VAT question

I am trying to get my head round VAT for a project I am working on, and have managed to confuse myself when it comes to the VAT.

To keep it simple (like me) lets assume:

Product sells for £280 including VAT, therefore the VAT content is £80 (output VAT)

That product cost £120 including VAT, therefore the VAT content is £20 (input VAT)

The HMRC will be expecting £60 (the difference between the input and output)

So, does that make the profit £160? or does it make it £120 (£100 net cost, plus the £60 the HMRC are expecting?); really confusing when you think that without the VAT involvement it would be purchased for £100 and sold for £200??

 

This is why I have a accountant!

 

The real pain in the rump here is that I am trying to design a database that will take into account variable rates of VAT, both input and output, and show the proprietor a profit margin for each job.

I feel really thick being stumbled by VAT in this way, but I am really struggling to get my head around it.

 

Fair enough @pete

You can bet your bottom dollar that even if the tax system were to change, it would be equally as complex. The more I am thinking about it, the more I am thinking that it would be £120 in my example above - net cost & VAT that would have to be paid to HMRC.

 

I have it set to be variable per order or purchase, so the cash values will adjust appropriately. If there is a variance within the order or the purchase it will be split across however many records are needed -- this is quite an unlikely scenario in the industry I am looking at. It is generally full VAT or No VAT; the other bonus is that there is a relatively small range of products/services and expenditure items.

The actual VAT returns will still be handled by the company accountant - the work I am doing is to give the proprietor an early warning type view so that they have a reasonable idea where they are at any point in time, and will (hopefully) prevent any nasty shocks come VAT return time.

 

I think I have it now. The reason that HMRC are looking for the difference between the input and output VAT is because the business will already have paid the input VAT on purchasing its raw product/service (or parts thereof). So, to use my figures above, as follows:

Raw Cost £100 + VAT @20% = £120 (VAT component is £20)

Sold for £280 including VAT @20%, therefore the VAT Component is £80

Difference between input and output VAT = £60, therefore:

£280 - £60 (VAT) - £120 (Raw Cost + VAT) = £100 Gross profit.

 

OK - not overly sure I am following you @longk (bearing in mind that I have to translate this into software with a variable rate also); where does the 6 x 5 come from?

Maybe best to put it another way, based on the changes I have made since initially posting - another example:

Sale £890 + VAT @20% = £1068 (£178 VAT)

Costs £672 inc VAT @ 20% (so £560 net, £112 VAT)

Difference input to output £66

Therefore Gross Profit = £152

How would that work with your method?

 

Thanks @longk - that makes sense now, and in short that is what I have arrived at this afternoon. I have a specific field that captures VAT paid and another for VAT received - this will link in with a further expenditures table which will also capture VAT paid, and via a query will return the total VAT paid, VAT received and thereby the difference due to the tax man - - - hopefully, this will make the accountants job a bit easier also.

Somewhat frustratingly, I am having to set this up as a non-VAT registered system to start with as they are currently not over the threshold, but given the moderately high value of each sale I do not see it being too long before they are VAT registered, and therefore I don't want to have to revisit too much of the design to enable then to move over. I think I have cracked it this afternoon though.

As is always the way with these things, the bugs won't be shaken out until it is put into full operation

EDIT - @CanadianLori - thank you too; that is essentially what I was trying to get my head around earlier. Mrs C opened a bottle of a nice Polish Plum Vodka earlier which seems to have helped the fog clear