VAT Can Be Complicated, Even For An Accountant!
Firstly, VAT is complicated! Don’t be ashamed if it confuses you. We are not all Will Hunting; people sit exams and become experts in it for that reason.
It can be confusing, and people ultimately need advice. If you haven’t dealt with VAT before, it is a preverbal minefield.
Why Do I Need to Register for VAT?
Limited companies, partnerships, limited liability partnerships, and sole traders alike, you may need to become VAT registered.
There are two main reasons;
- you have breached the VAT registration limit
- it is beneficial for you / your customer to do so
If you only have vat exempt supplies, then you don’t need to be vat registered. Just like Insync, insurance is an exempt supply.
You need to be registered for VAT if you have either:
- standard rated (20%)
- reduced rate (5%)
- zero-rated supplies
and your turnover is over £79,000 over a 12-month period.
This means that you will need to charge VAT at an appropriate rate on your sales, but you can claim it back on your expenses if there is VAT on them.
You can also apply to register if you are below the threshold (but HMRC can deny your registration).
Why would you do this? Well, if all your customers are VAT registered, they can reclaim it on your invoices. As a result, they won’t care if you put VAT on your invoices, and you can reclaim VAT on your expenses.
Or your supply may be a zero-rated supply which means the rate you apply to sales is 0% (this is different to an exempt supply), which will also enable you to reclaim back vat on your expenses. Result!
How to Apply for VAT
To apply for VAT registration, you can either use HMRC’s online services or send paper forms through the post.
Most applications for VAT registration can be completed online, but there are some circumstances where you have to apply by post.
Also, don’t forget that when you become VAT registered, if you are holding any assets which you purchased in the previous four years in your business like, machinery, furniture etc. you can reclaim this back on registration.
This also relates to services applying to these items as well.
How does VAT operate in the Trade?
I will go into more detail regarding other aspects of VAT; however, let’s now look at motor traders and, more specifically, second-hand ones.
If you buy a second-hand car which has VAT on, then the usual accounting rules apply. However, if you buy a vehicle without it on, then, the margin scheme will apply, and this will save you money.
How? If the car you buy doesn’t have VAT on it, then you cannot reclaim any, but on the sale of the vehicle, you will have to pay over 20%.
In simple terms, the margin scheme allows you to deduct the car’s purchase price from the vehicle’s sales price, and you only need to account for the difference between the two.
And heaven forbid if you sell it for less than you paid for it, then you don’t have to account for any VAT on the sale. Winner, kind of!
You can use the scheme if you can meet the following three criteria:
- One, you have acquired an eligible vehicle (it must have been driven on the road for business or pleasure and is suitable for future use if repaired, it cannot be new or from a company that is VAT registered unless they are a car dealer, they can come from auction sites, but you have to establish if it meets the eligible car definition)
- Two, if you calculate the margin correctly, you cannot add your overheads or repair costs onto the costs of the car (but you can claim the vat back on these costs anyway) you can add on MOT costs or accessories that helped sell that car.
- Three, you keep adequate records; you must keep a stock book that contains the date of the purchase, purchase invoice number, purchase price, name of the seller, Reg number, vehicles description, date of sale, sales invoice number, name of the buyer, sales price, and VAT due on margin.
The VAT Return
Right now, how to stick it on the VAT return, Box 1 – the VAT on the margin, Box 6 the purchase price of the car, Box 7 the sales price of the vehicle. Done.
About The Author
A qualified Accountant, Ben White is the Finance Director of several businesses in both the Property and Financial Services area.
One of his many assets is his ability to explain complex SME Business and Accounting issues and translate them into plain English.
Motor Trade Insurance
Insync provides a fresh approach to Trade Insurance, combining digital service with personal expertise.
Insync can Compare Motor Trade Insurance from the UK’s leading insurers without the need for fuss or forms and has access to many specialist schemes.