VAT
An
Introduction to VAT
VAT
registered businesses act as unpaid tax collectors and are
required to account both promptly and accurately for all the
tax revenue collected by them.
The VAT system is policed by Customs & Excise with heavy
penalties for breaches of the legislation. Ignorance is not
an acceptable excuse for not complying with the rules.
We highlight below some of the areas that you need to consider.
It is however important for you to seek specific professional
advice appropriate to your circumstances.
What
is VAT?
Scope
A transaction is within the scope of VAT if:
- there
is a supply of goods or services
- made
in the UK
- by
a taxable person
- in
the course or furtherance of business.
Inputs
and outputs
Businesses charge VAT on their sales. This is known as output
VAT and the sales are referred to as outputs. Similarly VAT
is charged on most goods and services purchased by the business.
This is known as input VAT.
The output VAT is being collected from the customer by the
business on behalf of Customs & Excise and must be regularly
paid over to them.
However the input VAT suffered on the goods and services purchased
can be deducted from the amount of output tax owed. Please
note that certain categories of input tax can never be reclaimed,
such as that in respect of business entertainment and for
most business cars.
Points
You Need to Consider
Supplies
Taxable supplies are mainly either standard rated (17.5%)
or zero rated (0%).
There is in addition a reduced rate of 5% which applies to
a small number of certain specific taxable supplies.
There are certain supplies that are not taxable and these
are known as exempt supplies.
There is an important distinction between exempt and zero
rated supplies.
- If
your business is making only exempt supplies you cannot
register for VAT and cannot therefore recover any input
tax.
- If
your business is making zero rated supplies you should register
for VAT as your supplies are taxable (but at 0%) and recovery
of input tax is allowed.
Registration
- is it necessary?
You are required to register for VAT if the value of your
taxable supplies exceeds a set annual figure (currently £58,000).
If you are making supplies below the limit you can apply for
voluntary registration. This would allow you to reclaim input
VAT, which could result in a repayment of VAT if your business
was principally making zero rated supplies.
If you have not yet started to make taxable supplies but intend
to do so, you can apply for registration. In this way input
tax on start up expenses can be recovered.
Taxable person
A taxable person is anyone who makes or intends to make taxable
supplies and is required to be registered. For the purpose
of VAT registration a person includes:
- individuals
- partnerships
- companies,
clubs and associations
- charities.
If
any individual carries on two or more businesses all the supplies
made in those businesses will be added together in determining
whether or not the individual is required to register for
VAT.
Administration
Once registered you must make a quarterly return to Customs
& Excise showing amounts of output tax to be accounted
for and of deductible input tax together with other statistical
information.
This must be completed within one month of the end of the
period it covers (except for those on the annual accounting
scheme who have two months - see below).
Businesses who make zero rated supplies and who receive repayments
of VAT may find it beneficial to submit monthly returns.
Businesses with expected annual taxable supplies under £660,000
may apply to join the annual accounting scheme whereby
they will make monthly or quarterly payments of VAT but will
only have to complete one VAT return at the end of the year.
Record keeping
It is important that a VAT registered business maintains complete
and up to date records. This includes details of all supplies,
purchases and expenses.
In addition a VAT account should be maintained. This is a
summary of output tax payable and input tax recoverable by
the business. These records should be kept for six years.
Inspection of records
The maintenance of records and calculation of the liability
is the responsibility of the registered person but Customs
& Excise will need to be able to check that the correct
amount of VAT is being paid over. From time to time therefore
a VAT officer will come and inspect the business records.
This is known as a control visit.
The VAT officer will want to ensure that VAT is applied correctly
and that the returns and other VAT records are properly written
up.
However, you should not assume that in the absence of any
errors being discovered, your business has been given a clean
bill of health.
Offences and penalties
Customs & Excise have wide powers to penalise businesses
who ignore or incorrectly apply the VAT regulations. Penalties
can be levied in respect of the following:
- late
returns/payments
- late
registration
- errors
in returns.
Cash
accounting scheme
If your annual turnover is below £660,000 you can account
for VAT on the basis of the cash you pay and receive rather
than on the basis of invoices.
Retail schemes
There are special schemes for retailers as it is impractical
for most retailers to maintain all the records required of
a registered trader.
Flat Rate scheme
This is a scheme allowing businesses with taxable turnover
not exceeding £150,000 and total turnover not exceeding
£187,500 to pay VAT as a percentage of their total turnover.
Therefore no specific claims to recover input tax need to
be made. The aim of the scheme is to simplify the way small
businesses account for VAT.
How
We Can help
Ensuring
that you comply with all the VAT regulations is essential.
We can assist you in a number of ways including the following:
- tailoring
your accounting systems to bring together the VAT information
accurately and quickly
- ensuring
that your business is VAT efficient and that adequate finance
is available to meet your VAT liability on time
- providing
assistance with the completion of VAT returns
- negotiating
with Customs & Excise if disagreements arise and in
reaching settlement
- advising
as to whether any of the available schemes may be appropriate
for you.
If
you would like to discuss any of the points mentioned please
contact us.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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