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Spire Accountants

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What Is VAT?

 VAT stands for value added tax and  is a tax that is applied to the price of certain goods and services that are bought and sold within the UK - these supplies are known as taxable supplies.  


It is important to note that a supply of goods and services is only taxable if it meets the following criteria:


  1. It is made in the UK or Isle of Man;
  2. It is made in the course of business;
  3. It is made by a business (sole trader, company, partnership or another unincorporated structure) that is VAT registered in the UK or SHOULD be registered for VAT;
  4. It is a supply that is not included under the 2 non taxable supply categories - VAT exempt and out of scope of VAT.



What Are The Rates of VAT On Taxable Supplies?

Zero Rated - 0%

Standard Rated - 20%

Reduced Rate- 5%

These are still taxable supplies with VAT charged at a rate of 0%.


The most common items covered by this rates include:


  1. Clothing and footwear for children;
  2. Safety helmets;
  3. Prescription medication;
  4. Aids for the disabled;
  5. Construction of residential buildings;
  6. Fresh fruit & vegetables;
  7. Milk, butter,eggs & cheese;
  8. Meat and poultry;
  9. Chilled or frozen ready meals;
  10. Canned food;
  11. Frozen food (except ice cream)
  12. Bread products;
  13. Cereal;
  14. Biscuits (as long as they are not covered in chocolate)
  15. Cakes;
  16. Newspapers, books, brochures and leaflets;
  17. Public transport fares
  18. Women's sanitary products.

Reduced Rate- 5%

Standard Rated - 20%

Reduced Rate- 5%

These are taxable supplies with VAT charged at the reduced rate of 5%.


The most common items covered by this rate include:


  1. Aids for the disabled
  2. Domestic supply of gas and electric

Standard Rated - 20%

Standard Rated - 20%

Standard Rated - 20%

These are taxable supplies with VAT charged at a standard rate of 20%.


These are most supplies which are not covered by the zero or reduced rates and are not exempt or out of scope supplies.

What Are Non Taxable Supplies?

VAT Exempt

Out of Scope

Out of Scope


These are supplies which you cannot charge VAT on, even at a rate of 0%.


The most common items covered by this rates include:


  1. Burial or cremation (human)
  2. Commercial land & buildings (selling/leasing/letting)
  3. Cultural events operated by public bodies (museums, art exhibitions, zoos & performances)
  4. Education, vocational training
  5. Financial services (money transactions, loans/credits, savings/deposits, shares/bonds)
  6. Insurance
  7. Gambling (betting, gaming, bingo, lottery)
  8. Health services (doctors, dentists, opticians, pharmacists & other health professionals)
  9. Medical treatment & care
  10. Membership subscriptions
  11. Postage stamps
  12. Sports activities & physical education
  13. Television license


If a business is supplying goods and services which are both taxable and VAT exempt, they are known as partially exempt. In this case, shared costs which cannot be traced to a particular supply such as overheads can be apportioned based on taxable turnover  as a percentage of taxable turnover plus exempt turnover. This percentage can then be used to determine how much relief can be obtained of the input VAT relating to the shared costs.

Out of Scope

Out of Scope

Out of Scope


These are supplies which you cannot charge VAT on or reclaim VAT on.


The most common items covered by this rates include:


 

  1. Goods & services sold outside the UK
  2. Goods & services supplied by unregistered supplier
  3. Statutory fees & services (MOT testing, congestion charge etc)
  4. Tolls for bridges, tunnels and roads (operated by public authorities)
  5. Voluntary donations to charity

Who Needs To Register for VAT?

A business, regardless of structure type they are operating as, must register for VAT if their taxable turnover exceeds £90,000. Taxable turnover is defined as all turnover generated by sales that are not VAT exempt or out of the scope of VAT. 


This  turnover threshold is measured in a rolling 12-month period rather than  a fixed period like the tax year or the calendar year. This means that registration is required if a business passed the threshold at the end of any 12 month period or is expected to within the next 30 days.

How Do You Register for VAT?

A business can register online on the HMRC website by creating a government gateway account and requesting the service you need.


Upon  registration, HMRC will issue a VAT registration certificate confirming  the business’ VAT number, effective date of registration and the due  date of the first VAT return.  


 

A VAT Registration Number (also known as a VAT number), is a unique code  that is issued to a company that is VAT registered. This number is 9  digits long and will usually feature GB at the start.   It is very important that  your VAT number is checked whenever submitting VAT returns. Mistakes in  your VAT return can cause delays, while HMRC may disallow your tax input  claim.




What Are The Implications of VAT Registration?

Charge VAT At The Correct Rate

Charge VAT At The Correct Rate

Charge VAT At The Correct Rate

You must ensure that VAT is charged on goods and services at the applicable rate.


The net amount is excludig VAT and the gross amount incudes VAT and can be arrived at as follows:


  1. Zero rated supplies - multiply net number by 1;
  2. Reduced rated supplies - multiply net number by 1.05;
  3. Standard rated suppies - multiply net number by 1.20.


A business, once registered, can either add VAT to prices or keep the prices the same and absorb the VAT cost. The latter would mean taking the sales of reduced and standard rated supplies for a VAT period and dividing them by 1.05 and 1.20 respectively to arrive at the net value of the supplies. The difference between the actual sale value for both reduced and standard rated supplies and the net value will be the output VAT due to HMRC.


Issue VAT Invoices

Charge VAT At The Correct Rate

Charge VAT At The Correct Rate

 A Full VAT Invoice is required to contain the following information:


  1. The supplier’s business name,      address and contact information
  2. The customer’s name and      address 
  3. A unique sequential invoice      number
  4. The supplier’s VAT registration number
  5. The tax point date (also known as the date of supply) that the goods/services were provided
  6. The date of the invoice (this may be the same at the tax point date)
  7. A clear description of what is being invoiced, (including quantity and cost of each item if applicable)
  8. The net amount (total amount      excluding VAT) being charged per item;
  9. The rate of VAT charged per item;
  10. The total amount charged excluding VAT;
  11. The total  amount of VAT charged.


Full invoices can be issued for any amount, however there are alternative formats which can be used depending on the net sales value of the invoice (invoice value exlcuding VAT).


However, a simplified VAT invoice for sales under the value of  £250 (including VAT) can be issued.  As the name suggests, this document contains far  fewer details. The following information is required:


  1. The suppliers details (name, address, contact information, etc.);
  2. The suppliers VAT registration number;
  3. A unique invoice number for identification;
  4. A  description of the goods and services provided;
  5. The date of supply for the goods and services;
  6. Gross amount (total amount including VAT);
  7. A clear indication of items which are exempt ot zero rated (some supplier use an asterix against these on invoices)


A modified invoice is another type of  VAT invoice - it is the same as a full invoice except it includes the total amount including VAT per line item. Modified invoices should be used when raising invoices for more than £250 exlcuding VAT.


A VAT invoice does not need to be issued if:

 

  • You are not VAT registered;
  • The sale of goods or services is exempt from VAT;
  • Your customer is not VAT registered;
  • You have gifted the service or goods being received;
  • You have a self-billing agreement in place with your customer.


Maintain VAT Records

Charge VAT At The Correct Rate

Maintain VAT Records

 

There are 2 records that are specifically required for VAT. These are:


  1. The VAT account - this records the VAT incurred on purchases during the period and VAT charged on sales. It should support the figures which have been included within your VAT return;
  2. A VAT invoice for supplies to other VAT-registered businesses -  a ‘VAT invoice’ is  just the term for an invoice which contains some information required by  the VAT rules, most commercial invoices will already hold the right information.


In addition to the above records, you are also required to keep business records documenting the transactions underrtaken by the business such as:


  1.  Sales invoices;
  2.  Purchase invoices;
  3.  Cash book or bank statements;
  4. A profit and loss and balance sheet;
  5. Till rolls to evidence sales;
  6. Import and export dcumentation


Records mus tbe maintianed for 6 years from the filing of the VAT return.

File VAT Returns

Pay VAT Due To HMRC

Maintain VAT Records

VAT returns are generally filed every quarter (HMRC will notify the business upon registration  of the date of its first VAT return). They are filed one month and 7 days after the end of the relevant VAT period.


VAT retruns must be filed in accordance with the Making Tax Digital (MTD) initative being rolled out by HMRC - this essentually required VAT registered businesses to submit VAT retruns using MTD compatiboe software which is able to generate and submit a VAT return automatically based on digital information that has been input into the software for the relevant tax period. The MTD system is replacing the online HMRC filing system which has been used in the  past and is continuing to be used for other taxes.


Spire Accountants use fully MTD compliant software which our clients can use to meet their MTD obligations and which we can then use to submit a final VAT return to HMRC. Contact us on 07442202165 for more information or email us at Shakeela@spireaccountants.net.

Pay VAT Due To HMRC

Pay VAT Due To HMRC

Pay VAT Due To HMRC

The payment date for VAT for a VAT period is the same as the retrun filing date. The payment must be recieved by HMRC by this date. 


To ensure prompt payment, the following methods will generally ensure the payments reaches HMRC the same day or the next day:

 

  • online or telephone banking (Faster Payments)
  • through your online bank account
  • CHAPS


All other forms of payment such as BACS and cheque will take up to 3 working days to clear.


HMRC will charge surcharges for late payment.

What Are The Penalties For Non Compliance?

Penalties For Not Registering For VAT

Penalties For Not Maintaining VAT Records

Penalties For Not Maintaining VAT Records

 

Where notification is late a failure to notify penalty will be  charged unless there is a reasonable excuse for the delay. The penalty  is a percentage of the VAT unpaid. It will be:


  • 5% if you registered no more than nine months late
  • 10% if you registered between nine and 18 months late
  • 15% if you registered more than 18 months late.

Penalties For Not Maintaining VAT Records

Penalties For Not Maintaining VAT Records

Penalties For Not Maintaining VAT Records

The period for retaining records is six years. There can be a fixed  penalty of £500 for breaching this requirement or £250 for businesses in  the first year of trading.


A penalty of £3,000 can apply if records  have been deliberately destroyed, which can be reduced to £1,500 if only  some records are destroyed. 

Penalties For Late Filing & Payment

Late Filings

 

Late submission penalties work on a points-based system.

For each return you submit late, you’ll receive a penalty point until you reach the penalty point threshold. When you reach the threshold, you will receive a £200 penalty. You will also receive a further £200 penalty for each subsequent late submission while you are at the threshold.


The threshold limits will depend on your VAT filing frequency requirement:


(1) Monthly     5 points

(2) Quarterly  4 points

(3) Annually    2 points


Late Payment


No penalty will be applied to payments which are up to  Maximum of 15 days late.


The first late payment penalty is calculated at 2% on the VAT you owe at day 15 for payments which are unpaid from 16 to 30 days late.


 A further penalty of  2% of what is still outstanding at day 30 is charged for VAT payments overdue by more than 30 days.


The second late payment penalty is calculated at a daily rate of 4% per year on the outstanding balance. This is charged every day, from day 31 until the balance has been repaid in full.


If the balance due to HMRC is outstanding by just under 2 years, a further assessment will be made by HMRC of any further penalties due.

Penalties For Inaccurate Returns

Cumulative net VAT errors of £10,000 or less discovered during a VAT  period may be included in the VAT return for the next VAT period, as may  net errors between £10,000 and £50,000, which do not exceed 1% of the  Box 6 (total value of sales and other outputs) figure for the same VAT period. Net errors exceeding those limits   must be notified separately   by completing form VAT 652 or by writing  to HMRC. Deliberate VAT understatements must always be notified on form  652. 


HMRC can impose different penalties for errors above £10,000 in value, depending on the nature or seriousness of the error:


  • Penalties for careless errors range from 0-30 percent of the value of the error.
  • Penalties for deliberate errors can be up to 70 percent of the value of the error
  • Penalties for errors that are deliberate and concealed can be up to 100 percent of the value of the error.


Prompted errors (where HMRC has made you aware of an error) attract higher penalties than unprompted errors, so it’s essential to notify HMRC if you spot an error.


If you have adjusted a careless error or inaccuracy on your  return that is within the thresholds, you may still write to HMRC  asking them to consider any reduction to a penalty. As the majority of  errors will not be careless or deliberate, no penalty will be due. 
 



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