Vat

[format]

I see on the scan website, you can get VAT free orders.

I'm a bit of a nub when it comes to financial things, so how some people get VAT free orders?

[Funkstar]

If you are VAT excempt, like if you are ordering something from outside the EU.

[Andy3536]

Can you post the link?
Most of these deals seem to just give you 17.5% off, they won't not pay any VAT, just the same amount off.

[format]

For example when an order says excl. VAT... why list that price if you can't buy it for that price?

[Salazaar]

As above it's for VAT exempt customers, usually businesses. It seems to be a bit of a legacy for IT companies to list VAT and ex-VAT prices, even on their public sites. If you had a business account with them you could get the ex-VAT prices.

[Funkstar]

For example when an order says excl. VAT... why list that price if you can't buy it for that price?

Ah, I see what you mean now.

Yeah, thats mainly for businesses because they claim the VAT back (provided they are VAT registered and so give the VAT they collect on their own products/services to the government). They have to pay it in the first place, but the claim it back at the end of the financial period.

All our purchase orders we do at work go out with the ex. vat prices on them because that is the value we use to keep a track of our costs as a company.

[Lucio]

It's not so much that you claim the VAT back, but that you offset your purchases against your sales, so for example if you sell £1,000,000 worth of goods, but purchase £500,000 you only have to send the government the VAT off £500,000.

It's to stop businesses paying VAT twice basically.

[Funkstar]

Or the other way around if you are a startup hemorrhaging cash

[Saracen]

As above it's for VAT exempt customers, usually businesses. It seems to be a bit of a legacy for IT companies to list VAT and ex-VAT prices, even on their public sites. If you had a business account with them you could get the ex-VAT prices.

Businesses aren't VAT-exempt .... or at least, most aren't. But, as others have said, they either claim back or offset it. I know it seems like semantics, but VAT exemption is a different thing altogether.

It's not so much that you claim the VAT back, but that you offset your purchases against your sales, so for example if you sell £1,000,000 worth of goods, but purchase £500,000 you only have to send the government the VAT off £500,000.

It's to stop businesses paying VAT twice basically.

Yup .... except that if in a given period, input tax is higher than output tax, you do indeed reclaim it. HMRC will either send you a cheque, or transfer the amount into your bank account.

For instance, one of the schemes a VAT-registered business can be on is such that, essentially, VAT liability becomes due when an invoice is paid, not when it's raised (which is the default position). If so, you might well end up getting paid in the next VAT period, and a large part of your work done in one period incurs VAT due in the next, when payment comes in. But you'll have been paying output VAT throughout the period (quarter, usually). So .... you can reclaim VAT you paid, which may exceed what you generated. Similarly, a small (or one-man) business may have minimal VAT on outputs if they go on a long holiday, but still incur VAT on inputs. The same situation can arise.


Exemption is a different thing. Or rather, things.

VAT is charged on all VAT-able goods as a specific rate. Sometimes, that rate will be zero. For instance, most foodstuffs, and books and periodicals, are zero rated. this means that they're subject to the VAT system, and are included in VAT statistics, but you don't pay VAT on them. That can change, however, just by changing the rate.

Other goods are VAT exempt. They aren't covered by the VAT system, don't get included in statistics and are specified as exempt by law, so charging VAT on them would mean changing the law. And example would be medical services, so you won't pay VAT on, for instance, your dental bills.

But then charities can have VAT exemption certificates, as can some disabled or chronically sick individuals, which means that under very specific conditions and rules, they are exempt from VAT on some products. They can't reclaim it via a VAT return because they aren't registered, so don't submit returns. But they fall into the qualification for exemption so as to not have to pay it in the first place.

For example when an order says excl. VAT... why list that price if you can't buy it for that price?

Now we get to the actual question. That's VAT exclusive prices, not exempt. And it's important because almost any real business, except perhaps the very smallest, is VAT registered, and can get VAT on things they buy back.

If you are a business, and your turnover of VAT-able goods (see above) exceeds a specific limit in a year, or looks like it's going to, you MUST register for VAT. But even if it doesn't exceed that limit, you can apply for registration .... and it might be a good idea to do so even for small businesses.

Once registered, you have to charge VAT on everything (except exempt goods) on anything you sell, but can reclaim it on what you buy. I'm VAT registered. If I buy a computer (or bits) from Scan, and it's for business, I reclaim the VAT. So if I buy a processor that costs you, the public, £117.50, that actually amounts to £100 for the processor, and £17.50 in VAT.

I have to pay that VAT to Scan when I buy the processor, but I get it back from Customs.

Once per period, usually per quarter, I have to fill in a VAT return. It shows the value of stuff (goods and/or services) I;ve sold, and the VAT I've charged on them.

It also shows that goods and/or services I've bought, and the VAT on them.

Suppose I sold £1000 of services. I'd charge £1175.00, which is :-

Goods (Outputs, or Sales) £1000
VAT on Outputs £175.

So, so far, VAT owed to HMRC = £175.

But, now I buy a processor for £100+VAT. I pay Scan £117.50, but that breaks down as

Goods (Inputs, or Purchases) £100
VAT on Inputs £17.50.

So my VAT return would look (and there's a little more to it than this) something like :-

A - Outputs £1000
B - Inputs £100

C - VAT on Outputs £175
D - VAT on Inputs £17.50

E - Net due to HMRC (C-D) = £175.00 - £17.50 = £157.50.

So I send a cheque to HMRC (or bank transfer, etc) for £157.50.

As a quick double check, the effect should be to pay VAT on the excess of outputs over inputs. So I sold £1000, bought £100, which means the excess is £900. And VAT, at £17.5%, on £900 is .... low and behold, £157.50. Of course, that calculation won't usually work in the real world, because some inputs are at zero rate (and I can't reclaim what I haven't paid out), and perhaps some more (like power bills) will be at 5%.


So, after all that, the reason many suppliers show prices both including and excluding VAT is that anyone that is VAT registered wants to know the net cost, and the VAT is just a cash flow adjustment. It goes out, then comes back in a bit later (or, in many cases, is just a set-off in their accounts and mostly, neither goes out nor comes back), and doesn't affect my overall profitability.

I don't care, for instance, that that processor is £117.50 retail, to you the buying public, because it costs ME £100 ..... if it's for business use.

The net effect of all this paying and claiming back is that at every stage of production, each stage claims back the VAT on what they buy, but has to pay HMRC the VAT, essentially, on their profit margin. And that happens at EACH stage. So every stage, from raw materials to selling to you, pays VAT on the difference between what they bought at and sold at. You, the end user, pay VAT on the whole price, but HMRC actually get a series of slices of that from each stage in the process.

That's why it's called "Value Added" tax. The value that each stage (be it design, manufacturing, transport, retailing, etc.) adds to the product is represented by the difference between their sale price, and their cost price plus all the expenses they incur along the route.

I hope that's a bit clearer, but by 'eck this stuff isn't easy to explain in a post.

[Saracen]

Or the other way around if you are a startup hemorrhaging cash

Indeed. And not necessarily just with start-ups, especially for small businesses. It can happen simply because of timings of cash flow, though hopefully, it corrects the next period.

[Funkstar]

That's why it's called "Value Added" tax. The value that each stage (be it design, manufacturing, transport, retailing, etc.) adds to the product is represented by the difference between their sale price, and their cost price plus all the expenses they incur along the route.

Even though I knew what VAT meant, I never made the connection to where the name is derived from.

Very good post Saracen

[schmunk]

Stuff about VAT.

Urk - my ATT/CTA exams come swimming back towards me... I thought I'd left all that VAT crap far behind..!

[Saracen]

Urk - my ATT/CTA exams come swimming back towards me... I thought I'd left all that VAT crap far behind..!

Consider youself lucky - not only do I have my Chartered exams to think back too, but 20 years of filling in VAT returns.

Would that I could leave it all behind me .... but the implication of the VAT system is that just about every business is also an unpaid tax collector for HMRC. And as such, get it wrong and you end up liable anyway for the tax anyway, even if you didn't collect it. In other words, if you should have charged, and collected, it and didn't, you get to pay it yourself.

[Zak33]

Even though I knew what VAT meant, I never made the connection to where the name is derived from.

Very good post Saracen

you KNOW that Saracen is the DADDY

[Lucio]

you KNOW that Saracen is the DADDY

This would explain why I always disagree with him!

[Dareos]

Ever thought of applying to be Chancellor mate? You appear to have a much firmer grasp of economics than our current one