Indirect Tax

Introduction to VAT

VAT is an indirect tax administered by HMRC.

The purchaser who is not VAT-registered bears the cost of the VAT. This is normally a member of the public.

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VAT Basics

Scope of VAT: Taxable supplies - 20%, 5%, 0% - can recover input VAT.

Exempt supplies - No VAT impact - cannot recover input VAT.

Registration: Registration limit - £85,000  Taxable turnover - all 0%,20% and 5%

Deregistration: £83,000

Compulsory:

Past turnover - historic test - check at the end of each month if the total  taxable turnover over the previous 12 months exceeds the registration limit of £85,000.

Future test: each day check if the total taxable turnover for just the next 30 days is likely to exceed the registration limit of £85,000.

Notification: notify HMRC within 30 days of the date of historic test, without delay for future test.

Registration effective from:  Historic test:  start of month following the end of the 30 day notification period

Future test: start of the 30 day period.

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Input and Output VAT

Input VAT - VAT on the purchases of goods and payment of expenses.  Reclaimed by business from HMRC

Output VAT - VAT on the sale of goods and provision of services . Paid by business to HMRC.

Calculation of VAT:

Exclusive amount:   £100.00 x 20% = VAT = £20.00

Inclusive amount:    £120.00 x 20/120 (or 1/6) = VAT = £20.00

Rounding: round down to the nearest penny!

VAT Payable:  Output VAT - Input VAT = VAT Payable/Repayable

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Fuel for Private Use

Fuel for Private Use - irrecoverable.  

Options:

  • keep mileage records so input VAT on just business miles recovered.
  • Reclaim all the input VAT suffered on fuel, but then accont for some output VAT using a set FUEL SCALE CHARGE - based on CO2 emission of vehicle.
  • Agree not to reclaim any input VAT on fuel purchased for any vehicles (including commercial)
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Partial Exemption

NB: TRADERS MAKING ONLY EXEMPT SUPPLIES CANNOT RECLAIM ANY OF THEIR INPUT VAT

If a VAT-registered business makes both taxable and exempt supplies, it is partially exempt.  The recovery of input tax will be restricted, subject to the DE MINIMIS limits.

DE MINIMIS LIMITS - below £625 per month and lower than or equal to 50% of the total input tax for the period.

Partially Exempt Traders:

a) only charge input VAT on their taxable supplies

b) can reclaim the input VAT on all purchases directly related to taxable supplies

c) can reclaim a proportion of input VAT which is not directly attributable to taxable or exempt supplies

Input VAT not

directly attributable to taxable        x           value of taxable supplies made

or exempt supplies                                  total supplies made (taxable and exempt)

 

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Overseas Transactions

Within the EU

Despatch = supply of goods to EU - Sales to EU:

If UK supplier has VAT number of EU recipient - zero-rated 0%

If no VAT number:  Charge applicable UK VAT rate

Acquisition = supply of goods from EU = Purchases from EU

VAT Neutral - UK trader accounts for output VAT at point of acquisition then treated as input VAT (provided tax invoice issued by supplier).

Outside the EU

Sale of goods = Export = Zero-rated 0%

Purchase of goods = Import = HMRC hold goods at point of entry, input VAT paid on value of goods - Input VAT deductible on next VAT return

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VAT Records

Accounting Records: all full records to be kept for a minimum of 6 years.  HMRC can inspect at any time.

VAT Invoices:

A VAT-registered business must  issue a valid VAT invoice within 30 days of making a supply.  It must have the name, address and VAT number of the supplier, purchaser's name and address, quantity of goods, description of goods, charge before VAT, VAT amount and total inclusive amount.

Simplified Invoice

If goods supplied are no more than £250, including VAT, a simplified (less detailed) invoice can be issued, which shows:  only the VAT inclusive amount and the rate of VAT.

If expenditure if below £25, then no invoice is required to reclaim VAT for:

  • telephone calls or car park fees
  • purchases made through coin operated machines
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VAT and Discounts

Two types of discounts:

Trade discounts: given at the time of sale/purchase, the reduce the selling price as an inducement to purchase

Settlement discounts: VAT must be basd on the actual consideration received:

a) Issue the invoice based on the discounted amount and a further invoice for the difference once the discount period has expired.

b) Issue an invoice for the full amount, followed by a credit note if the discount is taken up

c) Issue one invoice, with both possible prices and VAT amounts specified, with clear instructions to the customer regarding recoverability of input VAT.

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VAT and Bad Debts

Can reclaim Bad Debt relief (VAT on bad debt) if:

  • Debt is over 6 months old - from when payment was due, and less than 4.5 years old
  • Debt has been written off in books
  • VAT was originally paid to HMRC

VAT on Bad Debt Relief is claimed as Input VAT in Box 4

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VAT Schemes for Small Businesses

Standard Scheme - automatic on registration

  • Quarterly return
  • Payment due one month and seven days after  the VAT period if made electronically

Cash Accounting Scheme - turnover below £1,350,000 in next 12 months, must exit if exceeds £1,600,000

  • Quarterly return
  • VAT accounted for when cash received/paid

Annual Accounting Scheme - turnover below £1,350,000 and not exceed £1,600,000

  • Annual return
  • Nine instalments due within the year
  • Balance due two months after the year end

Flat Rate Scheme - turnover below £150,000 in next 12 months and not exceed £230,000

  • Quarterly return
  • Simplified VAT payable calculation
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Errors

Small errors adjusted on VAT return

Large errors reported separately.

Deliberate errors - report by contacting HMRC VAT Error Correction Team in writing, using Form VAT 652

Non-deliberate errors:

  • add together to get the 'net' value of errors
  • compare with error correction threshold, which is the greater of
    • £10,000 or
    • 1% of turnover subject to overall limit of £50,000
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Penalties

Careless and Deliberate Errors - a % of lost revenue.  Can minimise by making unprompted disclosure to HMRC

Inaccurate VAT returns - can be reduced to 0 if make unprompted disclosure.  HMRC will permit missing information to be estimated and corrected in the next return.

Late VAT return of payment - 1st time = default - 12 month surchage liability notice period started. If late payment occurs again within this period, surcharge penalty issued and period reset to 12 months.  Penalty is % of VAT unpaid to HMRC.

Failure to register for VAT - penalty based on a % of VAT due from the date registration was due to occur.

Failure to keep records - Where records have not been retained for an accounting period, maximum penalty of £3000 per accounting period.

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Tax Point

Tax Point

Tax point is the EARLIEST of the following:

  • Despatch/goods made available/service completed - BASIC TAX POINT
  • Invoice issued
  • Payment received

If the BASIC TAX POINT is the earliest date, check if the invoice was issued within 14 days of that date.  If so, the invoice date overrides the basic tax point and becomes the ACTUAL TAX POINT.

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The VAT Return

Box 1 - VAT due in this period on sales and other ouputs:

  • The total of the output VAT on sales (credit and cash sales)
  • Less the VAT on any credit notes issued (sales returns)
  • Plus any fuel scale charges
  • Plus adjustments for earlier period 

Box 2 - VAT due on any acquisitions for EU countries

Box 3 - Total of boxes 1 and 2

Box 4 - VAT reclaimed in this period on purchases and other inputs, including acquisitions for the EC.

  • The total of input VAT on purchases and expenses (credit and cash)
  • Less the VAT on credit notes received (purchases returns)
  • Plus VAT on any acquisitions for EU countries
  • Plus Bad Debt Relief
  • Plus adjustments from earlier periods
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The VAT Return

Box 5 - Net VAT to be paid for HMRC or reclaimed by you

  • Box 3 - Box 4

Box 6 - Total value of all sales and all other outputs, excluding VAT

  • Total all sales less credit notes issued (sales returns)
  • standard-rated sales 
  • zero-rated sales (including exports)
  • exempt sales
  • supplies (despatches) to EU member countries

Box 7 - Total value of purchases and all other inputs, excluding VAT

  • Total purchases less credit notes received (purchases returns)
  • standard-rated purchases (including imports)
  • zero-rated purchases (including imports)
  • exempt purchases
  • acquisitions from EU member countries
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The VAT Return

Box 8 - Total value of all supplies of goods (sales) and related costs, excluding VAT, to other EU countries 

Box 9 - Total value of all acquisitions of goods (purchases) and related costs, excluding VAT, from other EU countries.

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