Value Added Tax (VAT)

Direct Taxes Income tax Corporation tax Capital gain tax Tax payer Tax department

Indirect Taxes VAT

Tax payer Middle man Tax department

Basic principle: It is paid by the final consumer Purchase/inputs Input VAT Dr. Purchases $100 Dr. Input VAT $ 17.5 Cr. Creditors Business Sales/outputs Output VAT Dr. Debtors $ 176.25 Cr. Sales $ 150 Cr. Output VAT $ 26.5

$ 117.5

VAT payable = Output VAT – Input VAT VAT Input VAT Payable to HMRC $17.5 Output VAT $9 $26.5

Input VAT Output VAT

Business expense? Business Income?

No No

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Input VAT is Recoverable on purchases Examples: .Input VAT is not recovered on purchases Standard rated Examples: .Finance .Children’s clothing Although such supplies are Zero rated but still they are taxable supplies and will be taken into account when determining whether a trader is a taxable person or not Note: Students will be told in the examination what type has been made. When answers exams question you should check the date of a transaction to ensure you use the correct rate.Medicines .Education .Supplies not falling in exempt and zero-rated . Page 2 of 8 .5%.Output VAT is Deducted on sales Taxable supplies Zero Rated (0%) .Sports .CAT/T9 VAT is charged on: – a taxable supply – by a taxable person Taxable Supplies Exempt Supplies .Output VAT is not Deducted on sales .Land .Food .Books . You will not be expected to deal with period that span 31 December 2009. VAT Rate: The rate of VAT was temporarily reduced to 15% for periods up to 31 December 2009. Thereafter it returned to the usual rate of 17.Insurance .Output VAT is not deducted on sales .Input VAT is not Recoverable on purchases Examples: .Health .

000 Major Sales are Zero-rated Customers are not general public If a person forecast that his taxable turnover For future 30 days will Exceed £68.000 Notify tax department Within 30 days Registered After 30 days Voluntary registration: Advantages Notify tax department Within 30 days Registered Day 1 of notification • Input tax recoverable • If making zero-rated supplies VAT returns will show VAT repayable – can register for monthly returns to aid cash flow • Avoid penalties for late registration • May give the impression of a more substantial business • • Disadvantages Output charged on sales o If make standard rated supplies to customers who are not VAT registered will be an additional cost to them o May affect competitiveness VAT administration Irrecoverable Input VAT Motor cars Business entertainment Page 3 of 8 .CAT/T9 Taxable person: Who is liable to get registered for VAT Registration Compulsory registration Voluntary registration Two reasons to get Voluntary registered Future Taxable Turnover Historical Taxable Turnover If previous 12 months Turnover exceed £68.

5 % xx Expenses × 17.000 VAT equation = VAT exclusive amount × 17.5%(0r 15%) VAT exclusive amount = Sales price – trade discount – cash/early settlement discount VAT inclusive amount = VAT exclusive amount + Amount of VAT VAT Fraction = 7/47 or 3/23 VAT Calculation Output VAT: is the tax charged on supplies made by a taxable person Input VAT: is the tax paid by taxable persons on goods and services supplied to them and are recoverable from HMRC VAT account for the quarter ended Input VAT £ Output VAT £ Standard rated purchases xx Standard rated sales × 17.5% xx Purchases of capital item xx Car scale charges xx Purchases omitted from previous return xx Cash receivable from HMRC xx Bad debts relief xx Cash payment to HMRC xx Page 4 of 8 .5 % xx Sales returns × 17.5% xx Purchases returns × 17.5% xx Sales omitted from previous return × 17.CAT/T9 Penalties for late registration Minimum penalty = £50 Maximum penalty for Delay up to 9 months 5% of tax due 18 months 10% of tax due Deregistration A trader can de-register In the following conditions Over 18 months 15% of tax due When he ceases to make Taxable supplies Terms in VAT: OR When he expects that his taxable turnover in Future 12 months will Will be less than £66.

VAT return must be completed and returned to HMRC. Bad debt Relief When a customer fails to pay. within one month of the end of the relevant VAT period. Relief is given where: • A supply of goods or services has been made for consideration. • Out put VAT has been accounted for and paid by supplier. • At least six months has been elapsed since the time the payment was due. VAT Return for the quarter 31 March 2010 £ Less: Output VAT Input VAT VAT Payable xx xx xx VAT Invoices Records Records must be kept for all gods and services provided Page 5 of 8 . together with any VAT payable. the supplier may claim bad debt relief. VAT Return A VAT return shows the total Output VAT and total Input VAT for the VAT period to which it relates. • The whole or part of the debt has been written off as bad in the supplier’s books.CAT/T9 VAT with discounts VAT will be calculated on net of all discounts amount.

CAT/T9 Tax point/ Time of supply The time at which a supply is treated as taking place. For goods The basic tax point is when the goods are treated as • Supplied • Delivered • Collected • Made available to customer. But can amend Before Cash is received And Invoice is issued OR After Invoice is issued within 14 days For goods on return basis Earlier of Date of acceptance by Customer For services The basic tax point is when the services are • Rendered • Completed But can amend 12 months after the date of dispatch Before Cash is received And Invoice is issued OR After Invoice is issued within 14 days For continuous supply of service Earlier of Amount received VAT Invoice issued Page 6 of 8 . It is a rule to record sales in relevant VAT return accurately.

00.350.CAT/T9 Special Accounting Schemes Three accounting schemes aimed at small business Cash accounting scheme Operation Conditions VAT accounted for on cash • Taxable turnover ≤ payments and cash receipts.000 • VAT payments and returns must be up to date • Must leave the scheme if taxable turnover > £16. £1.000 Flat rate scheme Operation • Flat rate of VAT applied to total turnover (including exempt supplies and VAT) • Flat rate determined by trade sector • Flat rate only used to simplify preparation of VAT return o Still need to issue tax invoices Annual accounting system Operation • One VAT return prepared a year • Return due: o 2 months after end of VAT period • Payment on account (POA) o 9 POA due in 4 – 12 o each POA is 10% of VAT for previous year • Balancing payment due with VAT return • New business base POA on estimated VAT liability Advantages • Do not pay output tax until receive payment from customer • Provides automatic bad debts relief Conditions • The taxable turnover for the next twelve months ≤ £150.000 • VAT payments and returns must be up to date • Must leave the scheme if taxable turnover > £16.00.350.500 • Advantages • Reduce administration • May reduce total VAT payable Conditions • Taxable turnover ≤ £1.000 • Annual total turnover (including exempt supplies and other income) ≤ £187.000 Advantages • Reduces administration • Regular payments can help cash flow Page 7 of 8 .

CAT/T9 Page 8 of 8 .

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