to vat or not to vat

[Greg]

The non Vat company can't claim the vat back on purchases but does this really matter? Basic rate tax is the same as the vat rate. Ok, vat can't be claimed back quarterly but the total purchase expense is claimed in the annual accounts and therefore gets it back at the year end via income tax relief.

[Stephen Blair]

It depends on how much money you would like to make.

Under Vat your are limited, plus Vat threshold and you can profit a lot more if you do it right.

[Mesterh]

The thing I hate about being VAT registered is that the customer(domestic) is paying more money for no good reason whatsoever.

 

Theres no way I add any value to my customers trees.

[WorcsWuss]

The non Vat company can't claim the vat back on purchases but does this really matter? Basic rate tax is the same as the vat rate. Ok, vat can't be claimed back quarterly but the total purchase expense is claimed in the annual accounts and therefore gets it back at the year end via income tax relief.

 

Not quite, in a much simplified state, you can offset some of the expense against tax but how much varies by type of expenditure. It's highly likely you won't be able to reduce your tax bill by as much as you paid in VAT.

What it would do is reduce the amount of your profit you had to pay tax on, but you can still do this as well if VAT reg'd...

[GardenKit]

The non Vat company can't claim the vat back on purchases but does this really matter? Basic rate tax is the same as the vat rate. Ok, vat can't be claimed back quarterly but the total purchase expense is claimed in the annual accounts and therefore gets it back at the year end via income tax relief.

 

I agree with Worcswuss on this one.

 

Take, for example £120 of fuel, a genuine business cost.

 

A non vat reg user will claim tax relief on £120 (assume basic rate 20% tax)

So he will save £24.00 in tax and the fuel effectively costs £96.00

 

A vat reg user gets his vat straight back, so the short term cost is £100, which he claims for tax relief and saves £20.00 in tax, a total saving of £40.00, making the fuel cost only £80.00

 

The non reg users cost is therfore still 20% more than the vat reg competitor.

 

Apply this to all your daily costs, hire charges, vehicle repairs etc, as well as capital expenditure to get the real difference.

[muldonach]

hi all,

 

just read the "business advice" thread and some of the comments regarding vat registration really made me chuckle.

 

if we take two sole traders, who have the same equipment, same overheads, do the job to the same standards, in the same time.

 

yes, at the end of the year, the vat reg firm will be better off.

 

BUT, purely working the domestic side of things, quoting against each other, the non vat firm will win every time.

 

...........

Sorry guys, just playing devils advocate.

 

I for one would be very interested to see a justification for the highlighted statement.

 

If we take two traders as described where their costs are the same, margin is the same, then as far as I can see at the end of the year there is no difference between them.

 

However as you say, if all else is equal then the domestic customer will normally take the cheaper option - which is the VAT free one

 

Cheers

mac

[muldonach]

I agree with Worcswuss on this one.

 

Take, for example £120 of fuel, a genuine business cost.

 

A non vat reg user will claim tax relief on £120 (assume basic rate 20% tax)

So he will save £24.00 in tax and the fuel effectively costs £96.00

 

A vat reg user gets his vat straight back, so the short term cost is £100, which he claims for tax relief and saves £20.00 in tax, a total saving of £40.00, making the fuel cost only £80.00

 

The non reg users cost is therfore still 20% more than the vat reg competitor.

 

Apply this to all your daily costs, hire charges, vehicle repairs etc, as well as capital expenditure to get the real difference.

 

 

Er ... no

 

To state the obvious you do not "claim tax relief" on costs - you pay tax on profits, HMRC does not pay you money if you make a loss, (although you may be able to carry losses forward and offset them against future profits)

 

The non VAT reg chap has paid out £120 - he will have to charge his customer that to break even.

 

The VAT reg chap buys £120 worth of fuel on which he can reclaim £20 VAT as you say. He will have to charge his customer £100 to break even on which he is obliged to collect £20 VAT and return to it HMRC.

 

Cheers

mac

[GardenKit]

Er ... no

 

To state the obvious you do not "claim tax relief" on costs - you pay tax on profits, HMRC does not pay you money if you make a loss, (although you may be able to carry losses forward and offset them against future profits)

 

The non VAT reg chap has paid out £120 - he will have to charge his customer that to break even.

 

The VAT reg chap buys £120 worth of fuel on which he can reclaim £20 VAT as you say. He will have to charge his customer £100 to break even on which he is obliged to collect £20 VAT and return to it HMRC.

 

Cheers

mac

 

Ok terminology wrong, result right. Any increase in costs relates to a decrease in profit, therefore £100 less profit to be taxed on at 20% equates to £20 saving. If he is trading at a loss then its a different story, but maybe he needs to reconsider his business.

 

Why should the vat reg man have to to collect vat on the £100 fuel? He will surely treat it as a cost and therfore not charge it onward to customer just as he would for purchase of tyres, vehicle repairs etc.

[muldonach]

Ok terminology wrong, result right. Any increase in costs relates to a decrease in profit, therefore £100 less profit to be taxed on at 20% equates to £20 saving. If he is trading at a loss then its a different story, but maybe he needs to reconsider his business.

 

Why should the vat reg man have to to collect vat on the £100 fuel? He will surely treat it as a cost and therfore not charge it onward to customer just as he would for purchase of tyres, vehicle repairs etc.

 

He has to pass collect VAT on the £100 fuel because it is a cost to his business, if he does not pass on all such costs to his customer then he is going to lose money.

 

In exactly the same way tyres & repairs etc add up to the cost of running his vehicle, yes he can reclaim the VAT on those inputs to his business. However on order to make a business viable he must pass on all costs and apply a profit margin (obvious I know) but he MUST apply VAT to all outputs except where they are specifically excluded.

 

Your arithmetic is correct but no the result, the basic premise is wrong (imo)

 

Cheers

mac

[GardenKit]

He has to pass collect VAT on the £100 fuel because it is a cost to his business, if he does not pass on all such costs to his customer then he is going to lose money.

 

In exactly the same way tyres & repairs etc add up to the cost of running his vehicle, yes he can reclaim the VAT on those inputs to his business. However on order to make a business viable he must pass on all costs and apply a profit margin (obvious I know) but he MUST apply VAT to all outputs except where they are specifically excluded.

 

Your arithmetic is correct but no the result, the basic premise is wrong (imo)

 

Cheers

mac

Yes, I see where you are coming from. My first posting was to try to dispell the myth (imo) that it did not matter if you were vat reg as if you were not you could claim the total vat inclusive cost against tax and that would equate to claiming the vat back.

I still dont think it does, but am now so confused that "I am out":confused1: