How VAT Works?

There are some key concepts that we wanted to tell you. Let’s start with the basics. So I am going to say here as a disclaimer because of the reasons. I’ve already written about VAT is very complex. We will give you a comprehensive overview and of the majority of circumstances rather than looking at specifics. 

So to start with, what we should say is VAT is a consumer tax and indirect tax. It’s known, and all that means is that it’s paid by the people buying them the products and the services. Ultimately, those VAT registered businesses in the chain are paying it. But they are acting as Tax Collectors for the government, which we shall explain shortly. So it’s you, the end-user, that ends up paying the VAT. Hence, something that’s always interesting to me is people pay for it every day and don’t really realize it, you know, some of your shopping malls have it on there, you know, if you buy a TV your TV is going to Have it on there all those types of services. Still, people don’t get upset about it, but it’s interesting when they’re displayed on something like they’re buying a new boiler say or exam or getting a builder to come in and build something in their home. They can then see the extra Beauty on the invoice, and they start to get a bit concerned about it, but, interestingly, that seems so different depending on exactly where you see this VAT, whether it’s hidden or not. So you buy it every day on everything. 

Businesses don’t have to register the VAT until they reach at least 85 thousand pounds in 12 months now. That’s quite an important thing, the 380 thresholds. It’s probably another video and another tip that it’s straightforward to get yourself caught out. But if you just think about when you get to around 85 Grand in 12 months for the first time, those businesses have to register. You can do less than that and register. You can register from day one with no turnover if you like as long as you’re trading, and sometimes there are some excellent reasons to do that. And generally, what we find is as a general rule. Cool, if you’re dealing with the public is not necessarily a good idea to register from day one. Still, if you’re dealing with bigger v80 registered businesses that don’t care about the VAT you’re charging for the reason, I’m going to explain them often. It makes sense to register from day one. So the way it works is this image you as a consumer you’re paying all this extra VAT to the business, so if you imagine using an example 120-pound TV this nice cheap TV every 20 pounds, but the business is collecting. They’re going to hand over each quarter month year depending on how they do their VAT.

There are various options for revenue and Customs. So they’re just collecting it on your behalf. They’re able to do, though, is they’re able to offset any VAT that they’ve paid out before they hand it over, which basically means they get to reclaim the VAT doesn’t feel like reclaim most of the time they’re still handing money to the government. However, it’s a lot less than the money they’ve collected on their behalf. So that’s quite an important concept which is why it can be good to the VAT registers because you can reclaim your VAT you and care so, you know quite often that’s mobile. I’ll phone bills if you’re in business is going to be things like accountants. Some rent lots of different things that you’re going to incur. If you’re in the building game, You Know you’re Building Materials. I got it on now. It’s a good point to say there are some things that the government set and say they’re Xero rated. So they are valuable Services. It’s just happened to be that there’s 0% VAT, And then some things are outside of the VAT, something’s exempt from the VAT, and ultimately you just don’t pay VAT.

There’s a lot of technical reasons why they’re different and important, but for now, awesome things that you would pay VAT on, and there are some businesses as a result that charge services that are exempt from the VAT. They can’t be VAT registered. So not all businesses must be VAT registered in different circumstances. So for you, it’s worth checking with a professional to make sure where you sit with that, but the majority of people when you get there when you get the 85 cases, you’re going to have to have a review on your own clickers in your own pricing to make sure that’s okay because she gets 30 days to register from the point that you get there. 

So let’s do an example of how VAT works in practice. Let’s choose a handcrafted handmade chair now chair. He sells 400-pound and the materials that have used to make itself a 60. Now when we look at the receipts in detail, we see that the wood for the chair is actually 50 pounds plus vat, and that’s the breakdown on the receipt. So but still, the business is paying 60 pounds with a hundred pound take away 16 pounds equals 40 pounds making forty pounds. Now, if they were to VAT register tomorrow, their hundred pounds would become a hundred and twenty-pound chair, and there would thereby – still 60 pounds. So what happens is they get the 20-pound extra from the customer, and they’d normally hand that over, but because they’ve incurred 10 pounds on this chair of the wood, they’re able to offset the 10 pounds. So they had 20 take-ups away, ten and over 10 pounds to the taxman sounds really good. And as a result, what then happens is it made 50, so it’s still got the original hundred pound, and their cost is now only 50 pounds because they’re able to offset this extra 10 pound from the taxman. Well, the keen-eyed there. 

You will have noticed that, of course, you know, charging the customer a hundred twenty pounds. They might not be very happy about so as a result, if you’re dealing with the public, as we mentioned earlier, this can cause some pricing issues because if the person down the road is saying the same chair for a hundred because he’s not VAT registered you. Some customers are going to ask the question about whether they should be shopping with you or them. And of course, at that point is then looking at different ways to differentiate yourself as a business to make sure that people want to come and shop for you for more reasons than just pure price. However, You could have called still set at 400 pounds. Now the impact of that means that the taxman is still going to take some v80 money for the hundred pounds. So if you work it backward, what it really means is you’re now only charging 83 pounds 33 for the chair. So when you charge them under a pound, you’re going to take 16 pounds 67 and hand that to the VAT, man. And again, you’re going to be able to offset your 10-pound from your word that you’re buying. So you only hand over six-pound 67.

 However, you’ve only taken roughly 83 pounds. You think you got 83 pounds. Fifty pounds of the cost you only now making 33 quit instead of the 14 in the original example or the 50 in the other examples. You can see pricing is one of those difficult things but go back to the example. We can just add 20% if that was being supplied to a commercial dealer who was a big company but retailer who was the 18 registered already. They’re not going to be interested and worried about the VAT that you’re charging that extra 20 pounds because they can reclaim it and the result you’re winning. So in that scenario, quite often, you want to register From day one if nearly all your customers were the 80 registered customers. So hopefully, you can see how that works in practice, and that’s the basics of the 80. However, one of the things as a business that’s worth mentioning is now we have a thing called making tax digital is a scheme from revenue and Customs that means that you now need software to be able to submit your v80 returns. You must keep digital records, and they must be transmitted digitally now that doesn’t mean that you need photos are it just means that you need to actually store the transaction data. 

So if you imagine a big spreadsheet of names Mounts and everything that Community the day to the right now is what they want you to store. So, as a result, you can still use a spreadsheet. You normally need a bit of software that plugs into that spreadsheet to transmit you’ll be VAT return. So if you are becoming v80 registered, that’s something to be wary of, and the only other thing I really want to mention, of course, is that again? The Keen listener may have noticed that in theory, what happens then if I’m selling if I’m not solve anything by and buying loads of stuff? Does that mean I can get a V8 e refund, and the answer is yes, you can and actually, in a lot of circumstances, that is quite a normal thing, so you can get a bit? VAT refund if you end up buying more stuff and spending more than you’re actually getting in money. So in start-up mode or times like in the coronavirus or something like that and there might be times when you’re selling a lot, but you are she stocking up and buying things, and as a result, you may well end up in a reclaim how that comes back to you and how regularly depends on how you pay your VAT. That’s the basics of VAT for your business.

 

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