Introduction VAT is a large and, to many, scary subject. For many companies their VAT liabilities far outweigh their corporation tax liabilities and yet they know next to nothing about its operation. The following is an extremely brief guide to the subject.
10 Key Points - Scope of VAT
VAT is a tax on transactions. With certain exceptions, VAT is chargeable on each and every transaction carried out for a business purpose. It is intended to be neutral on businesses within the supply chain with the liability ending up with the end consumer. For this reason taxable, registered businesses making purchases on which they are charged VAT can reclaim it. - Legal Basis
UK VAT Legislation is contained mainly in the VAT Act 1994 and the VAT Regulations 1995. It is based entirely upon the EC 6th Directive, which tells all EU Member States how their VAT system should work. - Should I be registered
If your taxable income (non-exempt income, see 5) over the last 12 months exceeds the registration threshold (£58,000 as at April 2004) you must register for VAT. If your expected taxable income over the next 30 days will exceed the threshold you must register for VAT. If your turnover is less than this you can choose to register for VAT. You will normally only want to do this if your customers are able to recover VAT (i.e. VAT registered businesses). - Accounting for VAT
VAT registered businesses are required to submit VAT returns. On these returns you declare how much VAT you have charged to your customers. Against this you can reclaim the VAT you have been charged on your purchases (subject to exceptions, see 6). The difference is paid to, or claimed from, HM C&E. You are required to keep adequate records to back up these returns. - VAT Liability
Most goods and services are subject to VAT at the standard-rate of 17.5%. There are however other liabilities. The reduced-rate of 5% applies to domestic fuel & power, renovation and alteration of empty dwellings, residential conversions and women's sanitary products. The zero-rate is a positive rate of VAT calculated at 0%. Zero-rated transactions are taxable transactions and count toward taxable turnover in 3 above. They include food, books, children's clothing, exports, medicines and some construction services. Exempt supplies , on the other hand, are not taxable ; they are exempt from VAT. They include insurance, financial transactions, betting, education, health supplies, land and postal services. - Input VAT
In general a VAT registered business is entitled to claim back the VAT incurred on its purchases. This is called Input VAT. There are some restrictions. Businesses cannot reclaim VAT on any costs that do not relate to taxable supplies (e.g. VAT incurred in making an exempt supply). Also specifically restricted is input VAT on business entertainment (entertaining non-employees) and cars not used exclusively for a business purpose. - Partial Exemption
As per 6 above, companies who make exempt supplies (see 5) cannot recover Input VAT on associated purchases. Companies who make exempt and taxable supplies will have some purchases (mostly overheads) that cannot be attributed directly to either type of supply. VAT on these costs must be apportioned using a partial exemption method. The standard method uses the ratio of taxable and exempt income but other methods can be agreed with HM Customs & Excise. - Import / Export
Exports outside the EU and dispatches of goods to businesses in EU Countries are zero-rated. For exports you must have shipping documents. For dispatches you must have proof that the customer is in business (usually a VAT registration number) and evidence that the goods have left the UK. Imports from outside the EU attract VAT at the port of entry. You must pay the VAT or have a deferment account for the goods to be cleared. Acquisitions from EU countries do not attract VAT as they enter the country but you must declare acquisition VAT on your VAT return. Import VAT and acquisition VAT can be reclaimed subject to the rules in 6. - Dealing with HM C&E
Most peoples first contact with HM Customs & Excise is to register for VAT. Which office you should write to will depend upon your postcode. A full list can be found at www.hmce.gov.uk/business/vat/send-regnderegvars.htm. General questions and enquiries can be made by phone to 0845 010 9000. Written questions and requests for rulings from C&E should be made to your Written Enquiries Team. Details of the correct office to write to are at www.hmce.gov.uk/contact/postcodes.htm. If you intend to rely on advice received from HM C&E you must ensure you get it in writing. - VAT Visits
Many companies will receive occasional visits from HM Customs & Excise. This is not an indication that they believe you have been deliberately avoiding paying VAT but they will take a close look at your records. Cash businesses, for example restaurants, that HM Customs & Excise believe are suppressing sales may be covertly observed for up to a year before or after being visited. About the Author  This guide was written by Paul Taylor of VATease Ltd, independent providers of VAT advice to professionals and industry. VATease specializes in providing VAT advice to small to medium sized accountancy and solicitors practices.
For more information on VATease visit their website at www.vatease.co.uk, email them at
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
or speak to Paul Taylor or Simone Hurst-Franks on 0121 778 4299. Disclaimer The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein. |
