VAT for a sole trader

System

Hi,

My friend is a sole trader in a second hand shop and I am looking for some advice for him.

I know that once your turnover is £61,000 it is compulsary to register for VAT.

But previous to this do you not charge any VAT on products sold or keep a record of VAT?

The way I have read it (Inland Revenue site) that you do not charge VAT or keep any records but anything earned over £61,000 (i.e. if you have sold goods for £62,000 then it is only the £1,000 that is vatable) and thats when you can charge your customers VAT.

Am I making sense?

System

Re:VAT for a sole trader

Interesting point but one I cannot answer but leads to my own question which may kind of re-word your own...

Say you had your own business but didn't register for VAT as you didn't expect your business to grow too much. However, in your tenth month of trading, you suddenly realise you are going to break the VAT barrier and are supposed to report it to HMRC.

You have never kept VAT records as you didn't anticipate this to happen and subsequently, you do break the VAT barrier. Will you now have to pay VAT on all your sales since you began from day one - especially since you never charged VAT on sales up to this point - or just the over-limit part?

So what happens now?

Thanks,

Robert

System

Re:VAT for a sole trader

You must register for VAT when you know you will break the threshold.

Once registered you will start to charge VAT to your customers and be able to reclaim input tax on your purchases.

You can also then reclaim any input tax that you have paid within the last 3 years on capital items providing you still have them to hand when you make the claim.

Also you can reclaim input tax on the last 3 months revenue expenses.

Regards

Dean

System

Re:VAT for a sole trader

So assuming you achieved a £70k turnover in your first year of trading, you will only be liable for VAT outputs on those over threashold sales in excess of £61,000 and for all subsequent time periods?

Never really thought too much about VAT before, but I would imagine breaching the threashold level is also a death knell for many smaller businesses? Suddenly prices have to rise by 17.5% which surely cannot be entirely offset by being able to reclaim the input VAT. Small wonder so many fail once they reach a certain level... they get 'punished' for being marginally sucessful.

System

Re:VAT for a sole trader

blobbyh wrote:

So assuming you achieved a £70k turnover in your first year of trading, you will only be liable for VAT outputs on those over threashold sales in excess of £61,000 and for all subsequent time periods

It is abit of a stinky rule but take this as an example.

Start business - turnover £0
Prepare managment accounts in month 6 - turnover 50k

At this point you know that you are likely to exceed the VAT limit at some point within the next 6 months and in the above example you should register for VAT and this point.

Then your first invoice presumably in month 7 (depending on registration time) you will have to charge your customer the 17.5%. So from 50k to the threshold and above you will have charged the 17.5% not just starting from 61k.

blobbyh wrote:

Never really thought too much about VAT before, but I would imagine breaching the threashold level is also a death knell for many smaller businesses? Suddenly prices have to rise by 17.5% which surely cannot be entirely offset by being able to reclaim the input VAT. Small wonder so many fail once they reach a certain level... they get 'punished' for being marginally sucessful.

Depending on who the end customer is, it can be a bit of a nightmare but if you are dealing mainly with other VAT registered traders there is no problem and it will just increase their input tax claim. Registered traders effectively paying the same prices and they are used to.

Regards

Dean

System

Re:VAT for a sole trader

Thanks Dean,

I get you now about when to start charging. So, you don't even get the benefit of reaching the threshold and then paying, but instead can get charged in advance of it! Does sound a bit crap doesn't it?

I was mainly thinking of shops for the businesses killed by the VAT regs. There they are happily selling their candles, sandwiches or whatever to the retail customer when suddenly the VAT demons arrive and prices have to go up by 17.5%. Since many shop owners may not be able to pass this increase on to their customers, they choose to absorb it instead and end up in financial ruin. What a reward that is for trying to start your own enterprise.

Robert

System

Re:VAT for a sole trader

The joys of VAT. Then you get involved with what you can and can't claim, what's 17.5%, 5%, zero rated, expemt, keeping upto date with all the notes published.

VAT is one of my pet hates. I think they should class everything at 5% and have done with it! So what you might have to pay VAT on food but you'll save a bit else where.

It's 20 past 8 and you've got me thinking about VAT..... where is that wine bottle! :P

Regards

Dean

System

Re:VAT for a sole trader

Hi

I have just read this thread and thought I would add my comments on VAT Registration. There are two rules for deciding if you should be registered for VAT when making taxable supplies.

1. The monthly test
At the end of each month the business owner must check to see if their taxable turnover in the previous 12 months has exceeded the registration threshold. In theory, this must be done at the end of every month, but usually a person will know whether or not they are near the threshold, and whether they should check this or not.

If the VAT threshold has been exceeded, then usually you are obliged to register for VAT. You have 30 days to do this.

Your actual registration takes effect from (i.e. the day from which you start to charge VAT) the first day of the second month following the month in which you exceeded the threshold. So say you exceeded to threshold in October 2006, you should be registered and be charging VAT on supplies from 1 December 2006. Note that you do not start charging VAT from the day, or month, in which you exceeded the threshold.

2. The daily test
This test is whether you expect to exceed the threshold in the next 30 days alone. This may be the case if you were to receive a big order. In this circumstance, you would have 30 days to register, but you registration would take effect from the date on which you first expected your taxable supplies to exceed the registration threshold within 30 days.

For example, suppose you had a steady turnover of £3,000 per month. Obviously no reason to register for VAT. However, is on 1 November you received an order worth £65,000, and you expected to complete this order within 30 days, then you would have 30 days from 1 November to Register, but would actually be registered from, and charge VAT on supplies from, 1 November.

Late registraion
If you register late, then you will be charged a penalty (depending on how late you are) unless you have a reasonable excuse, or may be reduced if there are mitigating circumstances.

Just reaslised how long this is, man I must be bored :roll:

Regards
Tom