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Hey! Any finance/accountant types in the forum that can help would be appreciated.
My partner runs a succesful small house plant business, she buys from a supplier and then resell in a space in a cafe. They process the sale through their tills and then pass the money on monthly. They've asked her to put up prices to cover their VAT and supply invoices showing it. We're under the impression that we will pay VAT if necessary at the end of the year ourselves, so there shouldn't be a need for them to do it as well and we don't really want to increase prices....I'm no expert in this! Also think we pay VAT when we buy from the supplier. Anybody able to clarify how VAT works in this situation, who's responsible for what?
Thanks!
This is a tricky one, but if the garden centre is processing the payment then they will have to pay VAT on any sales where VAT is applicable (as they are obviously going to be over the VAT threshold). So if they sell a plant for £9.60 they have to pay £1.60 VAT (assuming it is applicable - I have no idea if it is on plants). If your wife is selling to them at £9.60 (without VAT as she is not registered) and is expecting £9.60 back, the garden centre is losing £1.60 per sale. If she is selling them at £5 then the garden centre is making £3 on each sale so it's up to whatever agreement they two parties have in place.
She can't supply invoices showing VAT if she isn't VAT registered - that is fraud.
She can't reclaim VAT on purchases unless she is VAT registered.
I suggest she registers for VAT - it'll be easier all around as she can reflect the fact she can reclaim lots of VAT back and this can be reflected in her wholesale price.
Remember she can claim for lots more than just the raw materials - anything connected to the business that attracts VAT can be reclaimed - a new desk, a phone etc etc.
Thanks for the reply, very useful. So their not making any money at all, the deal we had was that we install plants in their space (the cafe) and can sell them from it, and they just process the sale through their till. I guess that's now got complicated by them paying Vat on all their transactions which now include ours. We assumed we'd pay VAT on all our sales ourselves at end of year tax return stuff.
If they’re processing it, and then paying you, I assume you are invoicing them for how much they tell you they’ve taken from selling your plants?
You have a decision to make. Put your prices up to cover VAT and possibly lose sales. Or keep prices the same but now inc VAT and hope you can make some of it back when you reclaim the VAT on your supplies; bearing in kind that any other cost associated with the business are now VAT reclaimable eg fuel, any IT stuff, a bit of work-from-home allowance, work clothing, the list goes on...
Either way, IMO you should be VAT registered anyway as should any business where you’re buying something, adding value and selling on. Labour only businesses are normally better VAT free (under the threshold) as they’re more competitive and it keeps things simpler.
There are plenty of cheap cloud based accounting systems that will do all her VAT stuff for her - so there’s no need for it to be daunting.
Awesome thanks, that really helps. She is VAT registered so all above board, just working out the logistics about who does what. Your reply clears loads up thanks. Just need to work out how a bike can be used for the business and claim the vat back on it!
If you are already VAT registered all invoices should include VAT number and VAT amounts even if zero rated.
In theory you have been a bit naughty.
I doubt HRMC will investigate but by the sound of it you have been including VAT (money that should have been paid to HMRC) in you net profit position and in theory they could ask for it back
Thanks All, no worries on the naughtyiness grounds, it's a business that's pretty much just started and grew quicker than expected. Everything logged and tracked so we can pay VAT as and when necessary, which is what were working through now. Thanks for your help :).
!
So as she is VAT registered it changes everything - she really needs to recalculate any invoices / payments to allow for the VAT element (remembering everything she has bought and sold will likely to have had VAT included). It sounds like neither of you are that financially astute so I suggest you find a local book-keeper to go through everything for you and you might well find that you are owed some £££££ from HMRC especially if you have had any start-up costs such as office furniture, laptops, phones etc. Remember that *anything* associated with the business can be accounted for through the business for both VAT and tax purposes (for example, if she made £30,000 in a financial year but spent £10,000 on furniture, uniforms, laptops, mobiles etc then she would only be liable for tax on £20,000).
Regarding the bike - you can't buy a bike through the business (technically) but she can - as long as she can prove it is used to commute to work. If you were an employee of the business you could get a bike via the Bike To Work scheme though.
AND... If she is VAT registered, do you know the return dates? You are expected to provide HMRC with quarterly (I don't know if this is the same rule for all VAT schemes such as flat rate) - and if you miss a return you may be penalised (a percentage of the VAT return value).
Not lecturing, as the tax man never gets my income tax unless I've had at least one vaguely threatening letter 😆 but don't let yourselves get behind (or even caught out) on VAT. As much as they'll hassle you for a bit of income tax, they'll properly do you for messing up your VAT.
As johndoh says, you need to go back through ALL invoices and take out a sixth of each as that would have been the VAT component - get it together and give it to HMRC before they come looking for it. Obviously, after subtracting all the VAT you've paid out for stuff associated with the business.
Thanks All, no worries on the naughtyiness grounds, it’s a business that’s pretty much just started and grew quicker than expected. Everything logged and tracked so we can pay VAT as and when necessary, which is what were working through now. Thanks for your help :).
Mmm... she has though even unwittingly (and totally needlessly). If she's vat reg - she will require to make quarterly returns, its not something you fix at year end. HMRC run beginners VAT courses. If she's got in a muddle already then really she needs to get some accountancy guidance or eventually HMRC are going to slap penalties on that might kill the business (or financially ruin her if not a Ltd co).
the tax man never gets my income tax
The tax man is a pussy cat and usually a reasonable being, the VAT man is another kettle of poisson. (There are some scary individuals employed in VAT).
Very much this. Income tax? They might not give you pudding. VAT? They will come & smash your teeth in so you can never enjoy pudding again...
They will come & smash your teeth in so you can never enjoy pudding again…
Pffft, that's why rice pudding was invented, no teeth needed.
Is pudding an allowable expense for VAT?