small) - where do I declare this? I am VAT registered.

Thanks

trickywoo

14,249 posts

261 months

Saturday 2nd July 2016
quotequote all
If you are vat registered you need to charge vat on the stuff you sell - assuming it is Vatable.

If you are vat registered you'll be doing quarterly returns. These returns will determine the amount of vat you pay / reclaim.

Sounds like you need to do some googling before the vat man comes knocking.

Eric Mc

125,797 posts

296 months

Sunday 3rd July 2016
quotequote all
My advice is that you cannot afford NOT to have an accountant.

What is your current 12 monthly turnover likely to be?

Are you currently VAT registered?

Do you NEED to be VAT registered?

Are you operating as a sole trader or through a limited company?

2 sMoKiN bArReLs

32,039 posts

266 months

Sunday 3rd July 2016
quotequote all
scratchchin

Not very often a product has vat on then doesn't. Just as a matter of interest is that because you are buying it from somewhere different?

As Eric says, if you are asking these sort of questions you really do need to speak to an accountant soon before you get in a big expensive muddle!

AC123

Original Poster:

1,287 posts

185 months

Sunday 3rd July 2016
quotequote all
OK, thank you for the help.

Looking through the VAT paperwork I've received, I'm part of the annual accounting scheme (probably incorrectly).

I believe I do need to be VAT registered - some of the products I buy have VAT on and I then need to charge my customers VAT or I will lose money. IE, if I buy a product for £100+VAT, I will lose money selling it at £110 with no VAT.

I am a sole trader, and turnover since mid April is just under £8,000, profit just under £1,000. With some growth, yearly turnover could be about £50K.

You are right - I have switched supplier on a product that used to have VAT on it, the new company doesn't charge it. It's one of those products that's a bit on the borderline.

What sort of money would an accountant be?

I know people claim VAT back on various expenses but I haven't done any of that, perhaps a good accountant could offset their cost by doing that?

Thanks for your help, much appreciated.


Eric Mc

125,797 posts

296 months

Sunday 3rd July 2016
quotequote all
AC123 said:
OK, thank you for the help.

Looking through the VAT paperwork I've received, I'm part of the annual accounting scheme (probably incorrectly).

I believe I do need to be VAT registered - some of the products I buy have VAT on and I then need to charge my customers VAT or I will lose money. IE, if I buy a product for £100+VAT, I will lose money selling it at £110 with no VAT.

I am a sole trader, and turnover since mid April is just under £8,000, profit just under £1,000. With some growth, yearly turnover could be about £50K.

You are right - I have switched supplier on a product that used to have VAT on it, the new company doesn't charge it. It's one of those products that's a bit on the borderline.

What sort of money would an accountant be?

I know people claim VAT back on various expenses but I haven't done any of that, perhaps a good accountant could offset their cost by doing that?

Thanks for your help, much appreciated.
Annual accounting is not something most traders use. It's rather complicated. The vast bulk go with the normal three monthly (quarterly) system

Businesses only HAVE to register for VAT if their turnover exceeds £83,000 in a given 12 month period. You are well below that so I don't know why you really registered. Your assumption that you have to pass on VAT you are charged by your suppliers is rather confused. Essentially, as a business you apply "mark up" to what you but so as to generate profit on each sale. VAT shouldn't really be factor when trying to create profit.

You desperately need to speak to an accountant as you seem to have a very muddled understanding of what you should be doing.

For a small sole trader NOT VAT REGISTERED with a turnover around £50,000, I would expect most accountants would charge less than £500 per annum. That would include not only business accounts and advice throughout the year but would almost definitely include the completion of the annual self assessment tax return (which includes EVERYTHING to do with your tax affairs, not just the business income).

If a trader is VAT registered, the accountant might charge more as the reconciliations at the year end would be a bit more complex. Also, the accountant would charge extra is they were asked to assist in the completion of VAT returns.

By the way, did you not investigate the VAT Flat Rate Scheme?

wolf1

3,103 posts

281 months

Sunday 3rd July 2016
quotequote all
OP are your customers predominantly vat registered and would wish to claim the vat back? If not then why the hell would you wish to be an unpaid tax collector.

One of my businesses falls below the threshold for vat registration so isn't vat registered and doesn't charge vat. If I purchase an item for £100 +vat then charge £100 for the service of supplying that item to the customer , then the bill is £220. The vat is just passed on in the cost.

For some small businesses it is quite beneficial as although you can't claim vat back you just pass it on within the cost and your labour rates aren't plus vat keeping you cheaper.

AC123

Original Poster:

1,287 posts

185 months

Sunday 3rd July 2016
quotequote all
Hi

All my customers are VAT registered - B2B transactions - and would want to claim the VAT back. If I had to include the cost of the VAT in the margin I wouldn't be competitive.

I thought I was relatively intelligent until it came to this VAT jobby!

Cheers

Eric Mc

125,797 posts

296 months

Sunday 3rd July 2016
quotequote all
If you want logic - don't look at UK taxation.

One of the problems I come across with intelligent clients is that they assume, because they consider themselves smart, that they will be able to work out the UK taxation system by applying basic logic.

That can be a fatal assumption.

KevinCamaroSS

13,856 posts

311 months

Sunday 3rd July 2016
quotequote all
AC123 said:
You are right - I have switched supplier on a product that used to have VAT on it, the new company doesn't charge it. It's one of those products that's a bit on the borderline.
If the product is identical then one or other of the suppliers may well be incorrect, unless the second supplier is not registered for VAT through low turnover.

If the second option then you cannot claim back the VAT on purchases because there was none. You would still need to charge VAT as the sale would be VAT chargeable.

If the first, then you need to get clarification on whether the item is VAT exempt, or what rate it is at, then proceed accordingly.

Edited to add: What is the product?

Eric Mc

125,797 posts

296 months

Sunday 3rd July 2016
quotequote all
And why do you think the VAT status of the product changed? The VAT rules on products and services tend to be fairly static - unless there has been some sort of significant VAT case where a judge has ordered a re-classification.

recordman

443 posts

156 months

Sunday 3rd July 2016
quotequote all
Given that all of the OP's customers are VAT registered, in his position I would apply the standard rate of VAT to the product, irrespective of whether it might/could be zero-rated.

This will avoid any 'discussion' with a VAT inspector at a later date that might end with the VAT being charged by HMRC to the OP in retrospect along with interest etc.

Eric Mc

125,797 posts

296 months

Sunday 3rd July 2016
quotequote all
Even though his customers may be VAT registered, this does not mean that they can reclaim Input VAT on all the costs they incur. There are many reasons why Input VAT may be irrecoverable. Therefore, it is best to apply VAT properly rather than "take a flier" and just apply it to everything on the assumption that your customers can reclaimn the VAT anyway.

HMRC want traders to apply the VAT rules correctly.

2 sMoKiN bArReLs

32,039 posts

266 months

Sunday 3rd July 2016
quotequote all
Eric Mc said:
And why do you think the VAT status of the product changed? The VAT rules on products and services tend to be fairly static - unless there has been some sort of significant VAT case where a judge has ordered a re-classification.
That's what I queried a few hours ago. Might be buying from another (non vat reg) supplier?

AC123

Original Poster:

1,287 posts

185 months

Monday 4th July 2016
quotequote all
Hi

The product itself is urea which has a number of uses, hence why the variation on VAT. 1 supplier just supplies it to the animal feed industry, another to a wider variation of people/applications. Both will be VAT registered but I believe different uses have different rates.

I've had an example this morning of this VAT mess. Sold a product for £520/tonne, bought it for £495/T. Customer already paid, and I've just had the supplier invoice through with VAT on the product - total cost now £594/T so I'm set to lose £74 on the order. Or am I doing this wrongly?

As much as I don't think I can afford it, I see you're probably right and I do need an accountant.

Thanks

FredClogs

14,041 posts

192 months

Monday 4th July 2016
quotequote all
AC123 said:
Hi

The product itself is urea which has a number of uses, hence why the variation on VAT. 1 supplier just supplies it to the animal feed industry, another to a wider variation of people/applications. Both will be VAT registered but I believe different uses have different rates.

I've had an example this morning of this VAT mess. Sold a product for £520/tonne, bought it for £495/T. Customer already paid, and I've just had the supplier invoice through with VAT on the product - total cost now £594/T so I'm set to lose £74 on the order. Or am I doing this wrongly?

As much as I don't think I can afford it, I see you're probably right and I do need an accountant.

Thanks
They're taking the piss, or supplying the piss, you're taking the piss...

I think you've misunderstood a lot, even if you charge VAT it's not for you, you're collecting it for the VAT man, it shouldn't be a factor in your profitability (unless you're on a flat rate scheme or something and they let you keep a bit.)

HTH

gizlaroc

17,251 posts

255 months

Monday 4th July 2016
quotequote all
AC123 said:
Hi

The product itself is urea which has a number of uses, hence why the variation on VAT. 1 supplier just supplies it to the animal feed industry, another to a wider variation of people/applications. Both will be VAT registered but I believe different uses have different rates.

I've had an example this morning of this VAT mess. Sold a product for £520/tonne, bought it for £495/T. Customer already paid, and I've just had the supplier invoice through with VAT on the product - total cost now £594/T so I'm set to lose £74 on the order. Or am I doing this wrongly?

As much as I don't think I can afford it, I see you're probably right and I do need an accountant.

Thanks
You bought in for £495, there is then 20% vat added taking it to £594.

If you are vat registered you will claim the £99 vat back. So it has cost you £495.

Being vat registered means you need to charge the vat when you sell it on, so you sell it on for £520 + vat, so £624. The buyer than claims that £124 vat back, if they are vat registered.

You have made £25 profit.

If you are not vat registered you will have paid £594 for it as you can't claim the vat back. You could then sell the product for £619 with no vat added, you have made yourself the same £25 but your customer has got it £6 cheaper.




The problem is with such small profit margins it becomes a non issue really.


If you are making decent margins not being vat registered has far more benefit.

gizlaroc

17,251 posts

255 months

Monday 4th July 2016
quotequote all
Did you quote the price at £520 including vat?

Was the person you sold it to expecting it to include vat?

Being Vat registered you have just sold it for £520 including vat, which means you have to give the vat man £86, leaving you with £434.

gizlaroc

17,251 posts

255 months

Monday 4th July 2016
quotequote all
You really do need an accountant.

recordman

443 posts

156 months

Monday 4th July 2016
quotequote all
OP, as you are VAT registered, did your written quotation (if one existed) and subsequent invoice to your customer state:

1) that the selling price of £520 included VAT

or

2) did your invoice state or that no VAT was charged as you were of the opinion that the product was zero-rated?

Irrespective of either answer and of course depending on the relationship you have with your customer, make an approach to them admitting that an error was made and that you need to charge them 20% VAT now and provide them with a new invoice at £520 + 20% VAT.

If 1) the customer might tell you to go away as the product has now just gone up in price from £433.33 M/T to £520.

If 2) Provided the customer is VAT registered he should be able to reclaim the VAT as Input Tax as the net cost hasn't increased to him.

This product might or might not be subject to VAT depending on its final use, but the OP has no way of knowing for sure what that final use is, so therefore he should act like his supplier did and charge standard rate VAT.