If a company is VAT registered, then no, VAT is not included in its turnover. Turnover is the common term for sales, and its overall sum is the amount that has been billed to customers without VAT. VAT is added afterwards at whatever rate it’s set, usually 20%.
To find out more about taxable turnover and VAT, read on.
What Is VAT?
VAT is an acronym for Value Added Tax, and it’s a tax that the government has set against goods and services to pay for various public services. The standard VAT rate in the UK is 20%, and around half of all products purchased by households are subject to this rate. Under certain circumstances, this rate is lowered or outright exempt, such as for food, children’s clothing, newspapers, sanitary products etc.
For VAT compliance, it is important to adhere to Making Tax Digital (MTD) regulations, which require the use of HMRC-approved software for digital record-keeping and online submission of VAT returns. As with most things digital, this allows taxes and VAT records to be more efficient in record keeping and executive functions.
To register for UK VAT, businesses need government login credentials and a unique taxpayer reference.
Who Pays VAT?
If your VAT taxable turnover exceeds the VAT registration threshold (currently set at £90,000), you are legally required to register for VAT. Businesses are expected to monitor turnover, and when it is determined the registration limit has been surpassed, complete VAT registration. That being said, companies can also voluntarily register under this threshold.
The company must charge VAT for their products and services, but they are not the one who pays – it’s the customer. This VAT is then forwarded to the HMRC every quarter, meaning that the VAT amount is already owed to the HMRC upon purchase. It’s for this reason, the fact that VAT is never the company itself, that VAT is not included in turnover for the last tax year.
Failing to register on time can lead to penalties for late registration.
Can You Reclaim VAT?
Companies which are registered for VAT can reclaim the amount for business-related goods and services. You can also reclaim a proportion of VAT on purchases which are jointly used for business and personal purposes, such as a company mobile phone or laptop.
VAT is reclaimed by completing a VAT return. To reclaim VAT, you must keep accurate records, including valid VAT invoices.
What Is Turnover?
Turnover is the total value of your business’ profit across all income streams, excluding VAT – as this is considered monies owed to the HMRC.
The Companies Act of 2006 defines turnover as “the amount derived from the provision of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes”.
Turnover is quite simple to work out. Accounting software typically has turnover built in for quality-of-life purposes, but in situations where this isn’t the case, you can easily work it out using Excel spreadsheets. Simply add the total value of all sales excluding VAT through a simple formula.
What Is Taxable Turnover?
Taxable turnover refers to the total value of taxable supplies made during business activities, and it is essential in determining the business liability to register VAT.
What Is VAT-Taxable Turnover?
VAT taxable turnover is the total value of sales for products or services which are subject to VAT. Businesses must register for VAT if their total VAT taxable turnover has exceeded the VAT threshold.
Income which is exempt from VAT includes income earned through providing financial services, rental properties or building sales, and goods or services listed by the government as exempt.
Does Turnover Take Expenses Into Account?
No, expenses do not count. The only thing that can be deducted from turnover is VAT. Your company’s turnover should include any other money that comes into the business.
VAT Returns And Payment Of VAT
VAT returns must be submitted quarterly, and payment must be made at the same time. The deadline for submitting VAT returns and paying VAT is one month and seven days after the end of the relevant period. Businesses can submit their VAT returns online through the HMRC website and pay VAT using various payment methods, including online banking or debit/credit cards.
It is essential to comply with VAT rules and regulations to avoid penalties and fines. Businesses must keep accurate records of their VAT transactions, including invoices and receipts, and ensure that they are registered for VAT if their taxable turnover exceeds the registration threshold.
What Is The Difference Between Turnover And Profit?
Turnover is your total business income, including everything that comes into your business except for VAT. This includes any shipping costs that a buyer pays. Turnover can also be referred to as the net sales figure.
Profit, on the other hand, means your earnings that are left over after expenses have been deducted. However, it’s important to note that there are two different types of profit: gross profit and net profit.
- Gross profit – This is the total sales minus the cost of the goods or services, also known as the sales margin.
- Net profit – This is the figure left over after all expenses have been deducted.
So, turnover is the total income of the business, whilst profit takes expenditure into account. No matter how good your turnover is, you can’t run a successful business without the profits to back it up. Businesses must monitor their turnover to determine if it exceeds the VAT threshold, which mandates registration.
Conclusion
VAT can be a confusing thing to understand, but so long as you remember one thing, it should be easy to make heads or tails of it – it belongs to HMRC. All VAT you charge is not yours, the second the figures pass through your accounting software, you have taxes owed to the HMRC. Ensure you have account managers who are well-versed in taxes, as HMRC takes its tax collection duties seriously.
FAQ: Is VAT calculated on profit or turnover?
The cost of VAT is calculated on a transaction level, against the cost of your products or services. For example, if you sell a T-shirt for £10, the VAT cost will be £2.
You’ll need to register for VAT when your annual VAT taxable turnover reaches (or is expected to reach) £90,000. Your VAT taxable turnover includes everything that you sell that is subject to VAT, excluding exempt items.
FAQ: Who pays VAT buyer or seller?
VAT is paid by the person buying the goods or services. The seller is responsible for calculating and collecting that VAT, which is then paid to HMRC every quarter. The standard rate of VAT in the UK is currently 20%. However, some items are exempt from VAT, such as children’s clothing, sanitary products and most food products.
FAQ: Is turnover more important than profit?
Turnover and profit are equally important, for different reasons. Turnover allows you to see how much money is coming into your business, whilst profit offsets business expenditure against your turnover. The most successful businesses will measure both turnover and profit so that they can consistently see how their business is performing and where improvements can be made.
FAQ: How do you keep track of your business turnover?
Most types of accounting software will enable you to easily keep track of your business turnover. Popular examples of accounting software include QuickBooks, Xero, and Sage. Additionally, registering for VAT online through government platforms is necessary, and businesses must comply with Making Tax Digital (MTD) for VAT requirements.
Alternatively, you can easily keep track of your business turnover in Excel, by simply calculating the sum of all money coming into your business. However, be sure to exclude VAT from your turnover figure.
