VAT Class 101
So last month, a client asked me where the VAT shows in her profit & loss account.
It doesn’t, I said.
That can’t be correct because it’s a huge expense every quarter.
I was able to explain how VAT works in under a minute and where to find it in her accounts.
I’m pretty sure it did the trick.
I’ll try here:
- VAT belongs to HMRC.
- When you charge it to clients, you collect it on HMRC’s behalf.
- When you pay it to suppliers, you can claim it back from HMRC.
- You offset what you’ve paid against what you’ve collected.
- You then pay the difference between the two to HMRC, typically every quarter. (But can sometimes be monthly or even better yearly - if you would like to know more about yearly, feel free to reach out!)
- All the VAT you’ve collected, less all the VAT you’ve paid, is recorded in a VAT liability account on your Balance sheet.
- Everything you see in your profit & loss account excludes VAT.
Let’s say:
You charged a customer £100,000 + VAT
You incurred expenses of £50,000 + VAT
Your profit & loss looks like this:
Sales £100,000
Expenses (£50,000)
Profit £50,000
Your Balance Sheet looks like this:
Bank balance £60,000 (£120,000 - £60,000)
VAT liability (£10,000) (£20,000 - £10,000)
Net Assets £50,000
Feel free to reach out if you would like to learn more about VAT!
Accounting & Bookkeeping
balance sheet
Cashflow
Tax & Vat Returns
VAT Advice
