Income Tax after VAT?

Question

I am shortly to begin selling a particular product. After paying VAT on these products to the government am I also liable to paying income tax. Please elaborate.

Answer 1

You may need to make your question clearer. The answer depends on whether you are VAT registered yourself. You only need to register if your business turnover is over £64,000 a year.

If you are not registered then you will probably pay VAT on the purchase of your product (or the materials if you construct something yourself). You will just treat this as part of the cost of the product. When you sell it you will not charge your customer VAT. Your profit will be the difference between the selling price and the VAT-inclusive purchase price.

After deducting overheads and any other tax allowances you pay income tax on that profit.

If you are registered for VAT then you are not actually paying VAT to the government. You are acting as an unpaid tax collector. You charge your customer VAT, collect it from him along with your selling price, and pay it over to the government after deducting the amount you have already accounted for to your supplier. All the VAT entries cancel out.

Your profit is now the net selling price (before VAT is added) minus the net purchase price. This is then subject to tax after other deductions as above.