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 a bloody quick 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 VAT registered, taxable businesses making purchases on which they are charged VAT can reclaim it (subject to exceptions).
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 (rewritten in 2006 as the Principal VAT 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 (£81,000 as at April 2014) 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 Revenue & Customs. You are required to keep adequate records to back up these returns.
Most goods and services are subject to VAT at the standard-rate of 20%. 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 sales of 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 some postal services.
In general a VAT registered business is entitled to claim back the VAT incurred on purchases made in the course of its business. 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 and VAT incurred on private or non-business expenses). Also specifically restricted is input VAT on business entertainment (entertaining non-employees) and cars not used exclusively for a business purpose.
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 HMRC.
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 (and import Duty) 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 Revenue & Customs
Most people's first contact with HMRC is to register for VAT. This can be done online or by post. Full details can be found at http://www.hmrc.gov.uk/vat/start/register/how-to-register.htm. General questions and enquiries can be made by phone to 0300 200 3700. Written questions and requests for rulings can be sought by email or post. Details of how to do that are at http://search.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=dMVkEC6liWE. If you intend to rely on advice received from HMRC you must ensure you get it in writing.
Many companies will receive occasional visits from HMRC. 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 HMRC 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 Aardvark VAT Resource, independent providers of VAT advice to professionals and industry.