Liability to value added tax (VAT) VAT is charged on the value of supplies of taxable goods and services made in the UK, including some exports to EU countries. It is also chargeable on imports of goods from outside the EU.
The main rates are zero and 17.5%, but a few supplies are charged at 5%.
The supply of any goods and services, which are subject to VAT at any rate are called taxable supplies whether you are VAT registered or not. All traders must register for VAT if they make taxable supplies which exceed the set limits. Where the value of taxable supplies in the previous 12 months was more than £61,000, or is likely to exceed this annual limit within the next 30 days, the trader has to register within 30 days. Failure to notify on time attracts penalties.
The VAT system
A registered trader must charge customers output VAT on any sales. The value of input VAT can be offset against output VAT and the excess output VAT is paid over to Customs and Excise. Where there is an excess of input VAT, tax may be reclaimed.
Some input VAT cannot be reclaimed:
* Purchases of motor cars, except cars bought wholly for business purposes.
* Business entertainment expenses.
Most businesses have to account for VAT at the date that the invoice for the supply is raised. However, traders can claim VAT bad debt relief on debts more than six months old that have been written off.
Traders with a turnover of not more than £660,000 may account for VAT on a cash basis rather than an invoice basis, thereby obtaining automatic relief for any bad debts. This limit is due to be increased to £1,350,000 probably from 1 April 2007, subject to EC approval.
Certain supplies are exempt from VAT. Output VAT is not charged on such supplies and, in principle, input VAT attributable to such supplies cannot be reclaimed (or the claim is restricted).
Relatively small businesses may be able to reclaim all their input VAT - even for their exempt supplies. The input VAT attributable to their exempt supplies must not exceed £7,500 a year and must be no more than half the VAT on all their purchases.
* Exempt supplies include: insurance, finance, health, education, and burial and cremation services.
* In general, leases and sales of non-domestic land and buildings, other than newly built ones, are exempt, unless the option to tax has been exercised.
* A taxable person may choose to charge output VAT on supplies of existing buildings and land (including rents) that are not used for residential or charitable purposes.
* Sales of new buildings are standard-rated unless they are used for residential or charitable purposes.
If a business makes zero-rated supplies, it does not charge VAT on supplies but can reclaim input VAT.
Zero-rated supplies include :
* Most food and some drinks - but not catering, restaurant meals or hot take-away food.
* Domestic supplies of water and sewerage.
* Books and most other publications.
* Sales of new residential buildings and buildings for use by charities.
* Supplies of services by contractors when constructing new residential buildings or buildings for charities.
* Alterations to some buildings where listed building consent is needed.
* Public transport of passengers.
* Drugs, medicines and aids for the disabled.
* Clothing and footwear for children.
* Exports of goods and certain services to non-EU countries.
Reduced rate supplies
Some supplies are charged at a rate of 5%. They include:
* Domestic power and fuel and certain energy saving materials for residential or charitable use.
* The grant funded installation of heating equipment and the connection of a mains gas supply in the sole or main residence of an individual aged 60 or more or in receipt of social security benefits.
* Woman's sanitary protection products.
* Children's car seats.
* Cycle helmets.
* Conversions of residential property into a different number of dwellings, certain conversions into care homes or multiple occupancy dwellings, and certain renovations or alterations of property that has not been lived in for three years.
EU single market
Where sales are made to businesses that are registered in other EU countries, the supplier need not charge VAT.
* The customer's VAT number must be shown on the sales invoice. Jobs2india.
* The customer is then responsible for accounting for output VAT on the goods on its own VAT return, but may claim input VAT if the goods are for use in making taxable supplies. Convert2cad.
* However, output VAT must be charged on sales to private individuals in other EU states. Where such sales exceed that state's registration threshold, the trader must register for VAT in that state. Btassociate.
Collection of VAT
Registered traders normally have to submit VAT returns, and pay any VAT due, every three months.
* Traders who regularly reclaim VAT from Customs and Excise may apply to submit monthly returns.
* Some large companies have to pay monthly.
* Tax on imports from outside the EU has to be paid at the time of importation, unless special arrangements are set up.
* Traders with a turnover of £1,350,000 a year or less can complete annual returns only, making nine monthly VAT payments on account, with a final payment due along with the year-end return.
* Very small businesses can simplify their accounting by applying to pay VAT at a flat rate on total turnover without deducting input tax. The business must have taxable turnover (including exempt supplies) up to £150,000 and total turnover of not more than £187,500. The rate is determined by trade sector.
* Penalties are charged for late or incorrect VAT returns.
* A default surcharge of between 2% and 15% of the VAT payable is charged where returns are late.
* A penalty of 15% is charged for serious or persistent misdeclarations.
* Interest can also be charged on VAT paid late.