Friday, January 30

Value Added Tax

I've spent the last couple of days doing my VAT return. So I thought I'd cover a bit about why I'm voluntarily registered for VAT and what it entails. I'm not sure how this works in other countries, and hence how useful it'll be to readers from overseas - but I think it's pretty similar throughout Europe at least.

VAT is a sales tax that is supposed to be charged when it's sold to a personal customer (rather than another business). It's charged on almost everything, and when you buy something in a store that is mostly used by personal customers it's usually included in the price you see advertised (and not really mentioned). In the UK its recently been cut from 17.5% to 15% in an attempt to boost our faltering economy.

When a VAT-registered business sells to another VAT-registered business the price is shown as 'ex. VAT' (the actual price) and 'inc. VAT' (the price they pay). That's right - VAT registered businesses pay the same price as a personal customer. So why register for VAT? First there's a legal obligation: if your turnover is over a certain threshold (currently £67K in the UK) then you have to register. My turnover is nowhere near that - so why did I register?

The idea behind VAT is that it's only really paid once - by the end consumer. Everyone else in the supply chain charges it on their sales (outputs) and pays it on their purchases (inputs). But the two cancel each other out. Each quarter you submit a VAT return to HMRC, telling them how much VAT you charged on your outputs and how much you paid on your inputs. You then pay them the difference (if you charged more than you paid) or get a rebate (if you paid more than you charged). It's a bit more complicated than that, but that's it in a nutshell. If you're VAT registered you're only really paying the ex. VAT price on purchases (saving you the 15% extra for VAT which you claim back) and you're only really charging the ex. VAT price on your sales, and taking the extra 15% on behalf of HMRC.

Since this is reducing your costs, and your customer's costs (they're only really paying your ex. VAT price) it seemed like a good idea. Sure, when you sell directly to a customer (e.g. at a convention or for pre-orders) the VAT comes out of that, but you're making a decent margin on those (almost) MSRP sales anyway.

Being VAT registered means you've got to keep your books up-to-date (which you should be doing anyway) and you've got to keep a VAT account - a record of all your sales and purchases, including how much VAT you've paid and charged. It's an added faff, but when you're making the occasional large sale to a distributor it's not too onerous. Admittedly, when I've a hundred or so individual pre-orders going out over a few days it's a hassle, but again: margins!

I've spent the last few days doing accounting-type things since the deadline for my latest VAT return (Oct-Dec '08) is tomorrow and the deadline for my income tax return for last year (April 6th 2007 to April 5th 2008) is also tomorrow. I did the income tax return first (in the UK you don't normal have to do them, since income tax is usually taken out of your wages automatically). The VAT return was Wednesday afternoon & evening and all day Thursday's work. First I had to bring my books up-to-date (bad Jackson - no banana!). I'd left off doing November and December, which was mostly due to November being a big job due to the Carpe Astra pre-orders. Once that was done I needed to fill in the VAT return. It's a simple form (nine boxes, two of which are calculated for you!), but my VAT account (which I do in OpenOffice Spreadsheet) was a bit too simplistic. It worked fine for the previous return, but this time I'd bought some things in the EU (Carpe Astra) and sold some things to the EU (my new European distributors and a few shops at Essen). There's a few boxes that I'd been able to leave blank last time that I had to fill in this time, and the VAT account took some re-jigging to do that.

Last time I got a hefty rebate, having bought the entire It's Alive! print-run at the end of that quarter, but not sold much yet. This time I owed a lot :-(

In summation then, if you're intending to buy your games in the EU, run your business in the EU and sell mostly to distributors, then I think being VAT-registered is a good idea. Of course, I'm not an accountant, so don't treat anything I've said as gospel!


Mal said...

Are you not using the Cash Accounting VAT scheme to help with cashflow, then?

Mal said...

BTW, if anyone's actually interested(!), here's a page that summarises different UK VAT schemes.

Jackson Pope said...

Hiya Mal,

No. My cash flow is ok, and I figure I might as well do it the ordinary way.



Anonymous said...

I use the Flat Rate Scheme because it requires almost no additional book-keeping. The rate applicable is fairly generous, but that may not be the case for publishing games.

If either of you chaps had predicted, three years ago, we'd be having a future discussion about VAT, I would have laughed - before returning to pulverising mutant scientists with crowbars.

Jackson Pope said...

Hiya Linz,

With lots of my sales going inside or outside the EU (zero-rated) and my purchases also coming from the EU (VAT-neutral) I don't think the Cash Accounting scheme would be such a good deal for me - plus the overhead is not too onerous.