23d (edited) • Sales Level
VAT - are you spending money that doesn't belong to you?
VAT (Value Added Tax) is a tax on spending.
It gets added to the price of most goods and services in the UK.
The “value added” bit means VAT is collected in stages as a product moves from raw materials → manufacturing → distribution → retail/service — without taxing the same value again and again.
Quick history: the UK introduced VAT in 1973.
It replaced older purchase taxes and became a major way the Treasury funds public services.
Here’s why it is important to understand VAT.
✅ If you’re VAT registered, you’re basically a tax collector for HM Treasury.
You collect VAT from customers, reclaim VAT on what you buy, and pay HMRC the difference.
Let use Brake Pads as an example:
1) Raw materials supplier
Sells materials to the manufacturer for £100 + VAT (£20)
The supplier charges VAT and later pays HMRC (after their own costs).
2) Manufacturer
Sells finished pads (pack of 10) to a buying group/distributor for £200 + VAT (£40)
Output VAT collected: £40
Input VAT paid: £20
Pays HMRC: £40 − £20 = £20
That’s VAT on the value added by manufacturing.
3) Buying group / distributor
Sells the pack of 10 to the motor factor for £240 + VAT (£48)
Pays HMRC: £48 − £40 = £8
4) Motor factor
Instead of the garage buying a pack of 10 sets, the factor only sells them 1 set for £30 + VAT (£6).
Output VAT collected by factor: £6
Input VAT paid by factor (from buying group): £48
In this simplified example, the factor would reclaim more VAT than they collect on this one line item — in real life their VAT position is balanced across all the stock they sell and their actual margins/credits.
5) Garage (parts + labour to the customer)
You fit the pads and invoice the customer, for example:
Pads (your selling price): £60
Labour: £60
Total: £120 + VAT (£24)
Your VAT position on this job:
Output VAT collected from the customer: £24
Input VAT paid when you bought the pads: £6
VAT you owe HMRC on this job: £24 − £6 = £18
Final customer
The customer is the only one who can’t reclaim VAT, so the VAT cost ultimately lands with them.
Summary (read this twice)
VAT is not your money.
It looks like money because it hits your bank account with your takings… but it belongs to HMRC.
If you’re spending the VAT portion to cover wages, stock, rent, or a quiet week, you’re not “using cash flow”…
You’re borrowing from your next VAT bill.
Best practice: skim a % of takings daily/weekly into a VAT pot, so you stop accidentally spending money that doesn’t belong to you.
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VAT - are you spending money that doesn't belong to you?
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