VAT
Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. Businesses charge VAT on their sales, known as output tax, similarly however businesses are also charged VAT on the goods and services that are bought for and through the business known as input tax.
Therefore businesses act as unpaid tax collectors, ensuring that all VAT collected from output tax is promptly and accurately accounted for to return to the HMRC who heavily police this VAT system and enforce strict penalties for breaches in the legislation. Businesses can however reduce some if not all of the input tax suffered from goods and services against the output tax owed.
What is a taxable person?
For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business. If however, the annual turnover of this person is less than a certain limit which differs according to the Member State, the person does not have to charge VAT on their sales.
A transaction rests under the scope of VAT if;
There is a supply of goods or services.
The good or services are made in the UK.
The goods and services are bought and sold by a taxable person.
The transaction occurs in the course or furtherance of business.
Points to consider
Taxable supplies are mainly either standard rated (17.5%) or zero rated (0%). For the period 1 December 2008 to 31 December 2009 the standard rate of VAT was reduced to 15%. There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable 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 and administration
You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure which is currently £68,000. 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.
Once registered you must make a quarterly return to HMRC 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.
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 as this will ensure that the HMRC receive all the VAT owed and that the business is not in breach of current legislation. VAT accounts should be kept safe as they are a summary of output tax payable and input tax recoverable by the business. VAT accounts should be kept for six years as they can provide an insight into the financial growth of your business.
Inspection of records
The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. At times a control visit may be paid by a VAT officer to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.
If however any errors or inconsistencies are discovered in your records or accounts this is considered an offence and breach of the current legislation maintained and upheld by the HMRC and you may be penalized as a result. Similarly the HMRC have the power to penalize business for;
It is therefore vital that all records and accounts are maintained to a highly professional and accurate level which TMA Accountants can help you with.
Cash accounting scheme
If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoices. Under the cash accounting scheme the prime record will be a cash book summarizing all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice. In addition the normal requirements regarding copies of VAT invoices and evidence of input tax apply.
Advantages and Disadvantages of the Scheme
The advantages of the scheme are as follows.
Output tax is not due until the business receives payment of its sales invoices. If customers pay promptly, the advantage will be limited. Even so, the gain may be material.
There is automatic bad debt relief because, if no payment is received, no output tax is due.
Most businesses find it easier to think in terms of cash flows in and out of their business than invoiced amounts.
The potential disadvantages are as follows.
There is no input tax recovery until payment of suppliers’ invoices.
The scheme will not be beneficial for net repayment businesses - for example, a business just starting up, which has substantial initial expenditure on equipment, stocks etc so that input tax exceeds the output tax, should delay starting to use the scheme. That way, it recovers the initial input tax on the basis of input invoices as opposed to payments.
Flat rate scheme
The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.
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, but for some businesses it can also result in a reduction in the amount of VAT that is payable.
Under the scheme you must keep a record of your flat rate calculation showing:
You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.
When is this scheme not available?
The flat rate scheme cannot be used if you;
Use the second hand margin scheme or auctioneers’ scheme.
Use the tour operators’ margin scheme.
Are required to operate the capital goods scheme for certain items.
In addition the scheme cannot be used if, within the previous 12 months, you have;
Ceased to operate the flat rate scheme.
Been convicted of an offence connected with VAT.
Been assessed with a penalty for conduct involving dishonesty.
The scheme therefore, will clearly be inappropriate if you regularly receive VAT repayments.
How we can TMA Accountants help?
Ensuring that you comply with all the VAT regulations is essential. Therefore TMA Accountants can assist you in a number of ways including;
Tailoring your accounting systems to suit both you and your business bringing 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 if necessary with the completion of VAT returns.
Negotiating with HMRC if disagreements arise and in reaching settlement and advising as to whether any of the available schemes may be appropriate for you.
This factsheet has been published by TMA Accountants for the information and benefit of clients. It provides only a brief 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 as detailed above. 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.
