What is VAT? VAT is a tax chargeable on taxable supplies made in the UK by taxable persons. Credit is given for tax paid to other businesses and the net balance is payable or reclaimable, usually on a quarterly basis.
A taxable person is defined as one of the following carrying on a business:
- An individual.
- A partnership.
- An unincorporated association, e.g. trust or charity.
- A limited company.
VAT law covers all types of supply of goods or services (outputs), whether of a revenue or capital nature. Supplies include sale, hire or loan of goods. Output normally falls into four categories:
- Positive rated – taxable at 17.5% or 5% (from 4th Jan 2011 20% or 5%).
- Zero rated – including socially or economically important items, e.g. exports, most food, books, newspapers, public transport, drugs on prescription and children’s clothing.
- Exempt supplies – including necessities such as insurance, postage, finance, education and health.
- Some receipts are outside the scope of VAT, e.g. dividends, shares of profit compensation for losses and non-UK supplies.
Should I be registered for VAT?
You should notify Customs and Excise when:
- Vatable turnover for the past twelve months exceeds the current registration threshold.
- There are reasonable grounds for believing that your turnover for the next 30 days will exceed the current registration threshold.
In the latter case, notification must be within 30 days of the date on which grounds first existed. It is important to monitor turnover because there is a penalty for late registration. This is in addition to the tax payable. FWD can do all this for you.
Can I register for VAT if my vatable turnover does not exceed the prescribed limits?
It is possible to register voluntarily.
Cash Accounting Scheme
There is a special scheme applicable to businesses where taxable turnover is expected to be not more than the turnover limit in the next 12 months. This allows the trader to account for VAT on the basis of payments received and made rather than on tax invoices issued and received. It may be advantageous to use cash accounting from the date of registration, although some businesses will not benefit from this scheme.
Flat Rate Scheme
This is a special scheme whereby different businesses can elect to pay VAT on a flat rate. The rates are dependant on the industry sector. We can advise if this scheme is advantageous to individual traders.
Special schemes of accounting for VAT are available to retailers. We can advise on the best choice.
Credit for Input Tax
Input Tax paid on purchases can be recovered by registered taxable persons, who are able to offset Input Tax against their Output Tax liabilities. Traders with fully exempt outputs cannot register or reclaim any Input Tax. Credit is available for all VAT paid on inputs where a VAT invoice is available, except for tax on private expenditure, business entertainment, vehicles, certain building materials and goods bought under a second hand goods scheme. Recovery of Input Tax may be restricted if the business makes both taxable and exempt supplies.
How often will I have to complete a VAT return?
Every quarter, a return is issued and must be submitted to Customs and Excise no later than 30 days from the end of the quarter. Make returns and payments on time because extensive legislation exists to levy penalties on defaulters. Businesses with regular payments may make monthly returns. Those using the Annual Accounting Scheme need make only one return per year, which has to be submitted two months after the end of the scheme year. FWD would be pleased to advise you what records you need to keep to complete the VAT return.
When can, or must, I deregister?
You must deregister when taxable supplies are no longer made, e.g. when trading ceases. You can deregister when anticipated turnover for the next year (measured from any time) is less than the deregistration limit, but this may not be in your best interests please seek our advice first.
Specific rules are laid down as to the form and content of tax invoices. These are to ensure that all the necessary information is recorded for the determination of the rate of tax to be applied, the liability of the supplier to account for the Output Tax due on supply, and the entitlement of the recipient to reclaim all or any of it as Input Tax. There is no requirement to issue a tax invoice for a zero-rated or exempt supply. However, it would seem appropriate to issue some form of invoice for either type of supply to establish that VAT is not chargeable on it. Copies of all tax invoices issued and received must be retained for at least six years, unless a shorter period (normally at least three years) is agreed with Customs and Excise.
A tax invoice is required to show:
- An identifying number.
- The date of the supply and the date of issue of invoice.
- The name, address, and registration number of supplier.
- The name and address of the person to whom the goods and services are supplied.
- The type of supply by reference to categories e.g. sale, hire purchase, hire lease, rental etc.
- A description that is adequate for the purposes of identifying the goods or service supplied.
- For each description the quantity of the goods or the extent of the services, the rate of tax, and the amount payable, excluding tax.
- The total amount payable excluding tax.
- The rate of any cash discount offered.
- The total VAT payable.
Please contact us if you would like further help or advice.