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Adam Hunt
Adam Hunt, Accountant
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I have a VAT question. I am a director of a company which is

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I have a VAT question.I am a director of a company which is approaching the threshold for VAT registration so I think I should do it now.I do not understand something. If I do sales of £12,000 including VAT and I make purchaes of £6000 including VAT over the quarter then at the end of the quarter the VAT man takes £1000.00.However, sitting in my company's bank account is £1000.00 Is that £1000 subject to corporation tax? I need to know for my financial planning purposes.Thank you

Hi I am one of the experts. 12k sales and 6k purchase then yes payable VAT is £1k. This is the standard VAT calculation based on 20%.

VAT is the balance sheet item so you do not take this vat to profit and loss account. You take Net Sales without VAT to P&L for calculation.

Hope this has answered your question?

Customer: replied 2 years ago.
If I understand you correctly, by not taking that £1000 to the profit and loss account, the company does not pay corporation tax on it. If I understand you correctly, however, that £1000 remains on the balance sheet and is thus an asset of the company. If that is correct, is the company free to use that £1000 for whatever it wants?

No i am afraid you are wrong on Asset side of affair.

£2k were credit and £1k was debit. So £1k was the liability that you pay VAT to HMRC. So in the end this account balance is 0.00.

Customer: replied 2 years ago.
Sorry. I still don't follow. £2000 of VAT as a result of sales. £1000 paid out as a result of purchases. £1000 paid to HMRC. £1000 sitting in a bank account - can the company use that money as it pleases for any lawful purpose? Does that £1000 sitting in a bank account attract tax.

Just imagine, you have got sales of 12k and purchases of 6k. On sales you have received 2k and paid 1k on purchases. Now how much money have you got it hand? Answer: £1k. Now this 1k is sitting in your bank account. You will pay this £1k to HMRC as is your VAT liability. Once you have paid to HMRC then you will have no money left. Hope now you are clear?

Customer: replied 2 years ago.
It really is my fault. I will try and explain my question another way. Whenever my company receives money, it immediately transfers 20% into a separate bank account which I call the "tax account". When tax is due, it is paid from that tax account. Now aas you can imagine, If the company has £100k of sales, I would have put £20k into that tax account. Throughout the year it has say £50,000 of expenses so will only pay tax on £50,000 being the profit, so for argument's sake it pays £10k to HMRC in corporation tax from the tax bank account. There is then £10,000 which can be used as the company wants because it's paid tax on it. If I did the same with VAT I am physically going to have the cash and because physically there is cash is that taxed or just, as it seems from what youer' saying, a "bonus".
Sorry if I'm not getitng it.

It is alright dear. May be try requesting a phone call so that I can explain to you. VAT and corporation tax are two different tax regimes. In VAT account normally balance, in the end, is zero because once liability is paid to HMRC then there is no money left. Please do read my earlier example again and it will clarify the situation.

There will not be any money left in the end, please read it again,

Just imagine, you have got sales of 12k and purchases of 6k. On sales you have received 2k and paid 1k on purchases. Now how much money have you got it hand? Answer: £1k. Now this 1k is sitting in your bank account. You will pay this £1k to HMRC as is your VAT liability. Once you have paid to HMRC then you will have no money left. Hope now you are clear?

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