Principles
VAT is due to HMRC on certain sales (outputs) and recoverable from HMRC on certain purchases (inputs). VAT registered entities have a duty to complete VAT returns usually quarterly VAT returns now submitted online (paper returns no longer accepted) Principle is that if output tax exceeds input tax, the business pays the excess to HMRC, but equally if input tax is less than output tax a refund is due
Standard VAT rate is 20% and is payable on most of products and services There is also a 0% VAT rate (zero-rated) on certain items i.e. Childrens clothes Some services are exempt e.g. insurance Some items have a different rate e.g. 5% rate for the supply of electricity
Because he is not VAT registered, he cant reclaim the tax HMRC Paid: 400 Reclaimed: 0 HMRC paid by retailer
80 0 80
Meal at a restaurant
Salaries
PAYE
Accountancy
Water
STANDARD RATED
Biscuits Meal at a restaurant Accountancy Alcohol Hot food
ZERO RATED
Newspapers Fruit & Vegetables Cold food Water Cakes
EXEMPT
Postage stamps Residential rent Education
discretionary items
essential items
cash-like items
(+ education)
taxed elsewhere
So how are Zero Rated items and Exempt items treated on a VAT return?
Trivia: In 1991 HMRC attempted to reclassify Jaffa Cakes as biscuits. They lost and thankfully Jaffa Cakes are still VAT free.
Nothing
Company set up sub-let residential property e.g. not VAT paid on sub-rent, but cannot reclaim VAT on normal office expenses
Company that provides sub-let serviced accommodation with laundry and catering services VAT only reclaimable on laundry and catering direct costs and a portion of shared VATable expenses
Business that supplies both VAT exempt products and standard rated products / services
Purchases directly connected to standard rated products / services + an apportionment of shared expenses
Businesses that sell VAT exempt products cant reclaim VAT, but those with zero rated products can
Entities must register for VAT if their turnover goes over 79,000
Registration is voluntary at any stage below 79,000 if you make standard or zero rated supplies, this is advantageous for: Zero rated suppliers (e.g. greengrocers) as they will receive regular refunds from HMRC because their outputs will be nil Start ups with significant VATable expenditure but with limited initial revenue (which will help ease cashflow) Small companies that sell to consumers have a price advantage over bigger competitors because they effectively charge 20% less Companies that provide VAT exempt supplies cannot VAT register
However, being registered for VAT, doesnt stop certain items being Blocked i.e. where VAT is charged but not recoverable on your VAT return
Computers
Staff Entertaining
Food
Legal fees
Motor Cars
Computers
Staff Entertaining
Food
Legal fees
Motor Cars
There are three main VAT schemes each with pros and cons
PROs
Easy to prepare by just including transaction by invoice date Low accountancy costs All accounting software can deal with this scheme
CONs
Need to pay VAT before cash is received Cash flow issues e.g. if large sales invoice in period Bad debt risk takes at least 9 months to reclaim VAT if an invoice is never paid by a customer Time consuming to administer as VAT return requires different dates to annual accounts Not all software supports it VAT bills arguably more likely to fluctuate vs accrual method Only available to smallest businesses Must continuously monitor costs to make sure still most cost effective scheme, e.g. if supplier starts charging VAT Slightly more difficult to administer in terms of annual accounts
Accrual
Cash
VAT declared on outputs and inputs when the cash is actually paid 1.35m net sales limit
Cash flow benefit as only pay VAT when it is actually paid No bad debt risk
Flat rate
Flat rate percentage of revenue based on service/product provided Percentage advised by HMRC is then multiplied by gross turnover. Maximum of 150k net turnover
Potential cash saving Very easy to administer Can also be prepared on cash basis
Cash scheme generally better for small business; Accrual scheme generally easier for accountants!
In addition, you can re-claim the input VAT at the normal rate on capital items over 2,000 (gross).
Generally, any business owner who suspects he or she has a lower cost structure than average should consider it (but remember the 150k limit)
Net revenue*: Wages Rent - exempt Telephone* Computer* Travel Accountancy* Profit: Note: * VATable item All figures net of VAT
Construction of new commercial building Sales of new commercial building under 3 years old Work on existing commercial building
Option to tax: If supply of building/land is exempt can opt to tax i.e. opt to treat as a taxable supply and charge VAT Implications: Standard rated VAT will be charged on sale or lease Input tax relating to supply may be recovered Once made option applies for 20 years If land/building is sold where option to tax has been made, VAT needs to be charged on sale of land/building
Sale of old commercial building (over 3 years old) Lease of commercial building But option to tax is available
Option to tax is only useful if a landlord has significant other VATable expenses
Principles
VAT is ultimately charged in full to the consumer, but it is collected in stages throughout the supply chain VAT was intended to apply to all non-essential items and childrens shoes, water and certain types of food are still exempt Businesses that sell VAT exempt products cant reclaim VAT, but those with zero rated products can VAT registration is required over 79k turnover There are three VAT schemes: Accrual, Cash and Flat rate each with pros and cons Owners of commercial property can opt to apply VAT if they have significant VATable operating expenses
Special cases
YOUR TEAM
Thank you for reading! Need further help with the preparation and completion of your VAT returns? Our team are happy to answer any of your questions. Contact Us
CONFIDENTIAL
This Confidential Insight Report (the Insight Report) has been collated by Accounts and Legal Consultants Ltd (the Account ant), solely for the informational purposes of the shareholders and management team of the company named on the cover sheet of this document (the Company) from information fu rnished by the management team of the Company and other public and proprietary sources.
It is further agreed that the recipient of the Insight Report agrees to treat all information contained in the document as strictly confidential, being for use only by the shareholders and management team of the Company and for informational purposes only. The Insight Report does not purport to offer investment advice and may not be relied upon as such. The Insight Report may not be copied or distributed by recipients to third parties without the prior written consent of the Accountant.
The information contained herein has been prepared to assist the management team and shareholders of the Company in making an assessment of the financial and operational performance of the business and does not purport to contain all the information that a management team or shareholder may need to determine the appropriate strategy for the Company. The Accountant does not make any representation or warranty (express or implied) as to the accuracy or completeness of the Insight Report or any of the information contained or referred to herein, and shall not have any liability resulting from the use of, or any omissions from, the Insight Report. The Insight Report contains certain financial data, estimates and projections and other forward-looking statements, which have been prepared based upon information provided by the management of the Company and other sources, and which involve significant assumptions, elements of subjective judgement and analysis that may or may not be correct and are subject, among other things, to business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. Accordingly, there can be no assurance that any of the estimated and projected results will be achieved. Actual results can be expected to vary from those set forth in or implied by such estimates, projections and other forward-looking statements, and such variations may be material and adverse. All requests for additional information should be made to: Accounts and Legal Consultants Ltd 0207 043 4000 20 Kentish Town Road London NW1 9NX