VAT EXPLAINED IN SIMPLE TERMS

Wayne Bettess  from OFF THE TOOLS

Hello, everybody, my name is Wayne Bettess. In today’s session, I am going to try and explain exactly what VAT is, debunk a few myths and simplify the process. I would like to add, I’m not a qualified accountant. What I’m sharing today is just my interpretation of VAT, and the methods that I use to simplify it, always seek professional advice from your accountant. I have over 10 years of experience running non VAT and VAT registered businesses. So I have got a wealth of experience around this. Hopefully, the information that I share today will hopefully ease some pains that you might have and answer some questions. And ultimately, give you the confidence to move forward and drive your business in the direction that you want it to go.

FACTS ABOUT VAT

I’m going to start off with a few facts about VAT. So the current VAT threshold is 85,000 pounds, that’s your turnover, not your profit, okay? So the basic, it means the sales income comes into your business, if you exceed 85,000 pounds, then you should register for VAT. And that figure is based on a rolling 12 months. It’s not linked to the financial year, it’s a 12-month rolling period.

That can catch some people out because they feel that they might be keeping under that threshold. When in reality, if they looked at the 12 month rolling, they might be over. And there’s penalties and fines and it could cost you a fair bit of money. If you are not aware of that. Most of you that are VAT registered, and will submit our returns quarterly.

That means every three months, you have to compile the information and it gets sent and paid to HMRC as required. One thing that a lot of people don’t know is that you can actually reclaim up to four years on previous purchases, not for like materials that you’ve used. But for things like tools, vans, any stock that you might have that you still hold. It that can actually be quite a nice little kickback that you get.

Don’t Forget…

Make sure you keep the receipts, and it needs to be qualifying purchases. So make sure you do a little bit of due diligence on that. However, you could end up on your first return ended up getting a fair chunk of money come back into the business.

A random fact that you may not know is that over 130 billion pounds were collected last year in 2020. That is just an unbelievable amount of VAT revenue for the government.

Wayne Bettess 

So it is a vital part of the UK economy. And I just thought I’d share that random fact, there is a lot of misconceptions when it comes to VAT.

Okay, some of these are –

• That you will lose a lot of customers
• that you think that you’re going to be 20% more expensive than everybody else around you.
• I’m going to lose income by being VAT registered.

For a lot of people, they’re just scared of the complications and the extra time that it’s going to take to do it.

I’m hoping that over the course of this little session that I’m going to debunk some of these, and at least ease some of the pain points that you might have.

LETS GO

Let’s get started now. I’m going to start off with good old Mrs Smith. You know, we all know Mrs Smith. In the example that I’m sharing on the screen right now, this is for a non VAT registered company. So it’s very, very straightforward. You’ve got in one column, you’ve got your materials. In the other column, you’ve got your labour, and then you obviously have your total price that you invoice your customer. In this case, Mrs Smith. The materials are 1200 pounds, which does actually include VAT, if you’re not VAT registered, you’re still paying VAT on the materials. So just to be clear that you know VAT is on everything that we buy pretty much.

There are exemptions, but I’m not going to go into that in our industry, the majority of the things that we buy are going to have VAT. But when you’re a non VAT registered business, in essence, it doesn’t make any difference you pay the price and that’s the end of it.

Then you’ve got your 600 quid labour. Some will argue that that’s too cheap. I’m just using this as an example. It’s not meant as a pricing discussion. Ultimately that gives us the grand total of 1800 pounds that Mrs Smith will be billed and be happy to pay you guys.

Okay? Nice and straightforward.

You know, everybody when we start out this is basically the model you get your material costs, you get your labour, and you end up with the total price. Now I’m going to share with you for a VAT exam. So if you’re VAT registered, this one is more similar to the journey that you’re going to take. So again, we start off with our materials. What you will notice though, is that I’ve labelled it as materials as 1000 pounds, plus VAT.

For me personally, this is how I price things. I priced the materials, excluding VAT, the labour, excluding VAT, and then add the VAT to get me to the total price. It’s a method that I just prefer to use, it works well for me, and it simplifies the process. So again, 1000 pounds plus VAT, 600 pounds labour plus VAT equals 320 pound lie in VAT, that is due to the HMRC gives us a grand total of 1920. As you can see, this isn’t a 20% rise in your price.

As you can see here, you were 1800 on your total. And now you would be 1920. Okay? And as you can see along the bottom, it says is a 6.7% rise on this example, not a 20% rise, okay? Because this is a very important message here. A lot of people think that it makes them 20% more expensive across the board, and it doesn’t, okay?

In this simple version, you’re only less than 7% more expensive. All right?

Take Note

And I really want to want to emphasize that because a lot of people think that it’s 20%, which is a huge number, but it’s not. Okay? I’m going to break this down a little bit further for you. Okay, so on this simple equation, you currently ovate the HMRC 320 pounds in VAT. But now your VAT registered, you get to offset the VAT that you’ve paid on your materials, which is 200 pounds. So tech at you actually only owe the VAT man 120 pounds. All right. So you’ve collected 320 in VAT, you’ve offset the 200 that is applicable on your materials. And now you are ended up with the figure at the bottom, which is 120 pounds. Okay. But because you’re VAT registered, you can now offset that on lots of different things.

So obviously, your materials are the biggest VAT that you get to reclaim but all your overheads, your marketing, your advertising, any other qualifying business expenses, bands and things like that.

And that has to be factored in, because it basically means that your business is now going to cost roughly 20% less to run. That’s so important to realize, because over the month, over the year, all that VAT adds up, and you’re now getting that back. So it’s not all doom and gloom, it doesn’t mean that you’re out of pocket. In a lot of cases, you can actually make savings and move forward.

Simple Example

I know that was a very simple example. I wanted to start with that purely to simplify, so you could hopefully understand the process involved. And I’m now going to share a bit more of a complicated example. Okay, so this is based on a one week of average trading. It might not be exact, but I’ve tried to sort of have a mixture of jobs in there. So I’ve included three boiler swaps, 10 services, and for repairs.

And as you can see, the top line is your VAT example, if you’re VAT registered. So in this example, you’ve got 3400 plus VAT of materials. You’ve got 2775 plus VAT in labour, which means that you have a VAT collection of 1235 pounds, and that gives a total price that you’re basically you’ve invoiced out to the clients is 7410. Now, below is the non VAT registered example. So you would have 3,400 plus VAT comes to 4080. So you would have had a material costs of 4080. The labour cost would have been 2775, giving you a grand total of 6855. Again, based on a bit more of a complicated example, to try and emphasize the point. Now, on average are around 8% more expensive being VAT registered than you was being non VAT registered. Nowhere near the 20% that so many people think they are.

Wayne Bettess / Off The Tools    

So please, please take that message that you’re not going to be 20% more expensive, as you can see from this example, okay? And I’m going to break that down a little bit more. Okay? So that technically do you’ve collected is 1235, the VAT to offset based on the materials would be 680 pounds. But we can include overheads and other costs, I’ve used an overhead of 600 pounds a week, which gives us a VAT claim, clawback of 100 pounds. So you from that 1235 that you’ve collected, you’ve only technically own HMRC 455 pounds. Okay, so you’ve collected 1235, but you owe the VAT man 455, based on this one weak example.

So in summary, becoming VAT registered, removes the glass ceiling in your business. What I mean by that is, if you constantly try to stay below the VAT threshold, you’re putting a ceiling, you’re putting a fake ceiling, on what your business and what you can achieve, because you’re basically limiting your success.

DO NOT BE HELD BACK

By becoming VAT registered, you’re allowing your business to grow unrestricted. Yes, you’re going to be more, you’re going to be slightly more expensive, but you’re not going to be 20% more expensive. And the customers that you will lose, because of the slight increase in cost, you know, more than likely, will be the ones that will hold you back, if they can’t absorb a little bit of an extra cost for your personal and business growth, you know, are they really the customers that are going to help you build a business that you want.

One of the most important things about being VAT registered is that it’s actually going to make you a better business person because it forces you to stay on top of the finances, in your business and on your accounts, because you have to check them and submit every 3 months, it means that you’re more consciously aware of what’s going on in your business.

Modern Tech makes it easy

Thankfully, you know, modern software like zero QuickBooks, sage, and cash flow, they all make the system that make it work seamlessly, and do all of the hard work for you. So it doesn’t become time consuming, it doesn’t become complicated. The system that you can use, will do majority of the hard work for you.

Becoming VAT registered, is just part of the journey of running a business, do not let it hold you back. You know, it’s like growing up as an adolescent child, you don’t have many responsibilities, but eventually, you’re going to grow up into a young man or lady and your business becoming VAT registered is an important growing-up milestone. It’s something that you shouldn’t be scared of, you’ve just got to embrace it.

Yeah, you might have to learn a little bit, you might have to do a little bit of research on what in more detail on VAT and improve your operations in your business. So you can manage it. But that’s a good thing because that’s growth, and growth is so so important.

VAT EXPLAINED

So that’s pretty much it. It’s a nice, short video. This will have answered and explained some of the questions that you may have had. There’s more to it than this. There are flat-rate schemes, there’s the new VAT reverse scheme for the construction industry. These are subjects that are very vast and not the purpose of this video.

But if you are interested in that. I’m happy to get an accountant on and on my podcast and do a show based around the VAT reversal scheme and the flat rate schemes. And basically, hopefully, give you guys a better understanding of the more technical sides of VAT. Everything that we have discussed today is for the majority of us, what you need to know is nice and straightforward.

Don’t let it hold you back. And yeah, no excuses, guys. Let’s go.