VAT registration threshold - what is taxable turnover?

[IdleObserverNo1]

Vat

It's all about accounting for VAT on your sales + accounting for VAT on purchase of services from abroad.

If you are not registered for VAT and your vatable turnover is £60k, you are under the limit of £64k for ye 2007/08 (£67k for 2008/09) under 'normal' circumstances.

VAT POINT ONE:
But if you are registered and your t/o is, say £100k then your VAT due on Sales would be £100k x 17.5% = £17,500. [Box 1 of VAT Return]
If you also purchased certain services from the EC, say worth £10k net, but they did not charge you VAT, then you owe £10k x 17.5% = £1,750 VAT to someone! In fact you must declare this amount [Box 3 of VAT Return], making a total of vat due of £19,250 [Box 3 of Vat Return].
Are you with me so far? Good!
Then, you deduct all the VAT you have paid on purchases in the UK and on purchases of services from the EC.
So enter the figure in Box 4. Take Box 4 from Box 3, put the answer in Box 5 and that is your net VAT liability. You can see that if you have not paid vat on your purchases from the EC, you will now be doing so as a result of this computation. But if you have actually paid vat on this purchase from the EC, then the two figures will net off and you have no further liability.

VAT POINT TWO (the interesting bit!)
Now you have to declare the trade that created this vat liability.
First of all you had net sales of £100k. This figure goes in box 6.
Then you also incurred an additional liability to vat because of your purchase of £10k worth of services from the EC. Put £10k in Box 9
(we'll ignore box 7 & 8 because these are not relevant to to our discussion)
So now the vat man is able to see if you have calculated your vat liability correctly. He will see £100k t/o in box 6 and would expect to see £17,500 in box 1. He will also see that you 'incurred' an additional vat liability by virtue of your purchases of services from the EC.
Adding the two together will enable him to see the 'total VAT due', and the underlying amounts on which the vat was calculated, which will be 100k + 10k +110k. n.b This is the underlying figure upon which the total vat due to him is computed. This is also the figure he uses to determine whether or not your trading is under or over the vat trading threshold.

So! If purchases of EC services (poECs) + sales are under the threshold, the vat man is not interested. But if poECs + net sales is over the threshold, he is very interested! This is why you must add your poECs's to your sales to determine the situation!
I agree that poECs's are not t/o, but the vat man needs a combined figure to determine the 'vat flow' elements and to compute Gross/Total vat due. (Remember, of course, that the net amount of VAT due is after deducting vat already paid).

If this is difficult to follow, try jotting down these figures and box numbers down and seeing it for yourself (E&OE!)
(The vat man uses all these figures to calculate trade, UK and inter-EC.)
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If you have any further questions, please save them up until after I have left the country!

Regards

[ittony]

Thanks everyone, especially Malvolio for keeping all us n00bs on our toes, and THEPUMA with his wacky habit of actually answering the question. So, just to clarify - because of a quirk of the system, I do have to add an amount the company has spent from its income to the income itself in order to calculate turnover, and therefore if I've invoiced my clients 60k this year but spent 5k of it on a foreign designer to do my letterheads then although everyone else would regard my turnover as 60k, the VAT man will say it is 65 and I therefore need to register? That's a bit.... odd, isn't it?

[malvolio]

Also, Malvolio's post 3 which suggests including bank interest, dividends, etc within taxable supplies for these purposes is incorrect.

Aaargh.... Of course it is. What on earth had I been drinking...

[THEPUMA]

To answer the original query, this is a bit of an anomaly arising in connection with what is called the "reverse charge procedure".

When such services are provided in the EU, the supplier puts both his and the customer's VAT number on the invoice and doesn't charge VAT. The supplier also has to write on the invoice something to the effect that "the reverse charge procedure applies to this invoice".

Both the supplier and customer are then treated as having supplied and received services of the amount in question.

The purpose of this is to prevent suppliers in any particular jurisdiction having a competitive advantage over their overseas rivals purely by virtue of a lower local VAT rate but the knock-on effect can sometimes seem unfair.

Also, Malvolio's post 3 which suggests including bank interest, dividends, etc within taxable supplies for these purposes is incorrect.

[Mustang]

One would always hope that you would be successful enough that you were going to go through the threshold anyway. If that's the case, you might as well register early to avoid seeming to put a 17.5 per cent increase on later - especially if your competitors are also VAT registered.

[malvolio]

I've never understood Ms attitude of being narky just for the sake of it either.

It's not simply for the sake of it. Lost in the mists of the original boards I explained why...

Firstly, most of the time it's reserved for people asking dumb questions to which the answers are easily obtainable. Those of us who know the answers just occasionally get narked that others, especially newbies, can't be arsed to do some basic research into absolute basics. It's like turning 17 and asking everyone you meet to explain each page of the highway code rather than simply reading the damn thing yourself.

Secondly, and especially for newbies, if you can't take a bit of ragging from your peers, you're going to make a pretty poor contractor. Real clients are way worse than anything you'll get on here

Thirdly, it's my well known aversion to suffering fools (although I hasten to add ittony doesn't fall in to that category!), which is me in real life as well.

And finally it started as an experiment in running a persona completely different to my own, and I kind of got stuck with it. People actuially complain if I'm nice now...

So that's enough of the reasonable answers. Now f*** off...

[shoes]

What sort of ridiculous attitude is that? If you were running a business selling services to private individuals and were clearly under the VAT threshold, you'd put your prices up 17.5% out of sheer bloodymindedness?

I've never understood Ms attitude of being narky just for the sake of it either. He knows things so is worth listening to, but I wouldn't want to be stuck in a lift with him. PCG personified.

Personally I agree that if you were under the VAT threshold and so had the option of being VAT registered or not it would make sense not to be VAT registered if your clients were also not VAT registered (typically the general public). Your pricing could then be more competitive.

[malvolio]

Are you deliberately trying to confuse matters for comic effect? In a given year a company invoices its clients 60k, during the same year the company buys 10k of services from abroad. It's pretty simple stuff. You initially claimed this resulted in a turnover of 50k, which I'm pretty sure is wrong. I think it's 60k but the paragraph from the HMRC appears to imply that it should be 70k. Is anybody able to shed any light of the discrepancy without putting on a pathetic BOFH act?


What sort of ridiculous attitude is that? If you were running a business selling services to private individuals and were clearly under the VAT threshold, you'd put your prices up 17.5% out of sheer bloodymindedness?

OK, now you've explained the point properly, your gross income is £60k, your expenditure is £10k your net profit is £50k. The £60k is the bit that counts towards the VAT threshold.

And once you go over gross turnover threshold, you charge VAT. You can't therefore get out of VAT by pushing up your expenditure to compensate. You could of course simply lower your prices by 14.9% to cancel out the VAT or simply stop charging once you get to £63,99.99p in a year. That would not make any kind of commercial sense, but that's not my problem.

Like I said, get an accountant.

[Burrow01]

What sort of ridiculous attitude is that? If you were running a business selling services to private individuals and were clearly under the VAT threshold, you'd put your prices up 17.5% out of sheer bloodymindedness?

I'd put my prices up by 17.5% because they would'nt know the difference

....

[ittony]

Still don't get your point. What are going to invoice your client? Is the £10k for work that you are paying to have done and not passing on, which seems pretty silly, but yes your turnover would then be £60k. carp business management though, if you ask me though.

Are you deliberately trying to confuse matters for comic effect? In a given year a company invoices its clients 60k, during the same year the company buys 10k of services from abroad. It's pretty simple stuff. You initially claimed this resulted in a turnover of 50k, which I'm pretty sure is wrong. I think it's 60k but the paragraph from the HMRC appears to imply that it should be 70k. Is anybody able to shed any light of the discrepancy without putting on a pathetic BOFH act?

As for putting up your costs for non-VAT registered customers - well that's how it works. Someone's got to pay the VAT and gosh, it's the end consumer.

What sort of ridiculous attitude is that? If you were running a business selling services to private individuals and were clearly under the VAT threshold, you'd put your prices up 17.5% out of sheer bloodymindedness?

[malvolio]

Eh? Surely if I do 60k of work and put and "put 10k of it abroad" i.e. have to buy 10k worth of services from abroad in order to deliver my 60k, then my gross turnover is 60k, not 50?


It's not anybody's money if it's not applicable. No reason at all? How about not having to put your prices up 17.5% for non-business customers?

Still don't get your point. What are going to invoice your client? Is the £10k for work that you are paying to have done and not passing on, which seems pretty silly, but yes your turnover would then be £60k. Crap business management though, if you ask me though.

As for putting up your costs for non-VAT registered customers - well that's how it works. Someone's got to pay the VAT and gosh, it's the end consumer.

Seriously, if you haven't grasped such basics, get an accountant to do your book-keeping, since you will be making big - and potentially illegal - mistakes. We can play games with Hector but never ever mess with the VATMan, he has a long reach and big teeth.

[ittony]

Don't really follow your exmaple - if you do £60k of work and put £10k of it overseas, your gross is £50k, but if you sell someone £60k of your effort and £10k of someone else's then it's £70k.

Eh? Surely if I do 60k of work and put and "put 10k of it abroad" i.e. have to buy 10k worth of services from abroad in order to deliver my 60k, then my gross turnover is 60k, not 50?

And VAT is not your money anyway. There's no reason at all to try and avoid it and a lot of reasons why you shouldn't.

It's not anybody's money if it's not applicable. No reason at all? How about not having to put your prices up 17.5% for non-business customers?

[malvolio]

Can anyone please confirm or otherwise my understanding of turnover? I've always taken it to mean income, i.e. buy 10k of widgits, sell for 15k - profit 5k, turnover 15k; repeat process in same year - profit 10k, turnover 30k. So in the world of contracting, if you're invoicing less that 64k a year you shouldn't need to register for VAT (flat rate advantages aside) no matter what your spending is?

If so, can anyone make any sense of the following from HMRC : "If you receive certain services from abroad, for example advertising, data processing, consultancy or legal, accounting or professional services, these will be treated as if you supplied them and you must include the value in your taxable turnover"?

This seems to imply that if I subcontract some work abroad I should be adding some spending to my income in order to calculate turnover, i.e. invoice 60k, spend 10k on data processing in India - turnover 70k. This can't be right surely?

Thanks all, T.

Gross turnover is the measure. Any income (not loans) you receive from whatever source that reaches your UK-registered company's account in any given trading year - so that's mostly invoices but also interest earned, dividends received, bonuses, legal payments, whatever. Once that hits the threshold of £64k (? I think...), you have to be VAT registered.

Don't really follow your exmaple - if you do £60k of work and put £10k of it overseas, your gross is £50k, but if you sell someone £60k of your effort and £10k of someone else's then it's £70k.

And VAT is not your money anyway. There's no reason at all to try and avoid it and a lot of reasons why you shouldn't.

[Bluebird]

why wouldn't you want to register for VAT ?

[ittony]

Can anyone please confirm or otherwise my understanding of turnover? I've always taken it to mean income, i.e. buy 10k of widgits, sell for 15k - profit 5k, turnover 15k; repeat process in same year - profit 10k, turnover 30k. So in the world of contracting, if you're invoicing less that 64k a year you shouldn't need to register for VAT (flat rate advantages aside) no matter what your spending is?

If so, can anyone make any sense of the following from HMRC : "If you receive certain services from abroad, for example advertising, data processing, consultancy or legal, accounting or professional services, these will be treated as if you supplied them and you must include the value in your taxable turnover"?

This seems to imply that if I subcontract some work abroad I should be adding some spending to my income in order to calculate turnover, i.e. invoice 60k, spend 10k on data processing in India - turnover 70k. This can't be right surely?

Thanks all, T.