Vat Schemes, Vat Records and Tax Points
This article is concerned with the procedures used to account for VAT to HMRC and the way in which the tax is administered. Other matters considered in this article include non-recoverable import tax, the VAT position of persons who make both taxable and exempt supplies and a number of VAT schemes which exist in order to simplify the workings of the VAT system.
Accounting for VAT
At regular intervals usually quarterly VAT registered persons must submit a VAT return to HMRC,showing input tax and output tax for the period covered by the return. Any excess of output tax over the input tax is payable to HMRC. Any excess of input tax over output tax is repayable by HMRC.
It is important to note the following:
A. A VAT return must usually be submitted within one month and seven days of the end of the tax period to which it relates, together with any tax due. Online filing and electronic payments are mandatory (subject to certain minor exceptions).
B. A registered person making supplies which are wholly or mainly zero – rated will be entitled to a VAT repayment in most tax periods. Such a person may opt to submit VAT returns monthly rather than quarterly, so speeding up tax repayments at the expense of making twelve VAT returns per year rather than four.
PAYMENTS ON ACCOUNTS
A registered person who makes quarterly returns and whose annual VAT liability exceeds £2.3 million is obliged to make payments on account to HMRC. The first payment is due one month before the end of the quarter and a second payment is due at the end of the quarter. A balancing payment is made one month after the end of the quarter. All of these payments must be made electronically.
Each of the two payments on account is usually calculated as 1/24 th of the total VAT liability for the previous year. However, the business may choose to pay its actual VAT liability for each month rather than the set payments on accounts.
The Tax Point
A date on which a supply is deemed to occur is known as the tax point of fact supply. The tax points on the supply determines the following:
A. For outputs, the tax period in which the tax on the supply must be accounted for
B. For inputs, the tax period in which the tax on the supply may be reclaimed
C. The rate of VAT applicable to the supply (if VAT rates change).
For a supply of goods, the “basic tax point” is the date on which the goods are removed or made available to the customer. For a supply of services, the basic tax points is the date on which the services are performed. However, the actual tax point of a supply will differ from the basic tax point in the following circumstances:
A. If the supplier issues a tax invoice or receives payment on a date which is earlier than the basic tax point, the actual tax point for the supply (or part of the supply) to which that invoice or payment relates is the date on which the invoice is issued or on which the payment is received, whichever occurs first.
B. Otherwise, if the supplier issues a tax invoice within 14 days after the basic tax point, then the invoice date becomes the actual tax point.
If a taxable person makes a taxable supply to another taxable person, a tax invoice must be issued.The main purpose of this invoice is to provide documentary evidence of the transaction, so allowing the person receiving the supply to reclaim the input tax related to that supply. The required contents of a valid tax invoice are:
A. The invoice number, date and tax point
B. The name, address and the VAT registration number of the supplier
C. The name and address of the customer
D. For each invoiced item, a description of the goods or services supplied
E. For each description, quantity of the goods of the extent of the services, the unit price, the amount payable before VAT and the rate of VAT applicable.
F. The total amount due, before VAT
G. The rate of any cash discounts available
H. The total amount of VAT chargeable.
A less detailed tax invoice may be issued if the consideration for the supply does not exceed £250. A less detailed tax invoice need to show only the following:
A. The name address and VAT registration number of the supplier
B. Their tax point
C. The description of the goods or services supplied
D. The total amount payable by the customer, including VAT
E. For each rate of VAT chargeable, the gross amount payable including VAT and therate of tax which is applicable.
The issue of a tax invoice is optional if a supply is made to a customer who is not a taxable person.Retailers are not required to issue a tax invoice unless asked for one by the customer. A VAT invoice may be issued electronically as long as the customer agrees to electronic invoicing.
Every taxable person must keep such a record as are required by HMRC. The main records which must be kept are as follows:
A. Business and accounting records that include (orders, delivery notes, business correspondence, purchases and sales books, cash books and other account books, till rolls, bank statements, paying in slips and annual accounts).
B. A VAT account
C. A copy of each tax invoice issued
D. All tax invoices received (although tax invoices are not required for payments of £25.00 or less relating to telephone calls, car park charges, toll charges or purchases made through coin-operated machines).
E. Documentation relating to imports and exports.
HMRC may also specify additional record keeping requirements for all businesses of a particular description and in cases where additional records might assist in identifying supplies on which Vat might otherwise go unpaid for individual businesses. All records must be retained for a period of six years of for such a lesser period as HMRC may allow. HMRC is empowered to require a taxable person to provide their VAT records for inspection and is also what empowered to inspect these records at the business premises.
The government has proposed as part or the making tax digital project that VAT accounting records should be kept electronically from April 2019 and that businesses should provide HMRC with summary VAT data which is generated automatically from these records. This data would be supplied quarterly and will affectively replace the old VAT return.
The VAT system offers a number of special schemes which are intended to simplify the workings of the VAT system, especially for smaller businesses. The main schemes are as follows:
A. The cash accounting scheme
B. The annual accounting scheme
C. The flat rate scheme for small businesses
D. The flat rate scheme for farmers
E. The margin schemes for second-hand goods.
Each of these schemes is explained below. There are also several special schemes for use only by retailers. The retail schemes are briefly considered in this article however should you require further advice please contact London bookkeepers who are experts on all VAT schemes and offer specialist VAT guidance as part of our London bookkeeping service. London bookkeepers offers a full VAT service to small to medium size businesses in London.
Cash accounting scheme
A registered person whose taxable turnover is not expected to exceed £1,350,000 in the next 12 months may opt to join the cash accounting scheme. Those who join this scheme account for output tax in the tax period in which payment is received from the customer and reclaim input tax in the tax period in which payment is made to the supplier. The tax point is ignored when allocating inputs and outputs to tax periods.
Joining the scheme allows a registered person to delay the payment of output tax to HMRC until the tax has actually been received from customers, which is beneficial if customers are given extended credit. The scheme also applies automatic relief for bad debts. On the other hand, input tax cannot be reclaimed until the tax has actually been paid to suppliers. A person may not join the cash accounting scheme unless:
A. The persons taxable turnover excluding sales of capital items is not expected to exceed £1,350,000 in the next 12 months.
B. The persons VAT returns are up to date.
C. All amounts due to HMRC have in fact been paid, or the person has come to an arrangement such payments to be made
D. Within the previous 12 months, the person has not been convicted of a VAT offence or assessed to a penalty for VAT evasion involving dishonest conduct.
The person who belongs to the cash accounting scheme must withdraw from the scheme at the end of the tax period if taxable turnover for the 12 months to date has exceeded £1,600,000. HMRC will allow such a person to remain in the scheme only if it can be demonstrated that the high turnover is
not expected to recur and that taxable turnover for the next 12 months is expected to be no more
than £1,350,000. The cash accounting scheme cannot be used for supplies of goods and services which are invoiced before the supply is made up of supplies were payment is not due for more than six months after the date of the invoice.
Annual accounting scheme
The person with a taxable turnover which is not expected to exceed £1350,000 in the next twelve months may apply to join the annual accounting scheme and submit only one VAT return per year. The scheme operates as follows:
A. During the year the person makes nine interim payments to HMRC, each equal to 10% of the VAT liability for the previous year. These payments must be made by direct debit or by other electronic means and begin in the fourth month of the year.
B. Optionally and subject to approval the taxable person may choose to make three interim payments in months four, seven and ten rather than the nine payments referred to above. In this case, each payment is equal to 25% of the VAT liability for the previous year.
C. If a person joins the annual accounting scheme when first registering for VAT on less than 12 months after registration, the interim payments are based initially upon the persons expected VAT liability for the year.
D. At the end of the year the annual return is submitted together with a final payment consisting of the balance of the VAT liability. The return and payment must be made within two months of the end of the year.
E. The person who operates the annual accounting scheme must withdraw from the scheme if taxable turnover exceeds £1.6 million for the previous year.
The advantages of the scheme include a reduction in the number of the VAT returns submitted each year from 4 to 1 and more predictable cash flows. The results are more time at the end of the year in which to complete the required return and to pay any VAT which is due.
The flat-rate scheme for small businesses
An eligible business which is registered for VAT may opt to change to join the flat-rate scheme for small businesses. This scheme enables a small business to calculate its VAT liability as a flat-rate percentage of total turnover and so avoids the need to keep detailed records of input tax and output tax. The flat-rate scheme operates as falls:
A. Output tax is charged to customers at the normal rate for the supply. Similarly, import tax is paid to suppliers at the normal rate. But the output tax charge to customers is not paid over to HMRC and in general input tax cannot be recovered.
B. In each tax period, a flat-rate percentage is applied to the VAT inclusive turnover for the period including the value of any exempt supplies. The result of this calculation is the amount of VAT payable to HMRC for the period.
C. The applicable flat rate percentage depends upon the trade sector in which the business operates. With the standard rate of 20%, the flat rate percentage currently ranges from four per cent to 16.5%. This special rate of 16.5% applies to certain “limited cost businesses”. One example being labour only businesses.
D. Input tax on the purchase of capital assets costing at least £2000 including VAT can be reclaimed in of the usual way, in which case output tax must be accounted for in the usual way on the eventual disposal of the asset.
E. The flat rate scheme can be used in conjunction with the annual accounting scheme.It cannot be used in conjunction with the cash accounting scheme of the retailschemes. The flat rate scheme offers an optional cash based turnover method and an optional retailers’ turnover method.
The flat rate scheme is available to businesses with a taxable turnover which is not expected to exceed £150,000 in the next 12 months. The business must normally leave the flat rate scheme if its VAT inclusive income exceeds £230,000 during any 12-month period ending on an anniversary of the date that it joined the scheme.
Margin schemes for secondhand goods
In general, VAT is charged on the full value of goods sold, regardless of whether those goods are new or second-hand. However, subject to certain conditions, a taxable person selling secondhand goods may choose to sell them through the margin scheme and charge VAT only on his or her profit margin. The scheme operates as follows:
A. Output tax is charged only on the seller’s profit margin. This is the difference between the price at which the goods were obtained and their selling price. No output tax is charged to the customer unless the goods are sold at a profit.
B. The seller’s profit margin is deemed to be VAT inclusive, so that the amount of tax due is calculated by multiplying this margin by the VAT fraction. Expenses incurred by the seller such as the cost of restoration, repairs and spare parts are ignored when establishing the amount of the profit margin.
C. The buyer cannot reclaim the input tax suffered, even if he or she is a taxable person.
The main conditions which must be satisfied for the VAT margin scheme to be used are that the goods concerned are second-hand and that they were acquired either on a supply on which no VAT was chargeable ( Example from a member of the public) or from someone who also sold the goods under the margin scheme. The sales invoice must include an indication that the margin scheme has been applied.
It is essential that a London bookkeeper has complete knowledge of all vat schemes that are available for the client. If you require a bookkeeper in London who has excellent knowledge of Vat and Payroll Services in London please contactLondon Bookkeepers.
Vat Retail schemes
Retailers are those that supply goods and services directly to the public. The retailer’s sales will often consist of a very large number of small transactions and in these circumstances, it would sometimes be difficult and expensive to keep detailed records of each transaction for VAT purposes.
In response to this problem, retail schemes have been devised which enable retailers to calculate their output tax in a straightforward way. The standard retail schemes are as follows:
A. POS Point of Sale scheme
B. Apportionment Scheme 1
C. Apportionment Scheme 2
D. Direct calculation scheme 1
E. Direct calculation scheme 2.
Retailers with an annual taxable turnover exceeding £130 million cannot use any of these standard schemes. If such retailers wish to use a retail scheme they must negotiate an individual “bespoke retail scheme” with HMRC.
It should be noted that the growing use of information technology by large retailers and by man small retailers means that he is now much easier to record individual sales than it was when VAT was introduced in 1973. This means that the original rationale for the retail schemes have diminished over the years. Accordingly, retailers may not use any of these schemes unless full permitted to do so. HMRC permission will be granted only if a retailer cannot reasonably be expected to account for VAT in the normal way, so that the use of a retail scheme is strictly necessary.
Should you require any further information on Vat Schemes or this article please contact London Bookkeepers on Tel: 0203-984-7364