I recently came across a client, who is a second hand car dealer and wanted to know which VAT scheme will suit him the best.
As a business men, while you are looking to make profit, you have to make decisions that will improve your cash flows. There are different ways to account for VAT which will save you time, money and cash flows.
Normally you charge VAT on your sales and reclaim VAT on your purchases. However, if you are in second hand business for example you sell second hand goods, antiques or collectibles, there won't be any VAT for you to claim when you bought them. Here, HMRC gives you the option of using a VAT margin Scheme.
Under Margin Scheme, you will pay VAT on the margin that is the price that you paid for the item and the price at which you sell it.
For example, the total price that my client paid for the cars bought in an auction and some purchased personally was £ 13000, in some cars he made a profit and some were sold for a loss, however, the total selling price was £ 30000.
The VAT will be calculated on the profit margin.
VAT will be calculated on this value
VAT (16.7%) = 2,839
While you are using the margin scheme you can however, still use standard VAT on the other sales and purchases such as overheads.
IF however, you were using a standard VAT return, you would be paying VAT on the total selling price of £ 30,000.
IF you are dealing in second hand cars, it is important that you keep all the purchase invoices. The purchase invoice will help with the following:
- The date on the purchase invoice will help to establish that the purchase is related to the relevant VAT quarter
- It will confirm the purchase price.
- It will confirm the VAT on the extra charges which can be reclaimed.
- It will also help you figure out the buying premium price which should be accounted for appropriately.
In the same way, sales receipts should be kept and all the details of the sales and purchases should be recorded in the Stock Book. Under MTD these records will be kept digitally.
To understand what the stock book should contain go to the website: https://www.gov.uk/vat-margin-schemes/keeping-records
I always advise my clients to keep a record of the receipt of any cash purchases, or any VATable expenses that they incurred for which they paid in cash. These expenses which can include painting and renovation of the car can be reclaimed and therefore the total VAT liability can be reduced.
For Margin Scheme, you do not have to register, you can use it anytime, however you have to keep proper records and you have to report it in the VAT return.
For more advise on Submitting the marginal VAT return digitally, feel free to contact Taxaccolega at 02081270728.