THE CALCULATION AND PAYMENT OF VAT
The principal provisions relating to VAT are contained in the VAT Act 1994 as amended by subsequent Finance Acts. VAT law in the European Community is governed by various Directives, notably the Sixth VAT Directive (1977).
VAT is chargeable on [note 1];
VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payments) becomes due at the time of supply [note 2]. Supplies which are made in the UK or Isle of Man in the course of business and which are not exempt (see paragraph 78.6) are called taxable supplies [note 3]. The sale by the official receiver in his/her capacity as liquidator/trustee of assets used in the business carried on by the insolvent registered person will generally constitute a taxable supply.
VAT is chargeable where a taxable supply is made by a taxable person in the course of business carried on by him/her [note 4]. A company, firm or individual is a taxable person when he/she is, or is required to be registered under the VAT Act 1994 [note 5] (see also paragraph 78.8).
All supplies in the UK of goods and services to UK or overseas customers are taxable supplies, apart from items that are specifically exempt. All supplies made outside the UK and Isle of Man that are not made in the course of business do not attract VAT.
Exempt supplies come under the following headings:
Detailed guidance is provided in the VAT Act 1994 on the strictly defined and controlled criteria for exemption [note 6].
There are currently three rates of VAT in operation:
Standard rate - 20% [note 7]
This rate applies to all taxable supplies that are not zero rated or charged at the reduced rate. Thus on a sales price of £100, a vendor is required to add 20% (£20.00) to give a total VAT inclusive retail price of £120.00. In order to calculate the VAT chargeable on a tax inclusive sales price, the sales price is multiplied by a VAT fraction of 1/6.
Zero rate [note 8]
There are sixteen groups of zero rated supplies, the main ones being.
These are very wide categories and there are very detailed rules relating to the supplies that qualify for zero rating under each heading [note 9]. It should be noted that zero rated items are not exempt from VAT, but that VAT is charged on their supply at a nil rate. Those making zero rated supplies may recover from HMRC VAT that has been charged to them (including VAT charged at the standard or reduced rate).
Reduced rate - 5% [note 10]
The following groups of supplies are charged at a reduced rate of 5%:
Again, there is detailed guidance on the specific supplies that qualify for the reduced rate [note 11]. The VAT fraction for the calculation of tax inclusive supplies at the reduced rate is 1/21.
A person is a taxable person when he/she is, or is required to be registered under the VAT Act 1994 [note 5]. Registration is required whether the trading entity is a company, partnership, club or association or sole proprietor. In this chapter, the term "taxable person" describes all traders registered for VAT. Exemption from the requirement for registration is available where the anticipated taxable turnover falls below certain limits [note12]. The current limits for registration can be found on HMRC’s web site www.hmrc.gov.uk in notices 700/1 and 700/1.
VAT included in the purchase price of goods or supplies is input tax to the purchaser. VAT charged in the sale of the goods or services is output tax to the vendor.
Each taxable person in the chain between the original supplier and the final consumer of the goods is charged VAT on taxable supplies that he/she purchases or receives in the course of his/her business (input tax) and charges VAT on taxable supplies that he/she makes (output tax) [note 13]. VAT charged on supplies purchased or received for non-business purposes is not input tax.
At the end of each accounting period, input tax that the business has suffered is reclaimable from HMRC, and output tax that the business has charged must be paid to HMRC. Normally a payment to HMRC of the amount that output tax exceeds input tax is made, but where input tax exceeds output tax, a business may seek a refund of the difference from HMRC.
The tax value of a supply is the value on which VAT is due. The amount o VAT is the tax value multiplied by the tax rate.
78.11 VAT accounts, tax invoices and other records to be kept [note 14]
VAT registered businesses must keep a VAT account (a summary of the totals of input and output tax for the business) showing the calculation of the VAT liability for each period, and must supply a tax invoice in respect of each standard rate supply of goods or services made to another taxable person. All business records, e.g. annual accounts, bank statements, cash books and other account books, must be kept for six years. The business must keep a copy of each tax invoice issued and received. Each invoice must show [note 15] :
If a business mainly sells to the public, it does not need to issue a VAT invoice unless the customer requests one. Where the supply of the good/service is valued at less than £100 including VAT a less detailed invoice can be issued.
Tax returns are made to HMRC on form VAT 100 showing the VAT payable or repayable as summarised in the VAT account (see paragraph 78.11)
The period covered by a VAT return is called a tax period (on formal documents it is often referred to as a 'prescribed accounting period'). The return is due at HMRC one month after the end of the tax period.
Businesses that register with the electronic VAT return service may file their VAT returns via the internet.
The standard tax period for VAT accounting is three months. Returns are made to HMRC on a standard form VAT 100 and the return is due within one month after the end of the tax period. In the standard VAT scheme, the tax point (point of supply of the goods) is normally the earliest point of when [note 16];
There are separate provisions for relief from bad debts, (see Part 2, paragraphs 78.22-78.24).
Businesses with an annual turnover of taxable supplies before VAT of less than the prescribed amount (currently £660,000) can opt to join the cash accounting system for VAT, whereby VAT is accounted for on the basis of actual payments made and received rather than having to deal with the tax invoices issued and received. This avoids the business having to deal with the delay and paperwork involved in recovering the VAT on bad debts under the standard scheme.
(Amended March 2011)
A taxable person (see paragraph 78.8) may apply to use the annual VAT accounting scheme if they have an estimated VAT taxable turnover for the coming year is less than £1.35 million. The VAT can then be paid either monthly or quarterly. The VAT payable will be based on the VAT paid in the previous year, or an estimate of the VAT due for the year.
To pay monthly nine equal payments, each equal to 10% of the previous years VAT liability (or an estimate of the current year’s tax). These payments will be due at the end of months four to twelve. To pay quarterly three equal payments of 25% of the previous years VAT liability (or an estimate of the current years tax) will be due at the end of months four, seven and ten. A VAT return will need to be submitted within two months of the end of the annual accounting year along with any balancing payment between tax due and tax paid (if required).
Businesses with a taxable turnover (excluding VAT) of less than £150,000 and a total business income (excluding VAT) of less than £187,500 can apply to join the flat rate scheme. The VAT payable to HMRC is calculated as a percentage of the business's VAT inclusive turnover. The percentage to be used is determined by the type of trade sector that the business operates in. The different percentages are calculated by HMRC.
The standard VAT accounting scheme requires records to be kept of each separate transaction. For some retailers with a very high volume of sales, this might not be practically possible, so there are specific schemes that allow retailers to calculate their output tax in a way that suits their particular circumstance. These special schemes are restricted to businesses that cannot be expected to account for VAT in the normal way.
The capital goods scheme allows for adjustments to be made to the initial amount of input tax claimed. This reflects the differences in use of capital goods over a period of time. This period is known as the 'adjustment period' and allows for adjustments for up to 10 years.
Capital items include:
The scheme does not apply to assets acquired, or expenditure on assets held solely for resale.
78.19 Groups of Companies [note 17]
Two or more companies that are established or have a fixed establishment in the UK may apply to be treated as a VAT group if one of them controls each of the others, or if an individual, partnership or company controls all of them. Only one VAT return is then required and supplies between group members are disregarded for VAT purposes. Where there is no group registration VAT has to be added to charges for supplies from one company to the other, such as management charges. The group provisions are intended to reduce administrative burdens on businesses and provisions exist to ensure that unfair advantage is not obtained by group treatment.
Where two or more companies are treated as a group for VAT purposes all members of the group are liable jointly and severally for any tax due from the representative member [note 18]. HMRC will normally make a claim first against the representative member of the group and if that company is unable to pay the debt in full may make a claim against the other members of the group for the remaining debt.
78.20 VAT assessments [note 19]
If a taxable person fails to make a return when it is due or makes an incomplete or incorrect return HMRC have the power to assess the amount of VAT due. If a taxpayer does not submit a return and instead pays the VAT on the estimated assessment HMRC may increase the amount due with each assessment made.
Assessments must normally be issued before the 2 years from the end of the return period, or, if later, one year after the facts come to light. Assessments cannot be made later than 3 years after the end of the return period except in cases of fraudulent of negligent conduct, when the period is increased to 20 years.
Where the tax payer has died, no assessment can be made later than 3 years after death, or relate to a period more than 3 years before death.
HMRC have the power to charge interest on overdue tax in certain circumstances [note 20]. No penalty is charged if errors are disclosed voluntarily.
A default occurs if a VAT return is not received by HMRC together with all the VAT due for the period which it covers. A 'default surcharge' is payable if 2 or more returns within a year are not made on time. When a return is late HMRC will send a Surcharge Liability Notice or a Surcharge Liability Extension. The notice remains in force for the period of a year, unless a further return is late, in which case the period is extended for a year from the last day of the period covered by the return. A surcharge is calculated as a percentage of the VAT that is unpaid for the accounting period covered by the return. If a return is not sent and an assessment is made the surcharge will be calculate as a percentage of the assessed amount. For the first payment default during a surcharge period the surcharge is 2% of the tax outstanding at the due date. The rate of surcharge then progressively increases to 5%, 10% and 15% within the surcharge period. The 2% and 5% will not be collected by HMRC if the surcharge is less than £400.
If a material underpayment of VAT was not made in error and if the taxpayer cannot show a reasonable excuse the Misdeclaration Penalty and Repeated Misdeclaration penalty may be applied by HMRC. These are designed to encourage businesses to submit accurate returns. A penalty may be imposed by HMRC whenever there has been a significant or repeated lack of care in preparing a VAT return , leading to the true amount of tax payable being under declared. The penalty rate is 15% of the tax which would have been lost had the error been discovered.