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I'm VAT-registered. Suppose I buy something related to the business on credit (3% for 24 months) for £3000 (£2,500 ex-VAT plus £500 VAT). (These amounts are totally made up.) The payments are £128.94/month. How do I account for this on my VAT returns?

Specifically:

  1. For the return covering the period of the purchase:
    1. What do I list for the VAT of the purchase (Box 4)?
    2. What do I list for ex-VAT expenditure re the purchase (Box 7)?
  2. For the returns covering the repayments
    1. What do I list for the VAT of the purchase (Box 4)?
    2. What do I list for ex-VAT expenditure re the purchase (Box 7)?
    3. How do I account for the interest portion of the expenditure (£3.94/mo, also Box 7)?

Do I amortize? E.g.:

  • VAT: £500 / 24 ~= £20.83 / month
  • Expenditure: £3.94 (interest) + £104.17 (£2,500 / 24) = £108.11 / month

...for both the first return and the subsequent ones?

That makes sense, so I assume it's not what I do. :-/


(I wrote this on hold with HMRC late Friday. Sadly our connection was dropped after the end of hours, and they aren't back until Monday morning. I'm hoping someone can point to the relevant pages on https://gov.uk or similar so I can get most of the work done this weekend before confirming [if I still think I need to] with HMRC on Monday.)

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  • Have you borrowed £3,000 from a third party (which may have been arranged through the supplier) which you have paid to the supplier and are now repaying in instalments, or have you got credit terms from the supplier letting you pay for the item in instalments? – Mike Scott Aug 3 '19 at 6:25
  • @MikeScott - A third party. – VAT Guy Aug 4 '19 at 9:21
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How do I account for this on my VAT returns?

First, your accountant should know - you should not rely on the internet to answer business specific questions.

Second - in one go. Write down (depreciation) and financing are not VAT relevant. You claim the VAT on the purchase as you purchased it. I.e. immediately in the full amount.

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  • Thanks. But what about Box 7? We are paying out monthly, which is expenditure, how do I account for that? – VAT Guy Aug 4 '19 at 9:20
  • @VATGuy Your monthly expenditure here is a loan repayment, not the purchase of a VATable product. – Mike Scott Aug 4 '19 at 16:36
  • @MikeScott - Thanks. That makes sense to me. So I reclaim all of the VAT on the return when the purchase was made, but only record any up-front cost or payments that occurred in the same quarter as expenditure. On subsequent returns, there is no VAT to reclaim, and the expenditure is the loan repayments. That's quite logical -- which makes me somewhat skeptical. :-) (I'm kidding.) – VAT Guy Aug 4 '19 at 17:13
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I was able to confirm this with HMRC this morning. Naturally, this is only current as of this writing, I am not an accountant, and barring a really good reason, you should use an accountant for accounting.

The answer depends on whether you're using the Cash Accounting scheme or the non-Cash Accounting scheme.

On the Cash Accounting Scheme

You spread it out across the returns as you make the payments. You pro-rate the VAT for Box 4 and the ex-VAT cost for Box 7 (excluding interest, because interest isn't payment for goods or services). So £500 ÷ 24 = £20.83, and £2,500 ÷ 24 = £104.17.

So, say you do this toward the end of the quarter and only one payment is made within the quarter:

  • For the first one-payment quarter:

    • Box 4: £20.83
    • Box 7: £104.17
  • For the next seven returns, where there are three payments per quarter:

    • Box 4: £62.49
    • Box 7: £312.51
  • For the final return, they'd be two payments in the quarter.

On the non-Cash Accounting Scheme

You account for it all on the return containing the tax point, and it doesn't appear on any other returns from that point forward.

  • For the return containing the tax point:

    • Box 4: £500.00
    • Box 7: £2,500.00
  • For subsequent returns:

    • Box 4: £0.00
    • Box 7: £0.00

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