What tax do I get back?

Question

I'm starting up my own business and wondered a few things....
If I register for VAT what expenses do I get back? Do I get the VAT back from my purchases for the company ie- I buy an ipod at £120 excl VAT(141 incl) and sell it for £150 excl VAT (176.75 incl). (Only an example). What profit would I make overall - would it only be the £35.75 or would I get the VAT back from the original purchase too?

Answer 1

EDIT ** ok for all those above who answered, please check your calculations, the vat on £150 is £26.25 not £26.75.**


ok, here goes.....

Income & Expenditure for profit purposes is based on the net amounts, so in your example, your profit would be £150 (what you sold it for net of VAT) minus £120 (what you bought it for net of VAT), this means that you made £30 profit

A little background on VAT for ya : -

for the VAT, what happens is that a VAT return if completed for a 3 month period, 4 times a year. the normal periods are called Quarters (because 3 months is one quarter of a year) and they are :

1st Jan to 31st Mar
1 April to 30 June
1 July to 30 September
1st October to 31 December

The way VAT works is that the VAT on Sales is what you would pay over to the VAT man and the VAT on purchases is what you would claim back, but to make it easier what the VAT man allows you to do on each VAT Return you send them, is to deduct the VAT you would claim back from the VAT you would pay over.

heres an example based on your figures

VAT on Sales £26.25 (called output VAT)
VAT on purchs £21.00 (called input VAT)

Diff is £5.25 due to the VAT man

the VAT is due to be paid to the VAT man because the VAT on your sales is more then the VAT on your purchases.

if the VAT on your purchases was more than the VAT on your sales in any Quarter, then you would get refund of the difference.

******Please be aware that you do not have to register for VAT until your turnover reaches £64000 in any one year period. however this is calculated on a a rolling basis, so for example in your first month your turn over was £10000 then you would have to register as £10000 x 12 = 120000 which is greater than 64000 for a year*******

hope this clears it up.

Answer 2

In your example you would make £30 profit.

The VAT figures all cancel out so they can be ignored for the purposes of any profit calculations.

Just to prove this look at the cash flow.

You buy the goods so your bank is down £141.

When you sell your bank is up by £176.75.

At the end of the VAT period you pay HMRC the difference between the VAT figures, so your bank is down £5.75.

The net effect on your bank is (-141.00+176.75-5.75) = £30 which is the same as 150 - 120.

You do not need to register until your turnover exceeds the threshhold (£64,000) so you shoud consider whether it is wise to do so, but that's a whole different question.

Answer 3

When you are VAT registered you will be able to claim VAT back, including business meals, if you bought an item and calmed the VAT then sold said item for more you will not be able to clame the VAT as you have already done that. The only profit would be the amount between purchases and sales.

Answer 4

You claim the vat back on your original purchase (ie the £21) but you have to pay the VAT man the VAT paid to you when you sell it (ie £26.75) Your profit is the difference from your purchase price and selling price, in this case £30. But remember the VAT man is up £5.75 so that comes off your profit, giving you an overall profit of £24.25.

Answer 5

Those questions - and you will have lots more - can be best answered by your local IR office's VAT king (/queen?). Go and ask him (her?), that's what he (she?)'s being paid to be there for. Good luck with the new venture!