Should VAT be included in your Turnover Figures?
A frequent question pops up with new start-ups and its to do with VAT. Whilst my focus is on businesses turning over from £350,000 to £10,000,000 plus, I thought it was worth writing an article to explore this awkward topic.
I'm not an accountant and don't know you (unless of course you are an old or current client of mine), so please double check with your accountant first on where you stand with VAT.
- Should VAT be included in turnover figures?
- Does the flat rate scheme make a difference?
- If I'm on cash accounting for VAT does that make a difference?
VAT Quick Answer
- VAT should not normally be included in turnover or costs when looking at your sales or purchases.
- If you are on the Flat Rate scheme you will need to understand what your flat rate scheme percentage is.
- Being on cash accounting should not make a difference.
Introduction and a Story:
VAT is one of the most awkward, difficult and at times, headache inducing taxes!
You as the business owner or entrepreneur may not get involved directly with accounting for VAT but I believe its worthwhile trying to explain it because once understood it will stand you in good stead for the future.
Background to VAT
VAT started in 1973 and replaced something called Purchase Tax. The difference was that Purchase Tax was a tax on the manufacturing and distribution of products rather than retail. What kicked it off was the UK joining the European Union.
VAT is an indirect tax linked to the purchase and consumption of value-added goods and services.
In theory all would be well because things like Food have zero VAT except it's not that easy!
For example, and according to
"Food and drink for human consumption is usually zero-rated but some items are always standard-rated. These include catering, alcoholic drinks, confectionery, crisps and savoury snacks, hot food, sports drinks, hot takeaways, ice cream, soft drinks and mineral water.
Restaurants must always charge VAT on everything eaten either on their premises or in communal areas designated for their customers to use, such as shared tables in a shopping centres or airport food courts.
In addition, restaurants and takeaway vendors must charge VAT on all hot takeaways and home deliveries, but do not need to charge VAT on cold takeaway food unless it’s to be eaten in a designated area.
Certain animals, animal feeding products, plants and seeds also qualify for the zero rate, but only if the conditions in the following VAT notices are met, however products packaged as pet food are standard-rated".
So, that's easy then!
If you are baffled that makes two of us, but it gets worse, because cakes and biscuits have been to court!
Is it a Biscuit or is it a Cake?
"In the eyes of UK law, biscuits and cakes are necessities and are zero-rated. However, chocolate-covered biscuits are regarded as a luxury, which means the full rate of VAT is payable.
For reasons that are not entirely clear or logical, no distinction is made between chocolate-covered cake and cake without a chocolate coating.
All this might have passed us by as a quaint aspect of British legal thinking if McVities, the makers of Jaffa Cakes, had not gone to court, arguing that their product was a cake. To prove its case, McVities baked a special 12-inch Jaffa Cake which persuaded the court of its cake-like properties. As a result, no VAT is charged on Jaffa or other, more traditional chocolate covered cakes.
An equally eccentric VAT rule applies to gingerbread men. No VAT is charged if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable. So, it’s cheaper to buy no-chocolate-frills gingerbread men".
Hopefully you will start to understand that VAT can be incredibly complex and it's up to you to understand all these complexities. Because if you don't understand them HMRC has the law on their side, and they can and do get quite aggressive from time to time.
Your Business VAT and Cash-Flow
Hope you have stopped chuckling because there is one more thing I want to say.
Be careful with all that cash going through your cash registers because it's not your businesses nor is it yours.
There's a saying which goes something like this - Turnover is vanity, profit is sanity and cash-flow is reality. And most time's I would agree with this sentiment but be careful.
If you are a retailer, a café, or a restaurant, you will normally be handling lots of cash, or credit card transactions. If you are registered for VAT, much of your sales is likely to have VAT added.
Please be careful to allocate what portion of all this cash is attributable to VAT because if you don't you might be in for a shock!
As you sell your products and services it will seem as though you have plenty of cash to pay suppliers, staff wages, PAYE and so on. Well, you do have plenty of cash but some of it isn't yours.
VAT is normally paid each quarter and yet your business is likely taking cash every day. If you forget to allocate for your next VAT payment and set aside cash to pay it, you may end up with a big problem. One minute everything is going along okay until you realise you no longer have enough cash to pay VAT or some other tax like PAYE.
In conclusion, please understand that VAT is a tax which needs to be allocated, your friendly accountant should be able to help you. Don't include VAT in your turnover or costs because they are not part of your profit and loss.
Be aware of the cash-flow trap because it can be deadly
If you are on a Flat Rate Scheme, you need to check with HMRC to determine what rate you need to allow for. Limited companies is I believe a flat rate of 16.5% but please double check with HMRC or your accountant https://www.gov.uk/vat-flat-rate-scheme