Value Added Tax

VAT is a tax on consumer expenditure and is ultimately paid by the final customer. Most business transactions involve the supply of goods or services and VAT is payable if they are made:

  1. In the UK;
  2. By a taxable person;
  3. In the course or furtherance and are not specifically exempted or zero-rated.

Special rules apply to the supply of goods or services either within the EC or the rest of the world. VAT can also be involved on the import of goods into the country.

VAT is allocated by HM Customs and Excise on a return made by a business and is normally payable or repayable quarterly.

Registration

There are two different types of registration - compulsory and voluntary.

Registration becomes compulsory if:

  1. the value of the taxable supplies at the end of one month in the period of one year then ending had exceeded the registration limit of £61,000.
  2. at any time there is reason to believe that the value of your taxable supplies in the next 30 days will exceed the £61,000 limit.
  3. a business carried on by a taxable person is transferred as a going concern. The taxable supplies for the twelve months prior to the transfer exceed £61,000.

As in (1) the person must notify Customs & Excise of the liability within 30 days of the end of the month in which the value of the taxable supplies first exceeded £61,000. If for example, the value of the taxable supplies first exceeded £61,000 in the twelve months to 31 March, then Customs and Excise must be notified by 30 April and VAT registration would commence on 1 May.

Voluntary

It is possible to register on a voluntary basis in certain circumstances even though the value of the taxable supplies may not exceed £61,000. This is normally only beneficial where the majority of supplies are being made to customers who are themselves VAT registered.

The other situation in which a voluntary registration might be beneficial is where the supplies are all zero rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from Customs and Excise, with a few exceptions.

There are numerous advantages and disadvantages to registering voluntarily as follows:

Advantages Disadvantages
Enables input VAT to be reclaimed.

A VAT number can give the impression that the business is in fact larger than it is. 		Your are required to prepare VAT returns on a quarterly basis and submit them within one month of the quarter end. Thus involving more work and ensuring that the details are correctly accounted for.

You may be subject to 5 yearly visits from Customs and Excise to ensure that VAT is being accounted for properly. Any anomalies may be subject to charges or penalties.

Taxable Supplies and Taxable persons

Taxable supplies

Taxable supplies are all supplies that are made by a business either to a third party or trader himself (good for own use) which are not exempt supplies. Taxable supplies therefore include zero-rates supplies though VAT is not added.

The major categories of exempt supplies are:

  • Land (but not buildings) but under special circumstances there can be VAT consequences
  • Insurance
  • Postal services
  • Betting, gaming and lotteries
  • Finance
  • Education
  • Health & welfare

It is important that at the outset of a business, a trader establishes the VAT status of any supplies being made to avoid mistakes. This can be complex, so great care and attention must be taken until you are clear how these affect your business.

Tax Rates

There are three rates of VAT:

17.5%, 5% and zero rated. There is a special composite rate for small business and agriculture.

The 4 main areas of zero-rated goods are:

  1. Food and agriculture (excludes most catering and pet food)
  2. Printed material, including books and newspaper
  3. Young children's clothing & footwear
  4. Transport (excludes parking, taxis & hire cars)

Any VAT charged by the business, whether at 17.5% or 5% is known as output VAT and the total charge collected in the VAT quarter is payable to Customs & Excise, less the VAT paid.

Input VAT

This is the VAT that you are charged on your business purchases and expenses (the other persons output VAT) and is normally recoverable in full by a trader who only makes standard or zero rated supplies.

Although most input VAT is recoverable there are special rules for the following:

  • Imports & exports
  • Cars
  • Petrol supplies for private use
  • Business entertaining
  • Goods sold under a VAT second-hand scheme

In order to reclaim the VAT you have been charged, you must hold evidence that you have received a taxable supply, which is normally a valid VAT invoice from a supplier showing his VAT number and the amount of VAT charged.

VAT - Problem Areas

As VAT has become more complicated over the last twenty years, there are instances where it is not possible to calculate 7/47 of the sales income (7/47 is the easiest method of calculating VAT that is included in the total price). Assistance may be required in the following areas:

  • Importing & exporting - either within or outside the European Union
  • Partial Exemption - Where a business makes some exempt supplies
  • Retail scheme - where both zero rated and standard rated supplies are made
  • Land and property
  • Cash accounting
  • Self supplies
  • Second hand schemes for motor cars, boats, horses, ponies and others

Penalties

Penalties that businesses should be aware of are as follows:

  • Late registration penalty for not registering for VAT at the correct time. The penalty increases depending upon the lateness of the registration and is based on a percentage basis of the VAT due between the date of registration and the date you were required to register.
  • Surcharges are made for traders that are late in either submitting the VAT returns or payment of the VAT due.
  • Reclaiming VAT due if in excess of certain limits relating to the size of your business activity.

VAT CHECKLIST

Registration

a) Should the business be registered?
b) Is the basis of registration correct?
c) Are details on the registration certificate correct?

Preparation of returns

a) Has the return been received? If not then obtain a duplicate from the VAT office.
b) Review sources of the information.
c) Prepare draft return.
d) Make payment (if output Tax exceeds the input Tax)

Input Tax

a) Do any restrictions on the input tax exist?
b) Check invoice additions and calculations.
c) Is input tax claimed at the earliest tax point?
d) Are all claims supported by invoices and receipts?

Output Tax

a) Are all potential income sources (sales etc) covered by VAT the accounting system?
b) Is VAT captured at the correct tax point?
c) Is VAT correctly applied, where appropriate?

Many of our clients prefer to ask Mitchells to help prepare their VAT returns as part of our general bookkeeping services.

For more information, call us on 0113 274 3496 or email Clare Bruce at info@mitchellsgroup.com.

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