VAT Calc Question
Discussion
Can't get my head around this one.
We are in the process of tweaking some order management software for a client so they can generate more accurate reports with profit/loss, and being VAT registered it needs to handle VAT.
The system has a field for Stock Cost (ex vat) which holds the unit cost price of a product.
I'l try and run through an example here, hope this makes sense.
Cost: £10 (ex vat)
Retail: £20 (incl vat of £2.98)
Profit = (retail - vat) - cost
Profit = (£20 - £2.98) - £10
Profit = £7.02
This is how I have worked it out... my thinking is that the cost price VAT is paid, but by storing the value ex vat means the VAT has technically been claimed back since the cost does not include it. The profit is thus unaffected by the VAT paid on the stock, as it is claimed back anyway.
My customer says that’s wrong - and says it should be like this:
(same figures as above)
Profit = ((retail - vat) - cost)) + costVAT
Profit = ((£20 - £2.98) - (£10)) + £1.75
Profit = £8.77
They say that they offset the sale VAT with the cost VAT, so pay less VAT overall - which makes sense, and I suspect that’s how it works on the VAT return - total claimed from sales, less total paid = what you owe the vat man.
However I can't get my head around this because to me, the cost price VAT has already been taken into account by entering the cost price ex vat, so you can't deduct the same thing twice...
Please can someone tell me which is correct (and if possible, why).
Many Thanks,
Sam
We are in the process of tweaking some order management software for a client so they can generate more accurate reports with profit/loss, and being VAT registered it needs to handle VAT.
The system has a field for Stock Cost (ex vat) which holds the unit cost price of a product.
I'l try and run through an example here, hope this makes sense.
Cost: £10 (ex vat)
Retail: £20 (incl vat of £2.98)
Profit = (retail - vat) - cost
Profit = (£20 - £2.98) - £10
Profit = £7.02
This is how I have worked it out... my thinking is that the cost price VAT is paid, but by storing the value ex vat means the VAT has technically been claimed back since the cost does not include it. The profit is thus unaffected by the VAT paid on the stock, as it is claimed back anyway.
My customer says that’s wrong - and says it should be like this:
(same figures as above)
Profit = ((retail - vat) - cost)) + costVAT
Profit = ((£20 - £2.98) - (£10)) + £1.75
Profit = £8.77
They say that they offset the sale VAT with the cost VAT, so pay less VAT overall - which makes sense, and I suspect that’s how it works on the VAT return - total claimed from sales, less total paid = what you owe the vat man.
However I can't get my head around this because to me, the cost price VAT has already been taken into account by entering the cost price ex vat, so you can't deduct the same thing twice...
Please can someone tell me which is correct (and if possible, why).
Many Thanks,
Sam
Assuming:
1) All persons are in the UK:
2) All persons are VAT registered, and are abe to claim back 100% vat
3) That the products are not weirdos (e.g. cars)
Always ignore the VAT to compute profit.
So, as you say, if you sell at £20 inc vat the actual amount you keep is £17.02. If your cost is £10 ex vat, your profit is £7.02.
Most profit & loss accounting is reported wholly ex vat.
1) All persons are in the UK:
2) All persons are VAT registered, and are abe to claim back 100% vat
3) That the products are not weirdos (e.g. cars)
Always ignore the VAT to compute profit.
So, as you say, if you sell at £20 inc vat the actual amount you keep is £17.02. If your cost is £10 ex vat, your profit is £7.02.
Most profit & loss accounting is reported wholly ex vat.
Perhaps they are diddling the VAT man, and therefore making an extra £1.75 from him?and even if your customers aren't VAT registred, it makes no difference to you as you must charge it anyway, what they do afterwards is irrelevant. I say the profit is £7.02 but I suspect they are confusing the purchase price as being gross not net, ie £10(gross) is £8.51, less £17.02 would give an £8.51 profit?
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