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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 to (or
reclaimable from) H M Revenue & Customs (HMRC) -
normally 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. some Trusts & Charities)

• A company

All types of supply of goods or services (outputs) are covered by VAT law, whether of a revenue or capital nature. Supplies include the sale, hire or loan of goods.

Outputs usually fall into one of four categories:

• Positive rated – standard rate of 17.5% (or at a reduced rate of 5% for some supplies including construction work on property conversions, domestic fuel and power and energy saving materials)

• Zero rated - including 'socially or economically important' items (e.g. most types of food, books, children's clothing, public transport, newspapers, exports, drugs on prescription, vehicles adapted for the disabled, pedal cycle helmets)

• Exempt supplies - including 'necessities' (e.g. most forms of insurance, postage, finance, health and education)

• Other - some supplies are outside the scope of VAT (e.g. most non-EU supplies)

Registration

HMRC should be notified when:

Taxable turnover for the past 12 months exceeds £67,000. Notification required within 30 days of the end of the relevant period,

or

There are reasonable grounds for believing that the turnover rate for the next 30 days will exceed £67,000 per annum. Notification is required within 30 days of the date on which grounds first existed.

It is important to monitor turnover as there is a penalty for late registration in addition to any tax payable.

If your turnover is less than £65,000 it is possible to register voluntarily provided that you have a bona fide business.

This limit was £62,000 before 1 April 2007.

Credit for input tax

Input tax paid on purchases can be recovered by registered taxable persons, who are able to offset it against their output tax liabilities. Traders with fully exempt outputs cannot register and are therefore unable to reclaim any input tax.

Credit is available for all VAT paid on inputs where a valid VAT invoice is available, except for VAT on private expenditure, business entertainment, motor cars 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.

VAT Returns

Every quarter, a Return is issued and must be submitted to HMRC no later than 30 days from the end of the quarter. Extensive legislation exists to levy penalties on defaulters. Businesses with regular repayments may make monthly Returns. Some businesses may register to make just one Return per year via the Annual Accounting Scheme, if annual taxable turnover is not expected to exceed £1,350,000 and certain other conditions are satisfied.

VAT Invoices

Anyone supplying goods and services direct to the public does not have to provide a VAT invoice unless the customer requires one. Where the tax-inclusive value of supply is not more than £250, the invoice need only show:

• The name, address and VAT registration number of the supplier

• The date of the supply

• A description of the goods or services supplied

• The total amount payable, including tax

• The rate of tax at the time of the supply

Otherwise, specific rules are laid down as to the form and content of VAT invoices, copies of which (both issued and received) must be retained for at least 6 years. There is no requirement to issue a VAT invoice for a zero-rated or exempt supply.

From 1 January 2004, the EU invoicing directive laid down the following 10 mandatory items of information that must be included on all invoices:

• The date of issue

• A sequential number which uniquely identifies the invoice

• The supplier's VAT registration number

• Where the customer is liable to account for VAT on the supply of goods or services, the customer's VAT registration number

• The supplier and customer's full name and address

• The quantity and nature of the goods supplied or the extent and nature of the services rendered

• The date on which the supply of goods or services was made or completed, or the date on which the payment on account was made

• The net amount per rate, the unit price exclusive of VAT (for countable goods or services), and any discounts or rebates that are not included in the unit price

• The VAT rate applied

• The VAT amount payable

An additional four items must be included in certain
circumstances, including cases where a margin scheme
applies or an intra-community supply of a new means of
transport is concerned.

Cash Accounting Scheme

There is a special scheme available to businesses where taxable turnover is expected to be less than £1,350,000 in the next 12 months. This allows the trader to account for VAT on the basis of payments made and received, rather than on VAT invoices issued and received.

Some businesses may find it advantageous to use cash accounting from the date of registration.

Flat Rate Scheme

A simplified scheme is available for smaller businesses
with an annual turnover (excluding VAT) of £150,000 or
less and total annual turnover (including VAT) of £187,500 or less.

The net output tax is calculated by applying a percentage for the type of business to the total turnover (including VAT) on a quarterly or annual basis.

Depending on the type of business and the amount of input VAT suffered, use of this scheme may result in overall less VAT being paid over to HMRC. In addition there may be a considerable simplification in paperwork for purposes of VAT returns. Consideration of the scheme is therefore generally advisable.

Retail Schemes

Special schemes of accounting for VAT are available to some retailers. Professional advice should be sought as to which is the most appropriate.

Deregistration

You must deregister when taxable supplies are no longer made (e.g. when trading ceases).

It is possible to deregister when anticipated turnover for the next year is less than £65,000, but this may not be in your best interest. Take professional advice before doing so.

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from this firm or other suitably qualified person or practice.