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Profit from VAT

How can I draw the profit made from (reclaimed) VAT from the business?

Due to the recent changes in legislation, I am thinking of leaving the VAT Flat Rate Scheme and moving to standard VAT accounting for my (contractor) LTD Company.

I understand how the FRS has worked for me and how the profit from it is directly linked into my P&L account and thus how I am directly benfitting from it once I take my dividends etc.

However with standard VAT, am very confused as to how the recoverable input VAT that I will earn every quarter will be treated in my accounts and most importantly, how am I able to draw this recovered VAT from the business as it is essentially profit I have made?

Basically, it was clear to me how my profits from the Flat Rate Scheme end up "in my pocket", but with standard VAT I don't understand how this will happen and how it would be accounted for.

Apologoes if any of the above shows a fundamental lack of understanding, but I am really struggling to find an answer.

Many thanks. 

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By NH
22nd Sep 2017 09:21

What has your accountant said when you asked him/her?

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22nd Sep 2017 09:29

Yes I'm afraid it is a fundamental lack of understanding.
With the FRS there was a difference between the VAT you would have paid on the standard scheme and the amount payable under FRS, this was your 'profit' from using the scheme, on the standard scheme there is no difference to the standard scheme so no additional profit.

Now your P&L will be the net amounts of your income and expenditure, so if costs are £50 plus £10 VAT, and income £100 + £20 VAT, your P&L will show profit of £50 and you will have a VAT liability to payover to HMRC on your balance sheet of £10, giving the £60 difference between your cash income and expenditure.

Input tax doesn't give you extra profit it just offsets some of your tax liability.

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By Mondamo
to spidersong
22nd Sep 2017 09:45

Hi, yes totally understand your explanation and apologies for some bad wording.

I guess my question really pertained to your last point about how 'Input Tax offsets some of your tax liability', namely, when does this work its way into the equation of the figure upon which one is due to pay corporation tax on?

Many thanks

Thanks (1)
to Mondamo
22nd Sep 2017 09:53

You claim the input tax in full.

So you can't claim it against Corporation Tax.

So that increases your profits.

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By Mondamo
to lionofludesch
22nd Sep 2017 10:24

Thanks for your response.

I guess "increases your profits" is the crux of my question...

At what point is this reclaimed Input VAT added to my Profits and thus part of the total amount available to be paid as dividends?

for example:

10,000 (net sales)
2,000 (net expenses)
-----
8,000 (net profit)
(less 1,600 corporation tax)
-----
6,400 (after CT)
+ 400 (VAT balance)
-------
6,800 (available to be paid as dividends)

Is this correct in even a basic way?

Many thanks

Thanks (1)
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By jcace
to Mondamo
22nd Sep 2017 10:35

There is no VAT balance. You will have charged £2,000 VAT and (say) reclaimed £400 VAT, so will owe/have paid the £1,600 to HMRC.
When you charge VAT, you receive that money, but then have to pay it to HMRC, so no gain or loss to you.
When you pay VAT on expenses, you have to pay that to your supplier, but then reclaim it from HMRC; again, no gain or loss to you.

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to Mondamo
22nd Sep 2017 10:35

Instantly.

It's never deducted in the first place and never added back.

If you pay £100+ VAT for an expense, you deduct £100 from your profits.

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By Mondamo
to lionofludesch
22nd Sep 2017 10:53

All received and understood.

Many thanks for your time and patience everyone.

I was unable to ask my accountant as we have just had a massive falling out over the latest of many negligent mistakes he has made with my accounts and company filing.

I will be enlisting someone new very soon but needed to understand my VAT position beforehand so many thanks once again to you all.

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22nd Sep 2017 09:33

"Earn" input tax ?

You're fundamentally misunderstanding the nature of VAT I'm afraid.

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22nd Sep 2017 10:05

Your understanding is so off you need to see an accountant. You don't understand VAT, fundamentally, so there is no minor aspect that anyone here can clear up for you. Not being critical, just realistic.

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By Briar
22nd Sep 2017 17:24

You are not understanding what VAT means! Value Added Tax - i.e. a tax on value added.

Gross up your figures, then work out the value added and tax it at 20%.

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