Value Added Tax (VAT)

Current VAT Rates and Limits (pdf)

What is VAT?
Registering for VAT
VAT Invoices
VAT Visit/Inspection

What is VAT?

There are currently eight taxes that are levied in the UK by central government. These are divided into two major categories, Direct and Indirect.

Direct Taxes
- Income Tax
- National Insurance
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- Stamp Duty
Indirect Taxes
- Value Added Tax (VAT)
- Customs Duties (including duties on alcohol, petrol and tobacco

VAT amounts to approximately 20% of the total tax collection.

The basic principle is that VAT is chargeable on the supply of goods and services by a taxable person in the course of any business carried on by them.

A taxable person can be a company, a partnership or a sole trader. If or when the turnover of the taxable person (the value of sales to customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see VAT Rates and Limits above for current levels, or go to the Revenue and Customs site at www.hmrc.gov.uk/businesses/. More details of registration are given in the section below.

Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended. The operation of vat is in principle simple:

On sales to your customers you charge and collect VAT – known as OUTPUT TAX
You deduct the VAT you have been charged by your suppliers – known as INPUT TAX
You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

Cash Basis Scheme
Flat Rate Scheme
Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision.

VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Registering for VAT

It is important to recognise that it is a taxable person who registers for VAT, not a particular business. This means that a sole trader providing an IT consultancy service who registers for VAT would also need to include any income from say a part time car maintenance business.

The diagram outlines the registration timetable

A person making taxable supplies becomes liable to register for VAT if, at the end of any calendar month the value of the taxable supplies (excluding VAT) in the 12 months up to that date (or from the date the business commenced if less than 12 months) has exceeded the registration limit (see VAT Rates & limits download above). The taxable person has 30 days from the end of the month the registration limit was reached to notify HM Revenue & Customs. HMRC will register the person with effect from the end of the month following that month (or earlier if agreed).

It is possible to seek a voluntary registration for VAT even if taxable turnover is below the VAT registration limit. It is necessary to demonstrate to HMRC that you are genuinely in business and trading for consideration. It could be an advantage to an expanding or small business for recovering VAT paid on purchases provided that the increased sales value does make the business uncompetitive.

Companies and sole traders must register by completing form VAT1, partnerships must use form VAT2.

These forms may be downloaded from the HMRC site:

customs.hmrc.gov.uk

On registration HMRC will issue a VAT registration number which will have to be shown on all VAT invoices issued from the registration date.

VAT Invoices

Whenever a taxable person makes a taxable supply of goods or service to another VAT registered person a VAT Invoice must be given and a copy retained. If the customer is not VAT registered there is no obligation to issue a VAT invoice, but in practice it is likely that a VAT invoiced will be given to anyone who asks for one.

Generally VAT Invoices must show:

An identifying number
The taxable persons name, address and VAT registration number
The date of the supply (known as the tax point)
The date of issue if different to the date of supply
The customers trading name and address
A description identifying the goods or service supplied with :-
- The quantity of goods or extent of the service
- The unit cost
- The VAT exclusive charge
- The total vat exclusive charge
- The rate of VAT
- The rate of any cash discount offered
- The total amount of VAT charged

A less detailed invoice may be issued if the value of the supply is less than £100.

There are rules dealing with rounding issues in calculating VAT and amended rules for invoicing and recording retail transactions.

It is recommended for any VAT questions that professional advice is sought.

VAT Visit /Inspection

Sooner or later (sooner if you are late with payments or error prone) you will receive a visit from the VAT inspector.

Usually you will receive a telephone call to establish an appointment. The appointment is subsequently confirmed by letter.

The letter lays out some of the information likely to be required and will also specify the time period over which the Inspector may wish to review.

It is recommended good practice to keep the necessary information to support each VAT 100 return; It just makes life easier and less stressful in preparing for a visit.

A check list of the most usual information required can be downloaded: