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VAT - Understanding Value Added Tax

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 - normally on a quarterly  basis.

Taxable persons

A taxable person is any person carrying on a business which is, or is required to be registered for VAT and includes the following:

  • An individual
  • A partnership
  • An unincorporated association, e.g. trust or charity
  • A limited company
  • A limited liability partnership

Supplies

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. Outputs  normally fall into four categories:

If you suspect VAT fraud

You can report a suspected VAT fraud on Customs Confidential hotline on 0800  595 0000. The line is open 24/7. You will not be required to provide  your personal details.

  1. Positive rated - taxable at applicable VAT rates.
  2. Zero rated - including socially or economically important items,  e.g. exports, most food, books, newspapers, public transport, drugs on  prescription, children's clothing
  3. Exempt supplies - including necessities such as insurance, postage,  finance, education, and health
  4. Some receipts are outside the scope of VAT, e.g. dividends, shares of profit compensation for  losses, non UK supplies

Should I be registered for VAT?

You should notify HM Revenue & Customs when:

  • Taxable turnover for the past twelve months exceeds 70,000
  • There are reasonable grounds for believing that your turnover for  the next 30 days will exceed 70,000

In the first case, notification must be within thirty days of the end of the relevant month. In the latter case, notification must be within  thirty 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.

Can I register for VAT if my taxable turnover does not exceed the prescribed limits?

It is possible to register voluntarily provided you have a bona fide  business.

Cash accounting scheme

There is a special scheme applicable to businesses where taxable turnover is expected  to be not more than 1,350,000 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.

Retail schemes

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, motor cars, 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 with any  payment due to HM Revenue  & Customs no later than thirty 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 repayments 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.

We would be pleased to advise you what records you need to keep to  complete the VAT return.

Can I file my VAT return  online?

A service for online filing VAT returns is now operational. For access to this visit www.hmrc.gov.uk

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 £68,000, but this may not be in  your interests - seek our advice first

Tax invoices

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 the  supply, and the entitlement of the recipient to reclaim all or any of it as input tax.

You are required to use sequential numbering to identify the numbers  you use. You can use both numbers and letters for invoice numbers, and  use more than one sequence of numbers, but each must form part of a  unique and consecutive series. If you cancel an invoice, you must keep a copy of it to show that you have not broken the numbering sequence.

If you supply goods that are exempt, zero rated or meet reverse  charge criteria in the UK to  businesses and other member states where a VAT invoice is mandatory for such goods, you will have to indicate on invoices the reason for the exemption, requirement of the  customer to pay the VAT.

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 HM Revenue & Customs.

A tax invoice is required to show:

  • An identifying sequential number / letter (see note above)
  • The date of the supply and the date of issue of invoice
  • The name, address, and registration number of the supplier
  • The name and address of the person to whom the goods and services  are supplied
  • A description that is adequate for the purposes of identifying the  goods or services supplied
  • For each description the quantity of the goods or the extent or  nature of the services, price, 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

Anyone supplying goods or services direct to the public or to any  business that is not registered for VAT does not have to supply a tax invoice unless the customer requires one.  Where the tax-inclusive value of supply is not more than 250, the  supplier may issue a simplified form of invoice giving only the  following details:

  • Name, address and registration number of the retailer
  • Date of supply
  • A description, adequate to identify the goods or services supplied
  • The total amount payable including tax
  • The rate of tax at the time of the supply

Please contact us if you would like further help or advice.

Vector Accountants in St Ives, Huntingdon are professionally trained business advisers and management accountants specialised in helping SME companies be successful; as well as bookkeeping and VAT returns we offer executive coaching and mentoring for new business, start ups and established companies looking to improve performance, increase profits and pay less tax. 

Located between Huntingdon, Cambridge and Peterborough we typically serve clients in the East of England (Cambridgeshire, Suffolk, Norfolk, Essex, Lincs) and the East Midlands (Bucks, Beds, Herts, Leics), but with a global network of  professionally accredited  advisers and accountants in 28 countries across the globe location is not a limitation.

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