Value Added Tax General

General

UK VAT is broadly similar to Irish VAT. This is because VAT is a European Union based tax and derives from European Union rules.  Accordingly most the principles are similar throughout the European Union. However, there are significant differences not least in rates, turnover, registration requirements and the details of certain schemes and rules.

A taxable person is one who is or should be registered for VAT because he or she makes taxable supplies.  A taxable supply is every sale or supply in the course of a business.which is not exempt from VAT.  This is very broad in scope.

Businesses pay input VAT on their purchases.  They charge VAT on their outputs i.e. their sales of goods and services.  Input VAT can be reclaimed by businesses. The essence of VAT is therefore that the net VAT liability is on the output less the input.  Therefore, the tax charged on each stage is on the “value added” element by that supplier.

Supplies can be taxable, exempt or outside the scope of VAT.  VAT is charged on taxable supplies but not exempt supplies.  Only taxable supplies need to be taken into account in considering whether a trader needs to register for VAT.  Input VAT in relation to exempt supplies is not recoverable.

Sale / Supply of Goods or Services

VAT applies to the supply of goods or services in the course of a business. A business activity arises where goods or services are supplied on an ongoing basis in exchange for payment, as opposed to a once off or transitory transaction.

VAT applies to the sale or transfer of most goods and services. Exemption from VAT applies to certain goods and services, including in particular, insurance, certain doctors and dentists, certain types of education and training and financial services.

Because VAT taxes the increase in value, VAT on purchases is deductable.  “Inputs” or purchases must relate to the sale.  The net VAT only is payable.  VAT may be reclaimable if the inputs exceed the outputs in a VAT period.

If goods or services are purchased both for business and non business purposes VAT can be recovered only to the extent that they are used for business purposes. This principle also applies to goods and services purchased for a “vatable” business purpose and a non-vatable business purpose. An apportionment must be made.

Once a businesses’ turnover exceeds a certain level, it is necessary to register for VAT.  Once this happens a business must charge VAT on all its sales / supplies.  Correspondingly, it is entitled to a credit on the VAT on all of its purchases, relating to or for the purpose of those sales.

Reclaim of VAT on Purchases

It is usually possible for businesses to reclaim VAT paid on goods purchased for use in a business the subject of VAT on sales and supplies in the course of that business. It is only possible to reclaim input VAT on purchases to the extent and proportion that they are used for the supply of goods and services subject to VAT.

Apportionment arises where the same goods and services are exempt from VAT and some are not in relation to the reclaim of VAT on purchases.  Such businesses are referred to as partly exempt businesses.

There are a number of methods of apportioning the input purchases to exempt and non-exempt purchases There is a standard method and a special method for which approval must be obtained in advance.

It is possible to reclaim VAT on goods and services supplied prior to registration under certain limited conditions.   In the case of goods they must be supplied to the business within a certain period  before registration.  Records must show the quantity and date they were obtained.  In the case of services they must be supplied to the business not more than six months before registration.

Irrecoverable VAT

It is not possible to reclaim VAT on purchases that are not for business purposes or relate to the supply of goods and services that are exempt.The implication of a supply being exempt is that the corresponding input VAT (VAT on purchases) is not reclaimable.

VAT cannot be recovered on certain goods and services. This includes entertaining, cars unless they are 100% used for business purposes e.g. transportation business, or 50% of lease on charges for a car used partly for private motoring.

The business can recover VAT on the running costs of the car such as fuel and repairs even if there is private use.

Accounting for VAT

VAT accounting is normally undertaken quarterly. The net VAT due for the previous period must be paid by the deadline in the month following the relevant quarter.

An option to file annually is available to some traders Application must be made and HMRC must approve. Annual turnover must be less than €1.35 million. However interim payments are required throughout the year.

Tax arises at the time of supply.  In the case of goods this is when they are collected, delivered or made available.  In the case of services this is when they are performed.

This is subject to two qualifications. If the tax invoice is issued or payment is received before the above occurs the supply is deemed to take place at the date of this invoice. In these circumstances the date or issue or date of payment is the time when the supply is treated as being made.  If tax invoice is issued within 14 days after the above circumstances the date of issue of the invoice is the date when the supply is treated as taken place.

The value of the taxable supply is the amount on which VAT is charged.  This is usually the price. If a cash discount is offered VAT must be calculated as if the maximum available was taken.  If a trader withdraws good for his own use VAT must be accounted for on the replacement value of the supply.

Gifts of stock or fixed assets are treatable as taxable supply at replacement value except gifts to the same person which cost the trader £50 or less within a 12 month period or certain samples.

International VAT

The VAT rules on importing into and exporting from the UK are similar to those in Ireland because of the European Union background to the rules.  There are different rules for imports and exports from the UK to places inside and places outside the European Union, although the net effect may appear to be similar.

VAT is payable on imports from outside the European Union.  Goods imported must be declared to HMRC and VAT paid or accounted for. It may be possible to defer paying VAT on goods and services from outside the EU by registering with HMRC and showing that the business is entitled to reclaim  VAT.   The details must be entered in the importer’s VAT return form and VAT must be accounted for.  It may be possible to reclaim the VAT due so that there may be a netting off of VAT on purchases/inputs for business.

The supply of goods for export outside the EU or for dispatch to VAT registered customers in other EU countries is zero rated.   In the case of a supply within the EU the business purchaser/acquirer accounts for the VAT.

Equally when a UK business/acquirer purchases acquires goods from within the EU, it self accounts for VAT. If the supply is for the purpose of a vatable business,  there is a simultaneous accounting for VAT and corresponding deduction.This is reflected in the VAT return but no cash flow implication arises until there is sale of supply within the UK

If a business sells goods to VAT registered customers in other countries in the EU, it is necessary to record details in an EC Sales Lists in addition to the usual VAT returns.  Records of commercial invoices must be kept.

HMRC may permit use of a simplified annual EU sales list if the value of total taxable turnover is more than the VAT registration threshold plus €25,500, supplies to customers in other EU states are not more £11,000 per annum, andsales do not include new means of transport. Where simplified EU list is allowed an annual return is made

It is necessary to return an Intrastat Declaration if EU exports exceed £250,000 per year or imports exceed £1,500,000. The obligation does not apply to non-vatable businesses. Monthly intrastate returns are required.