Lecture 8- VAT

VAT (Value Added Tax)- An [blank_start]indirect[blank_end] or [blank_start]expenditure[blank_end] tax borne by [blank_start]final[blank_end] consumer, charged whenever taxable person makes taxable [blank_start]supply[blank_end] of goods or services in course of his or her [blank_start]business[blank_end]

Person who has to [blank_start]administer[blank_end] & [blank_start]submit[blank_end] tax to government is not person that [blank_start]suffers[blank_end] VAT because person has to [blank_start]account[blank_end] for & [blank_start]submit[blank_end] VAT to [blank_start]HMRC[blank_end] which is registered business

VAT works by each registered [blank_start]business[blank_end] or [blank_start]trader[blank_end] deducting VAT [blank_start]suffered[blank_end] from VAT [blank_start]received[blank_end] & pays [blank_start]net[blank_end] amount across to HMRC. VAT received in all its sales is known as [blank_start]output[blank_end] tax. VAT suffered on its purchases is known as [blank_start]input[blank_end] tax

VAT is charged at [blank_start]each[blank_end] stage of [blank_start]production[blank_end] & is borne by [blank_start]final[blank_end] consumer

There is no distinction between [blank_start]capital[blank_end] & [blank_start]revenue[blank_end] expenditure for VAT. Therefore, if business buys [blank_start]new[blank_end] equipment & incurs VAT on cost of equipment, it is part of business's [blank_start]input[blank_end] tax. If business sells non-current assets, VAT would be charged on [blank_start]sales[blank_end] of those assets

Items that are outside scope of VAT include payment of [blank_start]wages[blank_end] & [blank_start]dividends[blank_end]

VAT is charged when taxable person ([blank_start]individual[blank_end], [blank_start]partner[blank_end], [blank_start]company[blank_end], [blank_start]charity[blank_end] or [blank_start]club[blank_end]/[blank_start]society[blank_end]) makes taxable supply (any supply of [blank_start]goods[blank_end] or [blank_start]services[blank_end] in UK unless specifically exempt) of goods or services in course of [blank_start]business[blank_end] (supply for consideration)

Rates of VAT include [blank_start]standard (20%)[blank_end], [blank_start]reduced (5%)[blank_end] & [blank_start]zero rated (0%)[blank_end]

VAT is charged when there is supply of [blank_start]goods[blank_end]. This occurs when [blank_start]ownership[blank_end] passes for consideration. Also includes [blank_start]gifts[blank_end] of business assets (small amounts) & goods taken permanently for [blank_start]private[blank_end] use by owner

VAT is also charged when there is supply of [blank_start]services[blank_end]. This is any supply for consideration that is not supply of [blank_start]goods[blank_end]. This includes temporary [blank_start]private[blank_end] use of goods owned by [blank_start]business[blank_end] or [blank_start]private[blank_end] use of [blank_start]services[blank_end] supplied to business

Everything is taxable supply at [blank_start]20%[blank_end] unless it is specifically included in list of [blank_start]zero rated[blank_end] supplies or [blank_start]reduced rate[blank_end] supplies or supply that is specifically [blank_start]exempt[blank_end]

Exempt supplies are totally [blank_start]outside[blank_end] VAT. For exempt supplies, supplier cannot [blank_start]register[blank_end] & cannot [blank_start]reclaim[blank_end] VAT suffered. Examples include [blank_start]insurance[blank_end], [blank_start]betting[blank_end]/[blank_start]gaming[blank_end]/[blank_start]lotteries[blank_end], [blank_start]financial services[blank_end] & [blank_start]education[blank_end]

For zero rated supplies [blank_start]businesses[blank_end] only making these supplies can [blank_start]register[blank_end] for VAT. Business will be charging VAT on [blank_start]sales[blank_end] at 0%. It will be treated as [blank_start]registered[blank_end] business & will be able to [blank_start]reclaim[blank_end] VAT on its purchases. Examples include [blank_start]food[blank_end] (except [blank_start]luxury food[blank_end]), [blank_start]books[blank_end]/[blank_start]newspapers[blank_end]/[blank_start]journals[blank_end], [blank_start]children’s clothes[blank_end] & [blank_start]passenger transport[blank_end] ([blank_start]10+ passengers[blank_end])

Reduced rate supplies- [blank_start]5%[blank_end] otherwise as for [blank_start]standard[blank_end] rated supplies. Examples include [blank_start]fuel[blank_end] & [blank_start]power[blank_end] for [blank_start]domestic use[blank_end], [blank_start]installation[blank_end] of [blank_start]mobility aids[blank_end] for elderly, children’s [blank_start]car seats[blank_end], smoking [blank_start]cessation products[blank_end]

Value of supply- [blank_start]Amount[blank_end] on which [blank_start]VAT charge[blank_end] is based ([blank_start]net[blank_end] amount)

Consideration given for supply- [blank_start]Total value[blank_end] of supply plus [blank_start]VAT[blank_end] ([blank_start]gross[blank_end] amount)

Value of VAT (of supply) for [blank_start]gifts[blank_end] of business assets, or items taken out of business [blank_start]permanently[blank_end] for private use, is [blank_start]normal[blank_end] price for which it would have been [blank_start]sold[blank_end]

Value of VAT (of supply) for goods taken [blank_start]temporarily[blank_end] for private use is [blank_start]depreciation[blank_end] of asset whilst in [blank_start]private[blank_end] use

Value of VAT (of supply) for private use of services is appropriate [blank_start]proportion[blank_end] of services [blank_start]supplied[blank_end]

Value of VAT (of supply) for items where [blank_start]consideration[blank_end] was not for cash or items sold for [blank_start]less[blank_end] than market value to connected party is [blank_start]market value[blank_end]

Trade Discount Trade discount- Discount given before [blank_start]sale[blank_end] takes place, & therefore [blank_start]invoiced[blank_end] amount, & VAT calculation, is [blank_start]after[blank_end] deducting this discount

Early settlement discount- VAT is to be [blank_start]charged[blank_end] on amount that [blank_start]customer[blank_end] pays. Invoice will show value of sale before [blank_start]discount[blank_end]. VAT is shown as follows: (1) if business expects customer takes up [blank_start]discount[blank_end], discounted [blank_start]price[blank_end] will be shown, & VAT is calculated on [blank_start]discounted[blank_end] price, (2) if customer takes [blank_start]discount[blank_end], pays on time, that's [blank_start]end[blank_end] of it, (3) if customer does not take [blank_start]discount[blank_end] new invoice will be prepared to [blank_start]increase[blank_end] sale & to account for additional VAT, (4) if business does not expect customer to take up [blank_start]discount[blank_end], full price will be shown, with VAT on [blank_start]full[blank_end] price, (5) if customer does not pay within [blank_start]early settlement[blank_end] time, that's end of it & finally (6) if customer does take up [blank_start]discount[blank_end], & credit note will be issued

Tax point (date of supply) is used to determine [blank_start]rates[blank_end] & [blank_start]tax periods[blank_end]. Basic tax point is when goods are [blank_start]removed[blank_end] or made [blank_start]available[blank_end] to customer, or [blank_start]date[blank_end] on which services are completed. One certain exemption is [blank_start]basic[blank_end] tax point can be replaced by [blank_start]actual[blank_end] tax point which may be before/after [blank_start]basic[blank_end] tax point. Another is payment received before [blank_start]basic[blank_end] tax point then [blank_start]actual[blank_end] tax point is date of [blank_start]payment[blank_end]. Third is invoice issued before [blank_start]basic[blank_end] tax point then [blank_start]actual[blank_end] tax point is date of [blank_start]invoice[blank_end]. Finally, invoice issued within [blank_start]14[blank_end] days after basic tax point then actual tax point is date of [blank_start]invoice[blank_end]. Therefore, [blank_start]actual[blank_end] tax point cannot be later than date on which payment is actually [blank_start]received[blank_end]

Registration for VAT- When supplies in any [blank_start]12[blank_end]-month period exceed [blank_start]£85,000[blank_end] (limit from 1/4/17) person is required to [blank_start]register[blank_end]. Once registered VAT [blank_start]number[blank_end] will be issued & this must be quoted on all future tax [blank_start]invoices[blank_end]. If [blank_start]trader[blank_end] fails to register they are still treated as taxable person & sales treated by [blank_start]HMRC[blank_end] as VAT inclusive. For purpose of determining [blank_start]limit[blank_end] of £85,000, sales of [blank_start]capital[blank_end] assets are ignored in arriving at value of supplies. However, it is total [blank_start]supplies[blank_end] by that individual

If someone is in business & their sales are [blank_start]increasing[blank_end], it is important to keep [blank_start]record[blank_end] of monthly rolling [blank_start]12[blank_end] month total of [blank_start]supplies[blank_end] to make sure you have not reached [blank_start]point[blank_end] on which you have got to [blank_start]register[blank_end] & you missed registration [blank_start]deadline[blank_end]

Artificial splitting of businesses- Some traders may try to avoid [blank_start]registration[blank_end] & may try to artificially split their business into [blank_start]small[blank_end] parts to ensure that they keep [blank_start]below[blank_end] limits. [blank_start]HMRC[blank_end] can direct that artificially split businesses is treated as [blank_start]single[blank_end] person for VAT

Trader is required to [blank_start]register[blank_end] for VAT within [blank_start]30[blank_end] days of exceeding registration [blank_start]limit[blank_end]- registration applies from start of following [blank_start]month[blank_end]. If supplies are going to be > [blank_start]limit[blank_end] in next 30 days, registration applies from start of these [blank_start]30[blank_end] days

Trader may make [blank_start]voluntary[blank_end] registration for VAT to make business seem more [blank_start]prestigious[blank_end]. Also, it may be that business has mostly [blank_start]0 rated[blank_end] supplies (won't be charging VAT but can recover VAT on its [blank_start]inputs[blank_end]. Another reason is [blank_start]customers[blank_end] are VAT registered

There are certain exemptions from [blank_start]registration[blank_end] for VAT. Usually, if you are over [blank_start]limit[blank_end] of £85,000, but all sales are [blank_start]zero[blank_end] rated for VAT, [blank_start]HMRC[blank_end] are not missing out from collection of VAT. When you first register for VAT there are certain items of [blank_start]pre-registration input[blank_end] tax which you can recover (this is VAT suffered on [blank_start]purchases[blank_end] which can be [blank_start]reclaimed[blank_end] from HMRC in certain circumstances)

Pre-registration input tax for goods (VAT suffered on goods [blank_start]purchased[blank_end] in [blank_start]4[blank_end] years prior to registration if they are still [blank_start]owned[blank_end] by trader at date of [blank_start]registration[blank_end]). Pre-registration input tax for services (VAT suffered on services [blank_start]supplied[blank_end] in [blank_start]6[blank_end] months before date of [blank_start]registration[blank_end]

You can deregister for VAT if you can show your supplies in next [blank_start]12[blank_end] months is going to be less than [blank_start]£83,000[blank_end]. You have to deregister when you [blank_start]ceased[blank_end] trade & also if there is change in your [blank_start]legal[blank_end] status. On deregistration, if trader does not sell business as [blank_start]going concern[blank_end], they are considered to have made [blank_start]supply[blank_end] of all tangible assets of business, & must account for [blank_start]VAT[blank_end] accordingly. Any assets on which VAT was not claimed can be [blank_start]excluded[blank_end], & VAT in this circumstance is not collected if it is [blank_start]£1,000[blank_end] or less

Submission of returns for VAT is now done (since 1/4/10) via [blank_start]internet[blank_end]. Generally, return has to be done every [blank_start]3[blank_end] months & is due [blank_start]1[blank_end] month & [blank_start]7[blank_end] days after end of [blank_start]quarter[blank_end]. If output tax > input tax, [blank_start]pay to HMRC[blank_end]. If input tax > output tax, [blank_start]reclaim from HMRC[blank_end]. Businesses with mostly zero rated supplies can reclaim VAT on [blank_start]inputs[blank_end] & for cash flow purposes, it may be beneficial for them to do [blank_start]monthly[blank_end] returns

Tax invoices- Provides documentary [blank_start]evidence[blank_end] of transaction. It has to have full details such as supplier's [blank_start]name[blank_end], [blank_start]address[blank_end] & [blank_start]registration number[blank_end], [blank_start]tax[blank_end] point, invoice [blank_start]number[blank_end], [blank_start]name[blank_end] & [blank_start]address[blank_end] of customer & description of [blank_start]goods[blank_end] or [blank_start]services[blank_end]. Retailers may issue less detailed tax invoice if for less than [blank_start]£250[blank_end]. They must disclose supplier's [blank_start]name[blank_end], [blank_start]address[blank_end] & [blank_start]registration number[blank_end], date of [blank_start]supply[blank_end], description of [blank_start]goods[blank_end] or [blank_start]services[blank_end] supplied, [blank_start]rate[blank_end] of tax & total amount [blank_start]chargeable[blank_end] including VAT

Accounting records must be retained for [blank_start]6[blank_end] years & subject to control visits by [blank_start]HMRC[blank_end]

One special scheme for VAT is [blank_start]annual accounting[blank_end] scheme (for [blank_start]very small[blank_end] businesses). Instead of doing quarterly returns, they can do one [blank_start]annual accounting[blank_end] return. This can be done if taxable turnover < [blank_start]£1.35m[blank_end]. They have to make [blank_start]electronic[blank_end] payment on account which is either [blank_start]9[blank_end] monthly payments, starting in month [blank_start]4[blank_end] or [blank_start]3[blank_end] payments in months [blank_start]4, 7 & 10.[blank_end] At end of year return they will do [blank_start]return[blank_end] & pay balance [blank_start]2[blank_end] months after year end. They have to withdraw from scheme when turnover exceeds [blank_start]£1.6m[blank_end]

Another special scheme for VAT is [blank_start]cash accounting[blank_end] scheme. This scheme applies to businesses with turnover < [blank_start]£1.35m[blank_end]. Business will account for [blank_start]output[blank_end] when they receive payments from [blank_start]customers[blank_end] & will be able to reclaim [blank_start]inputs[blank_end] when they pay their invoices. Advantage of this scheme is that it gives [blank_start]automatic[blank_end] relief for bad debts but to join scheme all VAT [blank_start]returns[blank_end] & [blank_start]payments[blank_end] must be up to date, & have no VAT [blank_start]convictions[blank_end]. When turnover > [blank_start]£1.6m[blank_end] in 1 year & they cannot prove that turnover will return to < [blank_start]£1.35m[blank_end] in next year, they will have to leave scheme

Third special scheme for VAT is [blank_start]flat rate[blank_end] scheme (for [blank_start]small[blank_end] businesses). [blank_start]Customers[blank_end] are invoiced in normal way, & invoices received are [blank_start]paid[blank_end] as normal, but VAT due is calculated as [blank_start]flat-rate[blank_end] percentage of turnover. Rates vary from [blank_start]4%[blank_end] to [blank_start]14.5%[blank_end] (depends upon [blank_start]trade sector[blank_end] business is considered to be in). It is much simpler scheme as you just have to pay over VAT of that percentage of your [blank_start]sales[blank_end]. Any capital assets costing [blank_start]£2,000[blank_end] or more accounted for in normal way. This scheme can be used with [blank_start]annual accounting[blank_end] scheme. It is available to small businesses with taxable/total turnover not expected to exceed [blank_start]£150,000[blank_end] in next 12 months. Trader must leave scheme when total turnover exceeds [blank_start]£230,000[blank_end]

Unless you are in [blank_start]cash accounting[blank_end] scheme, you have to account for [blank_start]VAT[blank_end] when you issue invoice or basic tax point. Therefore, you would have to pay over [blank_start]VAT[blank_end], may be before you have received [blank_start]money[blank_end] from customer. If that amount becomes [blank_start]bad debt[blank_end], you have paid over output VAT which has never been received. Therefore, you get [blank_start]refund[blank_end] for VAT lost. If consideration was for money & output tax has been accounted for to HMRC, value not more than market value. [blank_start]Bad debt[blank_end] gets written off & was 6 months old & goods are passed to [blank_start]customer[blank_end]

There are few items for which you cannot recover input tax (non-deductible) which includes [blank_start]business entertaining[blank_end], [blank_start]motor car[blank_end] unless as [blank_start]inventory[blank_end] or for use [blank_start]exclusively[blank_end] for business & items used [blank_start]partly[blank_end] for business

Overall responsibility for administration of VAT is within [blank_start]commissioners[blank_end] for HMRC (head office Southend-on-Sea). Local VAT offices are responsible for local [blank_start]administration[blank_end] & advice, and to undertake [blank_start]control[blank_end] visits. They may issue [blank_start]VAT assessments[blank_end] if they believe trader has not made or made incorrect returns

[blank_start]VAT assessments[blank_end] are not normally needed, but will be made if business has not [blank_start]sent[blank_end] in return, or if one is considered to be [blank_start]incomplete[blank_end] or [blank_start]incorrect[blank_end]. Time limit for VAT offices to raise an assessment is [blank_start]4[blank_end] years after end of [blank_start]tax[blank_end] period, but [blank_start]20[blank_end] years if fraud

Taxpayer can make an [blank_start]appeal[blank_end] against VAT assessment & have [blank_start]30[blank_end] days to do this or they can go directly to [blank_start]local[blank_end] office to ask them to [blank_start]reconsider[blank_end] their decision

There are various penalties for not [blank_start]complying[blank_end] with VAT regulations which include [blank_start]criminal fraud[blank_end], [blank_start]failure[blank_end] to notify that someone should have [blank_start]registered[blank_end] for VAT, completing [blank_start]incorrect[blank_end] VAT returns, VAT “[blank_start]wrongdoing[blank_end]” & [blank_start]breaches[blank_end] of regulations

Default surcharge- Applies if taxable person submits late [blank_start]VAT return[blank_end] &/or makes late [blank_start]payment[blank_end] of VAT. HMRC then issues “[blank_start]surcharge liability notice[blank_end]” which specifies surcharge period running for [blank_start]12[blank_end] months. If further default occurs during this [blank_start]12[blank_end] month period, original surcharge period is extended to [blank_start]12[blank_end] months from new [blank_start]default[blank_end]. In addition, if [blank_start]default[blank_end] involves late payment of VAT [blank_start]surcharge[blank_end] is levied. [blank_start]Surcharge[blank_end] penalty is charged as percentage of [blank_start]tax[blank_end] paid late