When you complete a tax return for your company, you will be asked for your turnover. This tax return will be submitted to both HMRC and Companies House, so it’s important that you get it right. However, many company directors are left with the same burning question: does turnover include VAT?
In this article, we’ll explain both VAT and turnover, giving you the answers that you need to complete your company tax return accurately.
Is VAT included in turnover
The simple answer here is no, VAT is not included in your company’s turnover. Turnover is commonly referred to as sales, and is the total amount that you bill to your customers, without VAT.
Read on to learn why VAT isn’t included in turnover, along with how to calculate your company’s turnover.
What is VAT?
VAT, an acronym for Value Added Tax, is the tax that is charged on many goods and services. The standard rate of VAT in the UK is 20%, and around half of products purchased by households is subject to this rate.
When you see a price in a shop, VAT will have already been added and you will be paying it without even noticing. Some products are exempt from VAT, including most food, children’s clothing and newspapers and sanitary products.
Who pays VAT?
Currently in the UK, every company that has (or expects to have) a turnover of more than £85,000 during a tax year is legally obliged to register for VAT. Companies can also voluntarily register under this threshold. The threshold for VAT is set to remain at £85,000 until 31 March 2024, when it will be reviewed and possible altered.
However, it isn’t the company that pays the bill for VAT. The VAT is added onto the product or service that the company offers, with the customer footing the bill. This VAT is then paid to HMRC on a quarterly basis – so it is never the property of the company. That’s why VAT is not included in turnover.
Can you reclaim VAT?
Companies which are registered for VAT are able to reclaim any VAT that they pay on business-related goods or services. You can also reclaim a proportion of VAT on purchases which are partly used by a business and partly used privately, for example a mobile phone.
VAT is reclaimed by completing a VAT return. To reclaim VAT, you must keep accurate records, including valid VAT invoices.
What is turnover
Turnover is the top line of your business’ profit, taking into account all forms of income. However, this excludes VAT as the money does not belong to the company – it is the property of HMRC.
The Companies Act of 2006 defines turnover as “the amount derived from the provision of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes”.
This means that turnover is the total amount that you bill to your customers, without trade discounts or VAT. Therefore, your turnover includes anything you bill for shipping and expenses, before you take away any commission or PayPal fees.
How is turnover calculated
Turnover is quite simple to work out. Every type of accounting software should have turnover built in so that you can quickly see your figures. Alternatively, it’s easy to work out turnover in Excel – simply add up the total value of all of your sales, excluding VAT.
However, in the UK, companies are able to choose between two different types of accounting: simplified cash basis accounting and traditional accounting. The accounting method that you use will have an impact on how you calculate turnover.
If you’re using traditional accounting, your turnover will include all sales that your company has earned in the financial year, whether or not they’ve been paid for.
Alternatively, simplified cash basis accounting means that turnover will only include the money that actually enters the bank during the specified period. Simplified cash basis accounting excludes any money which has been earned in the specified period but has not yet been paid.
Why is turnover important?
Business owners need to understand their turnover so that they can be aware of how it translates into profit. If you know what percentage of your turnover results in profit, you can work out what your turnover needs to be to meet your target level of profit.
If your profit is low in comparison to your turnover, you can then look at ways to reduce your costs This could include renegotiating contracts with suppliers or reducing your business expenses.
By consistently monitoring your turnover and profits, you can keep track of both your income and expenditure and ensure that your business is running as efficiently as possible.
If turnover doesn’t include VAT, what is VAT taxable turnover
VAT taxable turnover is the total value of sales related to products or services which are subject to VAT. This means that you should deduct any income from VAT-exempt products or services before calculating your VAT taxable turnover.
Income which is exempt from VAT includes:
- Income earned through providing financial services
- Income earned through rental properties or the sale of buildings
- Goods or services which are considered VAT exempt (eg children’s clothing, sanitary products, many food products)
If you’re unsure about whether your income is subject to VAT, it’s always best to check with an accountant.
If your VAT taxable turnover exceeds the VAT registration threshold (currently set at £85,000), you are legally required to register for VAT. This means that you’ll need to charge your customers VAT which you then pay to HMRC.
Does turnover take expenses into account?
A common mistake that people make is to think that turnover takes expenses into account. The only thing that can be deducted from turnover is VAT. Your company’s turnover should include any other money that comes into the business, including money paid by customers for shipping costs.
What is the difference between turnover and profit?
It’s important to understand the difference between turnover and profit. They’re both important measures for your business, but they should not be confused with one another.
Turnover is your total business income, including everything that comes into your business except for VAT. This includes any shipping costs that a buyer pays. Turnover can also be referred to as the net sales figure.
Profit, on the other hand, means your earnings that are left over after expenses have been deducted. However, it’s important to note that there are two different types of profit: gross profit and net profit. Gross profit is the total sales minus the cost of the goods or services. This is also known as the sales margin. Net profit is the figure left over after all expenses have been deducted.
So, turnover is the total income of the business, whilst profit takes expenditure into account. No matter how good your turnover is, you can’t run a successful business without the profits to back it up.
How to keep track of your business turnover
Keeping track of your business turnover can help you to see how your business is performing. Comparing this against your profit can help you to identify where cost-savings can be made to reduce expenses and maximise your profits.
Most types of accounting software will enable you to easily keep track of your business turnover. Popular examples of accounting software include QuickBooks, Xero, and Sage.
Alternatively, you can easily keep track of your business turnover in Excel, by simply calculating the sum of all money coming into your business. However, be sure to exclude VAT from your turnover figure.
Is VAT calculated on profit or turnover
The cost of VAT is calculated on a transaction level, against the cost of your products or services. For example, if you sell a t-shirt for £10, the VAT cost will be £2.
You’ll need to register for VAT when your annual VAT taxable turnover reaches (or is expected to reach) £85,000. Your VAT taxable turnover includes everything that you sell that is subject to VAT, excluding items which are exempt.
Who pays VAT buyer or seller?
VAT is paid by the person buying the goods or services. The seller is responsible for calculating and collecting that VAT, which is then paid to HMRC on a quarterly basis. The standard rate of VAT in the UK is currently 20%. However, some items are exempt from VAT, such as children’s clothing, sanitary products and most food products.
Is turnover more important than profit?
Turnover and profit are equally important, for different reasons. Turnover allows you to see how much money is coming into your business, whilst profit offsets business expenditure against your turnover. The most successful businesses will measure both turnover and profit so that they can consistently see how their business is performing and where improvements can be made.
Turnover does not include VAT. It is the sum of all business income, excluding VAT. This is because VAT doesn’t belong to the company. It is taken from the customer and must be given to HMRC on a quarterly basis.
Turnover and profit are different measures, which have equal importance. Turnover relates to the income that comes into a business, whereas profit takes into account expenditure to work out how successful a business is. Both measures are equally important and should be continually measured by a business for the best chances of success.