Reply to: VAT Registration

[SueEllen]

Ok,

My scenario is that I became self-employed & my accountant is currently in the process of submitting my VAT registration.

We aren't self-employed on these forums we work through limited companies or umbrella companies.

If you want to find out about back-dating VAT invoices then do a search on these forums on how to do it properly.

The basic premise is that you issue every client/agency your company has done work for with an amended invoice for VAT i.e. you state what they have paid and then make it clear that they are just paying the VAT. If they refuse to pay you can inform HMRC about the company as you are collecting the money on their behalf.

[tbrain]

Backdated VAT invoice

Ok,

My scenario is that I became self-employed & my accountant is currently in the process of submitting my VAT registration.

Now I have two options:

i) be VAT registered from todays date: 04/11/2010
ii) be VAT registered from the date I became self-employed: 09/09/2010

I understand that it would be simpler to go for option i, and this is being pushed by my accountant as I will obviously be liable for VAT if my agency doesn't pay the backdated invoice for September & October invoices n.b. these invoices both stated that VAT registration was pending, and that a VAT only invoice would follow once registration had been completed.

Having spoken to my agency, they have confirmed that it is common practice for them to pay VAT only invoices that they receipt, as this is common place.

Q. I am also registering on FRS, so I am assuming that if I backdate my VAT registration to 09/09/2010, I will also benefit to the tune of a few hundred quid as I will be registered at 11.5%

I'm assuming that if I register as of 04/11/2010, I stand to lose any potential FRS savings for the months of September & October?

Any comments appreciated.

[TheCyclingProgrammer]

I completely disagree. To me (and probably most folks here), it's money for old rope! Here's my reasoning:

Sure, I see what you're saying and if you are already VAT registered (or HAVE to be) and your VAT reclaimable expenses are low then the FRS is a no-brainer.

My point was though, that once you've deducted the VAT that you *could* have reclaimed if you had been on the standard scheme, plus the extra time needed to administer your VAT account and returns (admittedly, it's not a lot, but time is valuable right?) and then deduct the corporation tax on your profit, then it isn't as lucrative as you'd think.

Sure, nobody is going to turn their nose up at an extra grand or so but if you're already turning over £60-70k each year, is it really worth the hassle of registering for VAT when you don't need to?

There are good reasons to register for VAT if you don't need to, I'm not convinced that the FRS surplus is one of them.

[Scrag Meister]

It's still money for nothing though!

Agreed, but not the same league as you initially hoped.

[Wanderer]

FRS is paid on Gross invoice value.12% of £70500 is £8460, when at 13% its £9165 Better check your previous VAT returns

Thanks for the correction! Now I know why I have an accountant to do the returns for me rather than doing it myself.

It's still money for nothing though!

[Scrag Meister]

Say £60,000 turnover, pre VAT reg.
VAT reg gives £60,000 + £10,500 VAT = £70,500 inc VAT at 17.5%.
You pay HMRC 12% of this (13% - 1% first year discount) = £7,200.
That gives your company £3,300 profit for doing pretty much nothing. Kerching.

How did that Math work? Did you do CSE not O level?

FRS is paid on Gross invoice value.

12% of £70500 is £8460, when at 13% its £9165

So thats £2040 profit at 12% and only £1335 at 13%.

Better check your previous VAT returns

[Wanderer]

Looks ok to me but don't you get taxed on profit?

Yep, that's a gross profit not net.

I did delete the bit saying "Those of us here who have subcontractors may have substantial expenses, but so long as you pay them over £2,000 on each invoice you can claim the VAT back so you're still a winner." because the >2000 only applies to capital expenditure though.

[northernladuk]

I completely disagree. To me (and probably most folks here), it's money for old rope! Here's my reasoning:

Say £60,000 turnover, pre VAT reg.
VAT reg gives £60,000 + £10,500 VAT = £70,500 inc VAT at 17.5%.
You pay HMRC 12% of this (13% - 1% first year discount) = £7,200.
That gives your company £3,300 profit for doing pretty much nothing. Kerching.

The downside is that you can't claim back the VAT on anything you buy unless the invoice is > £2,000.
The upside is that you don't have to get hundreds of VAT receipts (and you don't always automatically get a VAT receipt, so you may not be able to use them to reclaim VAT).

If you buy a lot of stuff through the company that you could claim VAT on (and remember that not everything has VAT), then maybe you are better off outside the FRS but you would have to have VAT eligible company expenses of well over £20,000 on a turnover of £60,000 to make it worth while.

Even then, I would still consider going on the FRS because it's a load less admin to do with a flat rate rather than faffing about with all your expenses and different VAT rates, zero rated supplies etc.

Those of us here who have subcontractors may have substantial expenses, but so long as you pay them over £2,000 on each invoice you can claim the VAT back so you're still a winner.

Or is my math completely wrong here??

Looks ok to me but don't you get taxed on profit?

I think the convo is going the wrong way anyway, yes there are some tangible benefits to VAT but the most important thing is to get your VAT right or you get in to some serious hot water. If there is a couple of extra quid for you at the end then fine. Better to look at the process and get that right than focus on FRS being a cash earner.

[Wanderer]

It's not a good earner. The profit gained from flat rate surplus isnt huge and the whole point of it is to cover any input VAT on your expenses. If your input VAT for the year is less than your surplus then congratulations, you've made a profit, in real terms. Bt it wont be much. If you are joining simply to try and make money, you are wasting your time.

I completely disagree. To me (and probably most folks here), it's money for old rope! Here's my reasoning:

Say £60,000 turnover, pre VAT reg.
VAT reg gives £60,000 + £10,500 VAT = £70,500 inc VAT at 17.5%.
You pay HMRC 12% of the VAT inclusive amount (13% - 1% first year discount) = £8,460.
That gives your company £2,040 gross profit (reduces to £1,335 after the first year) for doing less admin. Kerching.

The downside is that you can't claim back the VAT on anything you buy unless it's a capital expense and the invoice is > £2,000.
The upside is that you don't have to get hundreds of VAT receipts (and you don't always automatically get a VAT receipt, so you may not be able to use them to reclaim VAT).

If you buy a lot of stuff through the company that you could claim VAT on (and remember that not everything has VAT), then maybe you are better off outside the FRS but you would have to have VAT eligible company expenses of well over £12,000 on a turnover of £60,000 to make it worth while.

Even then, I would still consider going on the FRS because it's a load less admin to do with a flat rate rather than faffing about with all your expenses and different VAT rates, zero rated supplies etc.

Or is my math completely wrong here??

(Edit: My numbers were wrong, they should be correct now. Obviously, I am not an accountant and I won't be sacking my one anytime soon! )

[Scrag Meister]

We don't know what the FRS percentage will be for IT contractors but lets say it's 15% (it may well be more).

Oh yes we do, its going to be 14.5% for us IT service contractors.

FRS rates post Jan 2011

[TheCyclingProgrammer]

I do have an accountant, but I just want to make sure I know my stuff before asking him. I am not currently VAT registered and I have barely any expenses other than mileage, so I can see this being a good earner if I have calculated things right.

I will register for VAT this month and go on the FRS.

Thanks guys

It's not a good earner. The profit gained from flat rate surplus isnt huge and the whole point of it is to cover any input VAT on your expenses. If your input VAT for the year is less than your surplus then congratulations, you've made a profit, in real terms. Bt it wont be much.

Lets say for instance its next year and the VAT is now 20%. We don't know what the FRS percentage will be for IT contractors but lets say it's 15% (it may well be more).

Your £60k net turnover for the year is £72k gross including VAT. Your FRS payment at 15% of gross is £10,800. This leave you with a FRS surplus of only £1200.

So it's already not much. Once you deduct all of the input VAT you have paid out during the year that would have reclaimed if you were on the standard VAT scheme, you may well find that you only have half of that, leaving you very little in terms of real profit.

If you are joining simply to try and make money, you are wasting your time.

[Scrag Meister]

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.

e.g

Gross Invoice £100 + 17.5% = £117.50

You pay FRS VAT (It Consultant) £117.50 * 13% = £15.275 (Gross * FRS Rate)

Profit on VAT = £2.225 (Gross Invoice VAT - FRS VAT)

so although it looks like 4.5% it isn't, it's only 1.9% of gross invoice value, 2.25% of Nett invoice value.

[NorthWestPerm2Contr]

With the FRS if you buy a laptop, pay your accountancy fees* and a few other bits and pieces you can't claim the VAT back. (Unless the expense is over around £2000) So you aren't really gaining that much unless you have only non-zero rated expenses i.e. transport.

*Get yourself an accountant asap as from your posts you aren't an accountant.

I do have an accountant, but I just want to make sure I know my stuff before asking him. I am not currently VAT registered and I have barely any expenses other than mileage, so I can see this being a good earner if I have calculated things right.

I will register for VAT this month and go on the FRS.

Thanks guys

[SueEllen]

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.

With the FRS if you buy a laptop, pay your accountancy fees* and a few other bits and pieces you can't claim the VAT back. (Unless the expense is over around £2000) So you aren't really gaining that much unless you have only non-zero rated expenses i.e. transport.

*Get yourself an accountant asap as from your posts you aren't an accountant.

[NorthWestPerm2Contr]

Pretty much. Even though you are charging 17.5% on top of your rate / fees, you give the Govt. (for example) 13% of the gross amount (i.e. the rate / fees + 17.5%). So you don't exactly make a lot of money out of it, but you do get something back.

what do you mean by that?

I believe it is currently 12.5% if you register with flat rate at registration which means you have 5% left over which goes into the business? Next year that goes up to 14.5% giving you 5.5% which is a significant amount of say 60 or 70k (at least 3 or 4k) which can be used for dividends, expenses etc.