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VAT - where supplier is exempt

VAT - where supplier is exempt

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VAT query

If my supplier - either goods or services or both - supplies me goods/services and they are exempt from VAT due to the fact the suppliers total turnover is less than £77k pa and I sell their goods/services on to a customer can I account for the VAT on the VALUE ADDED ONLY?

EG - I employ a carpenter to make a cabinet for my customer.  The carpenter is not VAT registered and charges me £1,000.

I am VAT registered and sell the cabinet for £1,500 plus VAT to my customer

Is my VAT - £300 being £1,500 x 20%

or

Is my VAT - £100 being £1,500 less £1,000 cost - ie £500 x 20% - ie VAT on the VALUE ADDED

I have a lot of business like this and currently account for the VAT at the £300 level.

Also I am after the relevant legislation reference if anyone point me to the legislation as well

This query does not relate to Margin Scheme on second hand goods/antiques etc - I understand this scheme.

This query does not relate to Imports from EU countries etc - I understand VAT in these instances.

Thanks in advance for any help

Replies (23)

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By Peter Bonetti
07th Feb 2014 14:51

£300

The cost to you is immaterial and you add VAT to your selling price. I won't get into 2nd hand goods and margin schemes but that's the answer.

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By Peter Bonetti
07th Feb 2014 14:52

Oops, read the question fully!!!!

As it says. Sorry.

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By Peter Bonetti
07th Feb 2014 14:55

VAT Act 1994 para 19

That states you add VAT to the consideration.

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Replying to lionofludesch:
By Steve Kesby
07th Feb 2014 15:27

Peter

Peter Bonetti wrote:

That states you add VAT to the consideration.

Doesn't it say that the consideration includes VAT (ie price + VAT = consideration)? :)

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By bro0010
07th Feb 2014 15:17

At the risk of confusing matters

If you think through a scenario where A sells to B who sells to the Joe Public you'll find that B has acted as the conduit for the total amount of VAT collected from Joe Public and remitted to HMRC.  Everything else is just matching ins and outs.

If you are B and A charges you VAT then you'll pay A £1,200 and your input VAT will be £200 (£1,000 x 20%). Your output VAT will be £300 (£1,500 x 20%).  A pays his £200 VAT he collected from you to HMRC. You claim the £200 VAT you paid to A back from HMRC and pay the £300 you collected from Joe Public over to HMRC.  At the end of all of this you are neutral in terms of VAT, Joe Public has suffered £300 of VAT and HMRC has £300 in its coffers 

If you are B and A doesn't charge you VAT because he isn't registered then you pay A £1,000 and your input VAT is £0.  Your output VAT is £300 (£1500 x 20%). You pay the £300 you collected from Joe Public over to HMRC.  At the end of all of this you are neutral in terms of VAT, Joe Public has suffered £300 of VAT and HMRC has £300 in its coffers. 

I hope this helps.

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By Wonders of Paper Work
07th Feb 2014 15:41

Thanks to both

In bro0010 's response - I am however £200 more expensive when selling to Joe Public if I charge the VAT on at £300

 

Thanks for all your help

 

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Stepurhan
By stepurhan
07th Feb 2014 16:53

More expensive

You are correct in saying you are more expensive to Joe Public. However, you are no more expensive than any other VAT registered trader. If Joe Public wants an equivalent cabinet cheaper, he is going to have to go to a smaller business that hasn't had to register for VAT.

This is why your customers are a consideration when you are in a position to choose whether to register for VAT or not. If they are VAT-registered themselves then you becoming VAT registered is only a cash-flow issue at most (if they have to pay the VAT included in your bill significantly in advance of claiming the offset) The registration decision solely comes down to whether it would leave you better off. If most customers aren't VAT registered, you have to take into account loss of custom due to a 20% increase in prices, or lower margin if you keep your prices the same, but now treated as VAT-inclusive.

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By ruth.julian
07th Feb 2014 18:42

Your supplier is not exempt

Exempt supplies are a distinct category for VAT and include some financial and insurance services, property and funeral director charges.  In your example, your supplier is not liable to register for VAT as the total value of their sales is less than the registration threshhold for VAT.  Another common confusion is between zero-rated (a rate of VAT) and exempt.

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Euan's picture
By Euan MacLennan
09th Feb 2014 10:59

Possible solution to your problem

Get your cabinet maker to bill your customer direct for the £1,000 without VAT which he would otherwise have charged to you. You can still charge your mark-up of £ 500, plus VAT of only £100, as part of your overall bill.

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By shaun king
09th Feb 2014 13:27

mmmmmmm

The cabinet maker has to charge the customer for the £1500 or £1800 with no VAT charged. Then the intermediary charges £500 or £800 as a commission to the cabinet maker accounting for 1/6th VAT. If you pursue this route make sure the contracts reflect the reality!!

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Replying to Sarah Newland:
Stepurhan
By stepurhan
09th Feb 2014 18:29

Also check the figures

shaun king wrote:
The cabinet maker has to charge the customer for the £1500 or £1800 with no VAT charged. Then the intermediary charges £500 or £800 as a commission to the cabinet maker accounting for 1/6th VAT. If you pursue this route make sure the contracts reflect the reality!!
The figures you have for the cabinet maker are the figures including the OP's markup. The figures for commission likewise make no sense, since the VAT inclusive figure would only be £600 (£500 + 20% VAT) not £800.

Since Euan has already made the same suggestion, and used correct figures for the commission, this isn't exactly helpful.

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By shaun king
09th Feb 2014 19:07

What?

There are no correct figures for the commission £100 is the retail sale value inc VAT. The commission can be whatever the OP decides to charge - so helpful is a decision for the OP I assume.

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Replying to buttercup books:
Stepurhan
By stepurhan
10th Feb 2014 08:50

Correct figures are in the OP

shaun king wrote:
There are no correct figures for the commission £100 is the retail sale value inc VAT. The commission can be whatever the OP decides to charge - so helpful is a decision for the OP I assume.
With all due respect, there are correct figures because the cost and proposed charge to the customer are in the OP. I would also point out that your figures were based on those figures in the OP but using both the wrong recharge for the cabinet purchase and for the VAT-inclusive amount for the markup as given. If your point was that you could charge whatever commission you like, then you both should have said so, and used different figures. To instead use the opening figures incorrectly, and make no mention that this was to show you could charge different commission, is needlessly confusing. Their misuse of the term VAT-exempt makes it clear the OP is not an accounting professional, so it is beholden on us to give clear easily understood answers.
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By Wonders of Paper Work
10th Feb 2014 09:29

OP?

Sorry what does OP mean?

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Replying to deFoix:
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By Trevski
10th Feb 2014 11:05

Original post(er) I think

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Replying to lionofludesch:
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By Wonders of Paper Work
10th Feb 2014 17:08

Thank you

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By cathroberts1
13th Feb 2014 11:49

Other person

I thought that OP meant "other person". I have been thinking that for ages !! Back to the calculator for me..............

 

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By Dave P
13th Feb 2014 12:13

In the scenrio described, the cost to you of the cabinet is £1000; if your supplier was VAT registered the cost to you would have been £1000 +£200 VAT - £1200. As you are VAT registered you would have reclaimed this £200 VAT, making the cost to you £1000.

When you sell the cabinet for £1500 + £300 VAT, the customer pays the final amount of VAT due on this supply - ie. £300.

In this case, you have not been required to pay and account for £200 on the purchase of the cabinet and the final customer pays you the £300 VAT due on the sale. The £300 is payable on the VAT return meaning that you are not out of pocket.

 

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By Peter Bonetti
13th Feb 2014 13:40

Exactly Dave

It's really that simple.

I'm wondering how many accountants it takes to change a lightbulb. :-)

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By Wonders of Paper Work
13th Feb 2014 14:21

Thank you

Dear All

Thank you for your comments - I appreciate I am not out of pocket.

However, as noted above, I was looking at the effect on pricing to the end customer and being able to sell for £1,500 + £100 VAT (being 20% of £500 value added) - is cheaper to my end customer than selling for £1,500 + £300 VAT (being 20% of the total selling price).

This makes the cabinet at £1,600 - 11% cheaper for the end customer and the tax man is happy as the £100 he receives is on the value added.  I'm happy as I have sold a cabinet and the customer is happy has they have a cabinet 11% cheaper.

All the best

Wonders of Paper Work

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By Peter Bonetti
13th Feb 2014 14:50

Ok, sell at £1600

. but your net sale becomes £1,333.33 and your profit £333.33.

Your use of the present tense might suggest you still think it is possible to add VAT to your margin alone.

In your proposal the tax man isn't happy because you've done him out of £200 and there is no effect on pricing for the end customer because you cannot do what you propose.

Apologies if I've mis-read your last post.

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By reggiep
13th Feb 2014 15:44

So, if there is a fault with the cabinet, where is the final customers redress?

If he has entered into a contract with "OP" then "OP" has sold the cabinet and charges VAT on whatever the price is, any problem he deals with it, even though that may mean going back to the cabinet maker on his own behalf.

If he is acting as an agent for the cabinet maker, then he charges VAT on his commission. Anything wrong with the cabinet, in the end the final customer goes back to the cabinet maker.

It is the reality of the contracts that matter. You may be able to dress it up and get away with it, but that does not change the true position.

 

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By Peter Bonetti
13th Feb 2014 16:10

The Clapham omnibus

The very first words the OP posts are 'if my supplier'. This rather makes the OP the principal from that point on I would argue.

I would think that most people buying furniture would aways see their contract as being with the seller, the person in front of them at the time.

Of course there may be circumstances where you might set yourself up as agent but HMRC could look through contracts to determine the truth behind them but I think that's more than we ned to do here.

The OP thinks he's the principal and so that is as far as that argument goes. He incurs a cost without VAT and has to charge VAT on his supply at whatever the selling price is (minus the VAT).

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