VAT or Value Added Tax is this week topic of I Hate Numbers. In the UK alone VAT raises £136.6 billion. This is approximately £4,800 for each household, 17% of the total UK tax take.

The majority of countries have VAT or sales taxes, so VAT is a big deal.

In this episode we are going to look at what VAT actually is. What's the role of a business that's involved in VAT? How does VAT affect your prices? We may even volunteer to be VAT registered and be involved in the system. 

Value Added Tax

VAT is a tax that's charged on taxable supplies of goods and services, by a taxable person, during the course of a business. Forget the language of sales and purchases, it's all about supplies! 

Taxable supply

The episode looks at what a supply is and describes the three types of supply:

1. Exempt supplies
2. Outside of the scope of VAT. 
3. Taxable supply 

Taxable supplies and then broken down even further into two subheadings. 

Zero-rated supplies.

These are taxable, but the rate is zero! Typically children's clothing, newspapers, most food and medicine. 

Standard rated supply

This is the catch all category. Anything that is not exempt, outside of the scope of VAT, or Zero-rated is a Standard rated supply. The headline UK rate is 20%  

Taxable person. 

A taxable person is a business that is required to be registered for VAT. So, what do the legislators mean by "required to be registered"? There are two forms of registration. 

Compulsory registration.

Based on values of supplies. That is the right type of supply. Once you are registered for VAT, your role is effectively an unpaid tax collector and administrator. You have a responsibility, not by choice, but one that's imposed on you. Charge VAT correctly, keep the relevant records and collect the VAT from your customers.. 

If you do not follow the rules, then you will be fined, get penalties and at worst you can be prosecuted. 

Voluntary Registration

It sounds crazy. Why would a business wish to volunteer ti be an unpaid tax collector and administration. Get it wrong and you could be fined, pay penalties and interest.. 

Have a listen to the episode to find out more about voluntary VAT registration.

Takeaway

So in summary VAT quite a scary tax. You are the tax collector, the administrator, and if you are selling largely B to C, then VAT will represent a price hike for your customer. But also, VAT represents an improvement in your profit trajectory in your business direction. So look at that as a positive. 

Take action!

Value Added Tax impacts you business and you. Listen to this podcast episode, learn about more about how Value Added tax affects your business.

Grab a drink, make yourself comfortable, sit back and listen.

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Get in touch with us to find out more about VAT.  For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks, and welcome to this week's episode of I Hate Numbers. It's the show that doesn't want you to fall out with your numbers, rather get closer to them, understand them, get a bit more friendly, make money, survive, and thrive. This week's episode is about taxation, more specifically, about VAT. We're not talking vodka and tonic, rather we're talking value added tax.

Now, I'm not going to get involved in the details of VAT, rather give an overview, and you might be thinking to yourself, well, why do I as a business need to worry about VAT? Let me give you some eye-watering statistics. In the UK alone, VAT raises 136.6 billion pounds. That's a lot of zeros. That's a lot of money.

That accounts for approximately 4,800 pounds for each individual household. Approximately 17% of the total tax take that the UK government takes. Now, in context, if you compare it to the rest of the world, the vast majority of countries around the world have a system of VAT or sales taxes. So, this is important to understand and know.

In this week's episode, we are going to specifically look at what VAT actually is. What's the role of a business that's involved in VAT? How does it affect your prices? And bizarrely, there are circumstances where you may actually wish to volunteer to be involved in the system where you don't have to.

Sounds bizarre. Well, let's get on with the show and find out more. In this podcast, I'm going to focus on the UK situation. One thing you will find though, is that all countries that are involved in VAT, that have VAT as part of their tax system, the rules are very similar. So, if you're listening outside of the United Kingdom, there's some fantastic takeaways for you in this episode.

The primary purpose of this episode is to present a framework of VAT and its operations, introduce some terminology, some language that are used by the people in the VAT world. A natural question to ask is, what exactly is VAT? VAT is a tax that’s charged on taxable supplies of goods and services by a taxable person during the course of a business.

Those are specific terms used in the rules about VAT. Now, let's unpick them and see what they actually mean. One of the first phrases that I used in that sentence was taxable supply, which is, I didn't use the word sales because in the context of VAT, a supply can be when you rent something, when you provide services, even when you give things away with no money changing hands, that can still be categorised

as a taxable supply. In the context of what we are referring to here. Think of it normally as selling something, but could also apply when you give something away or when you are hiring or renting something. Now, in the world of VAT, there are three types of supply. Bear with me as we go through them.

Number one, is something called an exempt supply. So, if your business is selling insurance products, postal services, or financial services, what you are providing is what's called an exempt supply. What that means is that your business, your trade, you cannot register for VAT, and if you cannot register for VAT, any VAT that you might be charged by another supplier, you cannot get that back.

Category number two are those transactions that are outside of the scope of VAT. Typically, the payment of wages, the payment of dividends, payment of taxes effectively are outside of the scope of VAT. Lastly for everything else, anything else that's not categorised as exempt, anything that's not categorised as outside

the scope is categorised as a taxable supply. We mentioned taxable supplies and they in themselves are broken down even further into two subheadings. So, bear with me as we go through these next two categories. There are what are called zero-rated supplies. So, if your business involves selling baby clothing, newspapers, food, and medicine, then you are making a supply,

but the amount of VAT that's going to be added to those items is going to be zero. Anything else that doesn't represent an exempt supply, is not outside of the scope of VAT, and is not zero-rated, then that is what's called a standard-rated supply. And what that means is that if you are registered for VAT, and your goods or services are classified standard-rated, then 20% is added to the price of your goods and services.

Let's recap what we've said so far. So, within the idea of taxable supplies, we've said there are three main categories: suppliers that are classified as exempt, insurance, postal services, outside of the scope of VAT, payment of wages, dividends, and taxes, and the taxable supply, typically selling baby clothing, newspapers, food, and medicine will be classified as zero-rated.

If we revisit the initial description of VAT, I talked about taxable supplies, which we've looked at by a taxable person. Now, this is a bit of a circular definition, and a taxable person is a business that is required to be registered for VAT. So, what do the legislators mean that required to be registered?

There are two forms of registration. There is one that is compulsory i.e. you have no choice over the matter, and the second one is where you volunteer to be registered. Why somebody would want to do that? Sounds a bit crazy. We’ll pick up later on in the podcast. Let's talk about compulsory registration and what does it mean.

What's the implications of registering for VAT? Based on current UK limits, if your business has a turnover over the last 12 months of 85,000 pounds plus, then you have no choice and you must register for VAT. And remember, that turnover is based on standard-rated or zero-rated supplies. So, if your business provides training courses, for example, and over a last 12-month period, it's generated more than 85,000 pounds worth of business,

tick the box. You have to be registered. If your business is an insurance company and that's all you provide, then you don't register irrespective on what the level of turnover is. If your business is one of retailing food, then once it triggers 85,000 pounds a year plus, so you could be a bakery, then you have to register for VAT.

What does that actually mean? Well, once you are registered for VAT, your role is effectively an unpaid tax collector and the administrator. So, you have a responsibility, not one by choice, but one that's imposed on you to charge VAT at the appropriate rates, to keep the relevant records of the VAT, and to collect the tax from your customers of the VAT that you charge them.

Now, VAT is a bit of a seesaw tax. Let me use my own business as an illustration. I provide services to a client. I work out how much I'm going to charge that client, let's say for an argument's sake, it’s a thousand pounds. I will bill that client a thousand pounds. I will have to add 20% VAT to that and the client

then has to pay me 1200 quid of which 200 pounds is what I have to pay over to the government. Now, it's a seesaw tax because I'm likely to have bills as well to running my business. It'd be great if I didn't, but that's going to happen. So, other suppliers will provide goods and services to me. I will pay their bills, and if they charge me VAT, I have to pay that as well.

So, let's imagine in a typical period of time, I've charged my customers 200 quid. My suppliers would charge me, say, 50 quid worth of VAT. I compare the two numbers. What I have is a situation where I've collected 200 pounds from my customers. I've paid out 50 pounds worth of VAT to my suppliers. The difference is 150 pounds, and that's the amount of money that I have to pay over to the government.

Typically, for most businesses in the UK, you have to complete a VAT return. Once a quarter, so every three months a form will be completed showing how much VAT you've charged your customers, how much VAT you paid out to supplies. The difference is either paid over to the government, or if in a particular period of time

you've not sold anything or not sold a great deal, but you've bought a lot of goods, you've paid for a lot of services, and you've paid out more VAT than you've collected, then you will get a refund back from our friends at HMRC. We talked about compulsory registration, that situation where you trip and reach that magic threshold, then you must register for VAT.

Take note. Anything to do with taxation, if you do not comply with the rules, then you'll be fined. You will incur penalties, and in a worse case situation, if you're being really, really naughty, you can be prosecuted. Let's talk now about voluntary registration. It sounds crazy. Why would a business wish to enter a system where they've got administration responsibilities?

They've got to collect the taxes, they've got to make sure their records are up to speed. If they get it wrong, they will potentially be fined. They will pay penalties and interest. So, why would somebody wish to enter such a system on a voluntary basis? Let me give you the upside of why it can pay to voluntarily register for VAT.

Number one, you can create that impression that your business is larger than it actually is. It may make an impact on your customer base. Number two, you will be able to get back the VAT that you're paying on goods and services, which can be a benefit for your cash flow. Number three, you can prevent any future problems when the limits are exceeded.

So, remember, it's your responsibility as a business to keep an eye on that rolling 12-month turnover. Once you go over the limit, you have to register within a certain period of time. If you don't, slap on the wrist, and a penalty will ensue. So, you may think, do you know what? Life is easier if I register and I don't have to keep an eye on what's going on on my turnover.

Number four, I find really beneficial. It imposes a discipline on your business to keep accurate records. And on previous podcasts we've talked about good records equals good information, good way to manage your business, so therefore that's a good thing. And lastly, you can make more profits. How? Well, let's find out.

We're going to find out by looking at an illustration and let's throw some numbers in there just to make life more interesting. For this example, we're going to look at Serena, who is currently a non-VAT registered builder. Now, Serena has two types of clients. She's got business clients for which she does building work, and she's got consumer clients, individuals, members of the public for which she also does building work.

Currently, when she does her job, she charges 600 pounds for her services and she's got costs to the tune of 120 pounds, so she makes a profit of 480 pounds. Pretty good. Now, if she decides to register for VAT, first of all, she'll have to add 20% to the price of her services, so when she does work for her business client, the bill to them will be 720 pounds.

She will have collected 120 pounds worth of VAT off that customer. Now, the materials and the goods that she buys in has cost her 120 quid. Let's assume that there's VAT in that bill, so that's 20 pounds that she's paid over to her supplier. Now, if she works out how much VAT she's got to pay over, that's 120 pounds she's collected.

That's 20 pounds to the supplier, and that's a hundred pounds that gets paid over. And the way it'll work is Serena will make a profit now of 500 quid. Not bad. That's effectively an increase of what she had before. Now, when it comes to her individuals, other category of client, the consumer, the individual,

Serena's got a tough decision to make here. Now that she's VAT-registered, if she adds 20% to her price, that means the individual will pay 720. Now, because the individuals cannot be VAT-registered, that represents a big price hike for them. And Serena might think, actually, I'm going to price myself out of the marketplace.

So, she may decide initially to absorb that VAT. So, she still charges 600 pounds to that customer. Now, unfortunately, when it comes to paying over the VAT, the 600 quid will include VAT. She has to pay that out of, effectively, her profit margin. Consequence of that is that Serena will suffer a profit reduction.

If you are selling B2B and those business-customers are VAT registered, you will make more profit if you're selling B2C, which is the acronym for business to consumer, where those individuals are not registered, or you might be providing services to a charity, which also isn't VAT-registered, then your profit margins will drop if you don't increase your pricing accordingly.

So, what can we say in summary. VAT is potentially quite a scary tax. You are the tax collector, the administrator, and if you are selling largely B2C, then potentially VAT will represent a price hike. That's assuming that you put your prices up. That's assuming you can't find efficiency gains in your business.

But for me, also, VAT, if you have to register, represents an improvement in your profit trajectory, in your business direction. So, look at that as a positive thing here. So, ladies and gentlemen, I hope you've got some value out of this podcast. If you check the show notes at the end, there's an illustration of the numbers that we talked about earlier.

Hope you love the show. Give us some feedback. Have a listen, leave a review, and have a great week ahead. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.