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VAT Payments - A Bloody Stupid System

Discussion in 'General' started by Gareth Halfacree, 3 Aug 2020.

  1. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    I'm registering for VAT, and I deeply resent paperwork. So, riddle me this...

    Let's say I have a supplier, and I buy goods from it. I process the goods in some way to increase their value, and sell the processed goods on to my client. The client then turns around and sells them to the general public. All three companies are VAT registered.

    I buy a widget from my supplier for £10. My supplier charges me £12, the £10 widget cost plus £2 VAT. At the end of the quarter, my supplier sends that £2 to HMRC.

    I sell the widget on to my client for £100. My client pays me £120, the £100 widget cost plus £20 VAT. At the end of the quarter, I send that £20 to HMRC.

    My client sells the widget on to an end-user for £200. The end-user pays £240, the £200 widget cost plus £40 VAT. At the end of the quarter, it sends that £40 to HMRC.

    That's three payments to HMRC; HMRC now has £62 in VAT payments.

    However, remember when I said everyone involved except the general-public end-user is VAT registered? That means we can claim the VAT payments we made back. So, I claim back the £2 I had to pay to the supplier; my client claims back the £20 it had to pay to me.

    That's three payments to HMRC, and two payments from HMRC; HMRC now has £40 in VAT payments.

    So... why, for the love of the deity of your choice, do we do that? Four of those are completely unnecessary payments.

    Let's envision a world where VAT transactions make sense: if you're VAT registered, and you're transacting with another VAT registered entity, the VAT is simply zero-rated. Let's go through that process again:

    I buy a widget from my supplier for £10. My supplier charges me £10, pays HMRC nothing.

    I sell the widget on to my client for £100. My client pays me £100, I pay HMRC nothing.

    My client sells the widget on to an end-user for £200. The end-user pays £240, the £200 widget cost plus £40 VAT. At the end of the quarter, it sends that £40 to HMRC.

    That's one single payment to HMRC, no payments from HMRC. Yet, somehow, as if by magic, HMRC still has the same £40 as with the way the system works currently. The only difference is, we saved four annoying and unnecessary bank transfers and a heck of a lot of paperwork and admin.

    Here endeth the rant.
     
  2. BA_13

    BA_13 Active Member

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    Got to love the system, it's the same here in France. However if you order from another EU country and give your TVA number (French VAT) the tax isn't charged at all, this has saved us having thousands of Euros tied up with the tax office in the last couple of years. The advantage of the multiple payments is they have your money for anything up to 14 months here to do with as they please before they have to return it to you sans interest of course.
     
  3. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    Yeah, we have that too - though what happens in January I have no idea. (Also, you're supposed to pay the VAT locally, I believe - so if I buy some Business Wine from France, instead of paying the French government TVA I pay the UK government VAT.)
    Based on what I'm reading - I haven't had to do this yet, 'cos I literally started the ball rolling this morning for registration - here you basically have "input VAT" and "output VAT." In the example above, my input VAT is £2 and my output VAT is £20 - so rather than sending HMRC £20 and receiving £2 back, I just send HMRC £18 and call it even. Likewise, my client sends HMRC £20 - taking the £20 it gave me off as input VAT from the £40 it owes in output VAT.

    Which, okay, means that you're doing fewer transactions - three payments to HMRC still, but none from it this time - but is still more complex than just zero-rating it all bar the final sale to a non-VAT-registered entity.
     
  4. RedFlames

    RedFlames ...is not a Belgian football team

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    Tax doesn't have to be taxing... --HMRC Advert, way back when...

    Lol, hold our beverage --HMRC, in reality.
     
  5. Xlog

    Xlog Active Member

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    Wait, thats not the case in UK?
     
  6. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    Nope. You charge VAT and then they claim it back.

    The VAT *is* zero-rated if you're transacting with a VAT-registered company within the EU but outside the UK... but just to make things fun, the onus is on you to prove that you double-checked the company's registration. (My accountant says the best thing to do is look up the local-equivalent-to-VAT registration number on the VEIS system and take a dated screenshot to prove it showed as valid at the time, then save it next to the invoice. Seamless(!))
     
  7. BA_13

    BA_13 Active Member

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    Not sure about the UK I will admit, we just leave it all to our tax accountants as he French Tax system for farms is a complete nightmare. So far they haven't complained and the Tax office seem happy.
     
  8. Anfield

    Anfield Well-Known Member

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    Basically time is the enemy:

    At the time you purchase 100 thingamaboobies from your supplier you can't provide a cast iron guarantee on what will happen to them (you use them yourself, you sell them on to a VAT registered business or sell them on to an end user).
    You can only do so after you've done whatever you do with the items, so logically your purchase must be treated as the final transaction in the chain (thus making your supplier subject to paying VAT) until the time you generate a further transaction.
     
  9. Pete J

    Pete J Employed scum

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    @Gareth Halfacree
    • VAT is government run - did you really think it was going to make any sense?
    • Civil servants feed on paperwork (not being human and all).
    • Without excess bureaucracy, the masses might find the time to question their government and its structure.
     
  10. saspro

    saspro IT monkey

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    You don't charge VAT, you collect it for the government. You also don't claim anything from them, you deduct VAT you've paid from what you've collected from them (so in your example you would send them £18 rather than pay £20 & collect £2).
    You can also offset other VAT (maybe for goods you're not passing on) to lower what you're sending them.

    Then there's the other "flat rate" systems where you can't claim anything back on your own purchases but you pay the government a smaller percentag of the 20% you charge and get to keep the rest (to help compensate for not claiming VAT on purchases) https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
     
  11. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    That's not my understanding: I can reclaim the VAT paid to my supplier whether or not the widget I bought has actually been sold to my client or is just sat in the corner of my office gathering dust. To quote HMRC: "You can usually reclaim the VAT paid on goods and services purchased for use in your business" - it says nothing about "once you've sold the goods on."

    Granted, this is Day One and a Half of Having to Care About VAT so I'd be happy for you to point me in the direction of a correction to my understanding!
    Well, quite.
    Semantics: the invoice I send is how much I charge my client; they pay me what I charged. Just because I don't keep that money doesn't mean it's not a charge.
    Yes, I know. However, are you aware that HMRC literally refers to that process as "reclaiming VAT" and the paperwork involved as "your claim"? So, I rather think you do claim something from HMRC - and HMRC agrees with me.
    But you're just making my point for me, there: the exact same result would apply if all the VAT-reg-to-VAT-reg transactions were zero-rated, but with a lot less paperwork and without a bunch of unnecessary payments HMRC is never going to get to keep.

    I brought up the Flat-Rate Scheme with my accountant, 'cos getting what is effectively a free humpty-tump percentage boost to my revenue with very little paperwork sounded good to me - but he warned that because I'm not in the business of buying goods and selling 'em on, it's likely I'd be a "limited-cost business" and I'd be on the top 16.5% rate. He reckons that I'll be financially better off just sticking with traditional VAT and claiming back (there's that word again) VAT paid on the services I use.

    Mind you, he would say that, given he's an accountant and I can only assume loves paperwork...
     
    Last edited: 4 Aug 2020
  12. saspro

    saspro IT monkey

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    Some transactions are exempt for B2B where both are VAT registered (well reverse charge VAT technically but). Definitely transactions from Europe on cloud services, Google Adwords etc
     
  13. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    Yes, I know that, too - it applies specifically to transacting with a VAT-registered business within the EU/EEA but outside the UK.

    Which goes to prove my point even further: it's entirely possible to zero-rate VAT-reg-to-VAT-reg transactions, but the government chooses not to do it.

    Reasons that have been suggested to me on Twitter:
    • Stupidity
    • Keeps accountants busy and well-fed
    • Sometimes VAT receipts get lost/forgotten and HMRC keeps the cash
    • If you invoice for £100 cost and £20 VAT, but your client stiffs you - you still owe HMRC £20
     
  14. saspro

    saspro IT monkey

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    Yup, it's overy convoluted to say the least.
    Trying to run the correct VAT returns on 4 companies in the same group with cross charging without it looking like a carousel fraud is "fun" to say the least.

    Although on the plus side, all that new computer kit you want for your office (for work of course), your business mobile & internet etc is now 20% cheaper to the company.
     
  15. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    That is the upside, aye - although I've already done my big desktop upgrade and bought a new laptop, so it might be a while before I see a real benefit! (I know there's a thing about claiming VAT costs back stretching up to four years pre-registration, which I will flag with my accountant - but I'm also aware there's an unwritten "making yourself interesting to HMRC" rule or six, so I'm eager not to rock the boat.)
     
  16. edzieba

    edzieba Virtual Realist

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    If VAT were not accounted at each step of the supply chain, any half-awake accountant could figure up 6 ways to fiddle the government into paying them VAT before they'd finished their porridge.
     
  17. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    Show your working. Anything you could fiddle by charging VAT at 0% when you're both VAT registered (which, I remind you, is exactly what you're supposed to do when the other half of the transaction is outside the UK but within the EU/EEA), you could fiddle by charging VAT at 20%.

    In fact, my way would mean less opportunity to fiddle, 'cos HMRC would never pay anybody any VAT refunds.
     
  18. edzieba

    edzieba Virtual Realist

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    It's because VAT is Value Added Tax. The tax is being charged on the value being added to the 'raw material' (what you buy) and the product (what you sell to someone else). It's not an 'end-consumer tax', it just looks like one from the end of the chain.
    It is not a Sales Tax. Zero-rating VAT for all prior stages defeats the entire purpose of using VAT in the first place. It also makes border-hoping tax avoidance trivial: in an VAT-adjacent-to-sales-tax situation you can do all your I'm-totally-not-a-consumer trading in the sales tax region (no transaction taxation), shuffle over to the VAT region to sell (small fraction of the final tax paid as VAT on final sale), shuffle the profits back to the sales tax region. A zero-rated VAT setup means you can do that truffle-shuffle in the middle of the supply chain too.
     
  19. Gareth Halfacree

    Gareth Halfacree WIIGII! Staff Administrator Super Moderator Moderator

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    It's *supposed* to be, but as demonstrated is functionally a sales tax with extra paperwork.
    But you can do that anyway: as I say, you're *supposed* to zero-rate the VAT for cross-border reg-to-reg transactions across EEA borders.

    Prove me wrong: I've shown you my working, you show me yours.
     
  20. Mister_Tad

    Mister_Tad Will work for nuts Super Moderator

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    And imagine, UK taxes are a wonderful breath of simplicity compared to US ones.
     

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