Introduction to Value Added Tax
Introduction To Vat
London Bookkeepers are vat experts and as such offer a vat service as part of our London bookkeeping and accountancy service. The article below explains the fundamentals of vat. We are happy to talk to any vat traders about any vat issues, vat enquiries or vat matters. We specialize in all aspects of VAT.
VATA 1994- Law
Value added tax is an indirect tax which was introduced in 1973 (when the UK joined the EU ) and which is charged on the supply of a wide range of goods and services. Current vat legislation is to be found in the Value Added Tax Act 1994 (VATA1994) and is amended by subsequent Finance Acts. At present the underlying legislation on Vat takes the form of EU Directives, which are binding on the UK and dictate the results which UK legislation must bring about. If the UK leaves the EU this will no longer be the case but at present EU Directives are binding on UK tax law.
The basic principle of vat is that tax should be charged at each stage of the production and distribution process but that the total tax due should be bourne by the final consumer of the product. This is achieved by:
a. Traders who are registered for VAT are required to charge VAT on their sales and must account for this Output Tax to HMRC, but
b. Such traders are allowed to recover from HMRC the input tax which they pay to their own suppliers on purchases, so that
c. In effect, registered traders suffer no VAT and the total VAT is borne by the consumer at the end of the distribution chain.
d. In effect no vat trader should be better or worse off financially as a result of being vat registered.
Taxable Persons (Vat Registered Individuals or companies)
Formally, UK VAT is chargeable when a taxable supply of goods or services is made in the UK by a taxable person in the course of the business. The term “person” can refer to an individual, partnership or company, as well as to any body which supplies goods or services in the course of business. There is no need for a profit motive to exist, just that goods or services are supplied for a consideration, so the term “person” can also refer to a charity, or a club etc. It is simply a term. Vat traders new to vat registration often confuse the principles of income tax which is essentially a tax on profit with the principles of vat which is simply the transfer of tax on the supply of goods or services on behalf of HMRC. The term “Unpaid tax collector” has been widely used by the VAT traders but it is correct, the vat registered business is effectively a collector of direct taxes for the government in the form of Value Added Tax.
A taxable person is a person making taxable supplies who is, or should be, registered for VAT. Persons must register if their turnover of taxable items exceeds a prescribed registration threshold and may decide to register for VAT even if their turnover is below the VAT threshold. A taxable person should charge Vat to customers when making taxable supplies and must account for this output tax to HMRC and may reclaim the tax suffered on the input VAT. A person who is not a taxable person ( Not being Vat registered ) can neither charge VAT to their customers nor reclaim the vat charged to them by their customers on goods or services they have paid for. The only exception being museums and art galleries in that they are allowed to reclaim the vat on purchases even though they provide free admission to the general public and so HMRC decry that they do not operate as a business. A similar rule applies to the non-business activities of certain charities.
A taxable supply is any supply of goods or services in the UK other than a supply which is specifically exempted from VAT. VAT Is charged on a taxable supply at the standard rate of 20%, unless the supply attracts tax at the reduced rate (5%) or at the zero rate (0%). The types of supply which are exempt from VAT and the types of supply which are taxable at the reduced rate or the zero rate are as follows:
SUPPLY OF GOODS
A supply of goods is deemed to occur when the ownership of goods passes from one person to another. In general, a supply of goods will fall within the scope of VAT only if it is made for a consideration (example : for the return of money or payment in kind ) but the following are also deemed to be supplies of goods for VAT purposes: It explains as follows the rules on supply of goods for vat purposes.
- Gifts of business assets on which input tax has been reclaimed, other than:
- Gifts made to any one person in any rolling 12-month period costing in total no more than £50.00
- Gifts that are considered as “Samples”. A sample is a specimen of a product which is intended to promote sales of that product.
- Goods permanently taken out of a business for private business use by the owner or an employee of the business, in respect of the which input tax has been reclaimed.
Higher Purchase (HP Sales).
Importantly, the sale of goods on hire purchase terms is deemed to be a supply of goods but VAT is charged on the cash price of the goods, not the Higher Purchase price.
Supply of Vat Services.
London bookkeeping services offered by London Bookkeepers are of the opinion that any supply which is made for a consideration, but which is not a supply of goods is deemed to be a supply of services. However, a gift of services is not a taxable supply. The hiring of goods to a customer is a supply of services not a supply of goods since the ownership of goods does not pass to the customer. A supply of services is also deemed to occur if the owner or an employee of a business temporarily makes private use of goods owned by the business, in respect of which input tax has been reclaimed or makes private use of services which have been supplied to the business in respect of which input tax has been reclaimed. However, the private use of a business motor car is generally not a taxable supply.
London bookkeepers offers a full vat service to its London bookkeeping and service clients as well as a full payroll service in London. Our aim is to ensure that our London vat services are compliant with HMRC regulation. As leading London accountants, it is our aim to describe in full tax law in a full and transparent way.
A “self-supply” occurs when a taxable person makes a supply to himself or herself. For example, a self-supply of a motor car occurs if a motor manufacturer produces a car and then uses it instead of supplying it to a customer. The treasury is empowered to order that for VAT purposes, self-supplied goods or services are regarded as both:
a. A taxable supply made by the business, and
b. A taxable supply made to the business.
The effect of such an order is that output tax must be accounted for in relation to the supply but that an equal amount of input tax is deemed to have been suffered. This input tax may then be irrecoverable in whole or part.
Vat Exempt Supplies
The rules on vat exempt supplies are as follows:
A supply of goods or services is an exempt supply if it falls within one of sixteen exemption groups. In summary, these exemption groups are as follows:
Group 1: The sale or lease of land and buildings, other than
- The sale ( or lease of more than 21 years ) of new and certain second-hand buildings for residential or charitable use ( zero-rated ).
- The sale of new or uncompleted commercial buildings or land to be used for their construction ( standard-rated ).
- The grant of gaming rights, fishing rights or timber rights: the provision of hotel and holiday accommodation, caravan and camping pitches, boxes and seats at a theatre or sports ground, parking facilities and facilities for the storage or mooring of aircraft, ships etc: the letting of sports facilities, self-storage facilities or hairdressing facilities ( all standard-rated ).
- Any supply which would otherwise be exempt, but in respect of which an election has been made to waive exemption (“The option to tax” ).
Group 2: Insurance.
Group 3: Public postal services provided by the Royal Mail.
Group 4: Betting, gaming and lotteries.
Group 5: Financial services ( e.g. bank charges, stockbroking, underwriting )
Group 6: Education provided by schools, universities and further education colleges
Group 7: Health and Welfare services
Group 8: Burial and cremation services.
Group 9: Subscription to trade unions and professional bodies.
Group 10: Sports Competitions entry fees paid to non-making bodies.
Group 11: Disposals of works of art to approved bodies (eg: The National Gallery ).
Group 12: Certain fund raising events organised by charities.
Group 13: Cultural Services.
Group 14: Supplies of goods where input tax cannot be recovered.
Group 15: Investment Gold.
Group 16: Supplies of Services by groups involving cost sharing.
The tax implications of a supply of goods or services being exempt are as follows:
A. VAT cannot be charged on an exempt supply.
B. A person who makes only exempt supplies cannot register for VAT , charges no output tax, is not a taxable person and cannot reclaim input tax.
C. In effect, a person making only exempt supplies is in an identical position with regard to VAT as the final consumer at the end of a distribution chain.
If you are unsure about VAT exempt items we offer a London vat services which is included in our London Bookkeepers packages. London bookkeeping services and London accountants may not offer this service but London bookkeepers are specialists in all aspects of vat compliance.
Option To Tax.
The inability to reclaim input tax when making exempt supplies of land and buildings might lead to the supplier to “elect” for the “option to tax”. If such an election is made, the supplier charges output tax on the supply as standard rate but may then reclaim input tax. The customer will have to of course pay VAT, but if the customer is also a taxable person then he or she will be able to reclaim the tax paid and therefore may not object to the arrangement.