The ABC of VAT

24 October 2003 by
The ABC of VAT

Value Added Tax (VAT) was introduced in the UK on 1 April 1973 by the Finance Act 1972. A series of Finance Acts have made amendments to the law, which has now been consolidated in the Value Added Tax Act 1994.

Customs and Excise is the Government agency responsible for the tax and it has far-reaching powers to control the taxpayer.

What is VAT?

VAT is a tax on consumer expenditure and is collected on business transactions and imports.

The basic principle is to charge VAT at each stage in the supply of standard-rated goods and services. If the customer is registered for VAT and uses the supplies for business purposes, he will be able to reclaim the VAT from Customs & Excise. The broad effect is that businesses are not affected and VAT is borne by the final customer.

Rates of VAT

There are three rates of VAT:

  • a standard rate, currently 17.5%
  • a reduced rate of 5% on domestic fuel and power and the installation of energy-saving materials, and more recently in relation to urban regeneration
  • a zero rate. No tax is payable on zero-rated supplies, such as food, books, children's clothing.

Zero-rated supplies are treated as taxable supplies in all other respects, including the right of the person making the supply to recover the VAT on their own business expenditure.

Some supplies are exempt from VAT (eg education), which means that no tax is payable, but equally the person making the supply cannot recover any of the VAT on their own expenses.

Some supplies are "outside the scope" of the tax and bear no VAT.

VAT registration

Supplies that are made in the UK or the Isle of Man and which are not exempt are called taxable supplies.

A taxable person is an individual, limited company, partnership etc, which is, or is required to be, registered for VAT.

A person who makes taxable supplies above certain value limits is required to be registered for VAT with Customs & Excise.

The compulsory taxable turnover limit is currently £54,000 (from 1 April 2001) in any 12-month period. This limit is generally increased annually by the Budget regulations.

A person who exceeds £54,000 of taxable supplies within any 12-month period must notify Customs & Excise within 30 days. If notification is not made at the proper time, Customs & Excise may issue a financial penalty.

Where only zero-rated supplies are made, C&E may exempt a person from registration.

If the taxable turnover is below the specified limit, a person who makes taxable business supplies can request voluntary registration.

A person who is registered for VAT can apply to deregister if the VAT exclusive value of supplies in the next twelve months will not exceed a specific limit (currently £52,000 from 1 April 2001). This limit is generally increased annually by the Budget regulations.

VAT returns

The VAT Central Unit in Southend-on-Sea keeps registration records, despatches return forms and reminders, receives completed forms and VAT payments and repays VAT.

Once a person is registered, a VAT return will be sent to them either monthly or quarterly.

The VAT return, and any payment due, must arrive at the VAT Central Unit by the due date shown on the form. A person could be liable to a financial penalty if the return and any payment is late or seriously inaccurate.

In any period covered by a VAT return, a registered person either makes a payment to Customs & Excise, or Customs & Excise makes a repayment to the registered person.

Payment is made to Customs & Excise when the amount of VAT levied on sales is higher than that on purchases. Customs & Excise makes a repayment if the VAT on purchases is higher than the VAT charged on sales.

Errors

If an error has been made on a previous VAT return, there are two methods of voluntary disclosure.

  • Method 1 - for errors not exceeding £2,000 (VAT).
    The VAT account for the period can be adjusted and the value of the adjustment included in the current VAT return.
  • Method 2 - for errors exceeding £2,000 (or any error).
    Disclosure can be made on form VAT 652, which is obtainable from a local VAT Office or Business Advice Centre or by writing to Customs & Excise.

Records and accounts

Once VAT registered, you must keep records of all the supplies you make and receive and a summary of VAT for each tax period covered by the VAT return. The summary is called a "VAT account".

Specifically, every taxable person must keep the following records:

  • Business and accounting records
  • VAT account
  • Copies of all VAT invoices issued
  • VAT invoices received
  • Documentation received relating to acquisitions of any goods from other European Community (EC) countries
  • Copy documentation received relating to transfer, dispatch to other EC countries
  • Documentation relating to imports/exports

Business records include, in addition to the specific items listed above, orders and delivery notes, relevant business correspondence, appointment and job books, purchases and sales books, cash books, records of daily takings such as till rolls, annual accounts, bank statements and paying-in slips.

Penalties are payable for failure to keep and preserve records.

A taxable person must keep and preserve records for a period of six years, or a shorter period if authorised by Customs & Excise.

Special schemes

A number of special schemes have been introduced over the years, mainly to assist retailers and the smaller business.

Retail schemes
VAT retail schemes were introduced at the start of VAT in 1973 because it was identified that many businesses dealing directly with the public and making supplies at different rates of VAT would be unable to keep records of every sale in order to calculate the VAT due in the normal way.
The retail schemes are, therefore, methods for arriving at the value of taxable retail supplies and determining what proportion of those sales are taxable at different rates of VAT.
Details of retail schemes can be found in Customs & Excise Publication Notice 727, Retail Schemes. There are special arrangements for caterers.

Cash accounting
A business may, subject to certain conditions, account for and pay VAT on the basis of cash paid and received. Businesses with a turnover not exceeding £600,000 may adopt this scheme.
The main advantages of the scheme are automatic bad debt relief and the deferral of the time for payment of VAT where extended credit is given. This scheme is not beneficial where most sales are paid for promptly or in cash. Full details can be found in Customs & Excise Publication Notice 731.

Annual accounting
The annual accounting scheme allows businesses to complete one VAT return each year. Depending on the level of turnover, interim payments are made either monthly or quarterly, although some smaller businesses are exempt from this requirement.
The annual VAT return must be completed and submitted to Customs & Excise, along with any balancing payment, within two months of the end of the annual VAT accounting period. Full details can be found in Customs & Excise Publication Notice 732.

All the notices, plus details of the special arrangements for caterers, can be obtained from the national advice service on 0845 010 9000.

VAT inspections

Long gone are the days when customs officers visited businesses as a matter of routine.

Today Customs & Excise specifically identifies a business where it considers the tax paid to be incorrect, using a variety of methods.

Customs officers normally visit the main place of business to inspect the records and accounts. Generally they will only review the last three years of trading, unless they suspect fraud. The visit may take between a couple of hours or a couple of days depending on the size and complexity of the business.

It is usual for an appointment to be made, but it is not uncommon for officers to call on cash-orientated businesses unannounced and request an interview and take in-depth readings from the till register. Should this happen, professional advice should be sought immediately.

The type of businesses that should expect this kind of visit include take-aways and restaurants.

Officers' assessments

Customs & Excise officers are given powers to raise an assessment where VAT returns have not been submitted or it appears that the returns are incomplete or incorrect.

The assessment must normally be made within two years from the end of the return period in question, or (if later) within one year of the facts on which the assessment is based coming to the knowledge Customs & Excise.

An assessment cannot be raised more than three years after the end of the return period, except in cases of fraud, where the period is extended to twenty years.

Interest and penalties

Interest is chargeable in certain circumstances where the tax has been under-declared or over-claimed. Customs also pays a repayment supplement when it does not make a repayment on time. Interest can be paid to the taxpayer as a result of error by Customs & Excise, where VAT has been overpaid or under-claimed.

Customs has a wide range of criminal and civil penalties including the following:

Offence - criminalMaximum penalty
Fraudulent evasion of VAT Unlimited fine or seven years' imprisonment
Producing false documents Unlimited fine or seven years' imprisonment

Offence - civilMaximum penalty
Evasion of VAT Amount of VAT evaded
Misdeclaration or neglect 15% of the VAT that would have been lost
Repeated misdeclaration 15% of the VAT that would have been lost
Failure to register 15% of the VAT that would have been due
Failure to keep records £500
Default surcharge 15% of the unpaid VAT

Certain civil penalties can be avoided where there is a reasonable excuse for conduct and can be mitigated by Customs & Excise or a VAT Tribunal.

Appeals

An appeal against a decision of Customs & Excise on certain designated matters may be made to a VAT & Duties Tribunal and from there, on a point of law, to the High Court (Court of Sessions in Scotland) and continued up to the House of Lords under normal procedure.

When a person disagrees with a decision made by Customs & Excise, he may ask his VAT office to reconsider it.

Although a reconsideration can be requested at any time, a notice of appeal to the VAT Tribunal must normally be served within 30 days of the disputed decision. Form Trib 1 is used to notify an appeal to the Tribunal Centre.

The decision following the hearing is generally made by the tribunal chairman in writing sometime after the end of the hearing.

Useful addresses
VAT Central Unit
Alexander House
21 Victoria Avenue
Southend On Sea
SS99 1AA
Tel: 01702 348944
Fax: 01702 366687

The Customs & Excise Web site - www.hmce.gov.uk - lists all the VAT Business Advice Centres, with addresses and telephone numbers.

HM Customs & Excise Advice Helpline: 0845 010 9000.

by Dave Sweeting
Dave Sweeting is head of the VAT department at accounting firm Wilson Braithwaite Scholey.

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