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VAT Introduction Print E-mail

Government legislation requires trading entities to tax goods directly at the point of sale and pay a balance over to HMRC on a regular basis depending on the type of scheme that the entity is registered under.

Entities are required to register for VAT once an annual turnover threshold has been reached. The limits are amended from time to time. They can be found on HMRC's website 

https://www.gov.uk/vat-registration-thresholds

A registered entity charges a rate dictated by legislation on the sale price of goods and services and adds it to the selling price on a tax invoice. The rates are published on HMRC's website.

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services

A VAT registered entity can also deduct  VAT on invoices received from suppliers from VAT collected from customers to calculate its VAT liability to HMRC. In the VAT control account of the general ledger the VAT paid on supplier invoices is deducted from the VAT charged to customers and the balance is passed to HM Revenue & Customs. The idea is that only the end users of goods and services suffer the VAT liablitiy.

VAT at a standard rate of 20% is added to the selling price of goods. Not all supplies are subject to VAT as they may be exempt, zero rated or outside the scope of VAT. The consumer pays the gross amount of sales plus VAT to the business at the point of sale.

Business entities file monthly, quarterly or annual VAT returns that declare how much VAT has been collected and deducted. Legislation has been passed making it compulary to file online VAT returns. Once registered for online filing, there is an option to recieve emailed notifications of changes to VAT rules and due dates of returns and payments. VAT periods can range from 1 to 12 months. 

Small business can take advantage of the flat rate scheme, annual accounting scheme and the cash accounting scheme, but note although it may be easier to administer it is not always cheaper.  More information is available at:

https://www.gov.uk/vat-flat-rate-scheme/overview

https://www.gov.uk/vat-annual-accounting-scheme

https://www.gov.uk/vat-cash-accounting-scheme

The effect of the VAT scheme of tax is that only the end user or consumer pays VAT. Businesses therefore act as ‘agents’ for the government by collecting VAT on their behalf. HMRC carry out random inspections at business premises that can lead to fines and penalties if too much VAT has been claimed from HMRC or to little has been paid to HMRC.

Some supplies of goods and services in UK are exempt from VAT, such as food and clothing. See 'exempt supplies' in this section for more details. When an entity supplies some exempt goods and some taxable supplies, it may be required to make partial claims on expenses. The aim is to avoid making 'profit' from VAT claims.  It is wise to use a VAT expert to negotiate the best deal with HMRC in cases where they require partial claims to be calculated.

VAT is charged on the accruals basis. This means VAT is charged and payable whether or not the money for the supply has been received.  Recognising that this may create cashflow problems for very small businesses, the cash accounting scheme and flat rate scheme are available. The flat rate scheme allows an entity to charge the standard rate of VAT to customers but pay a reduced rate of VAT to HMRC without calculating the claims of VAT on invoices from suppliers. The balance between the standard and flat rate is added to turnover and taxed at Corporation tax rates.

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