VAT – Value Added Tax was introduced in 1975 and replaced Purchase Tax, which was mostly on luxury goods. At that time Income tax was 33% and the first rate of VAT was 12.5%. Since then VAT rates have risen and Income rates have fallen. VAT income now accounts for about 1/3rd of taxation income.
The VAT legislation is extensive and is published by HMRC as VAT Notices. VAT Notice 700 – VAT Guide is the starter which all VAT registered persons should read. There are now over a hundred VAT notices covering all forms of trading – even the trading in racehorses. All the VAT notices are listed on HMRC’s website and details of the contents are extensive. If you have a query and you can’t find the answer then they also list helplines.
What is VAT? A company purchases raw materials e.g. rolls of cloth and converts these to shirts using labour and overheads then sells these to a chain of shops at a profit. VAT is chargeable on the shirts sold and the amount paid on the rolls of cloth is set off against it. The output tax (on the shirts) less the input tax (on the cloth) creates a tax on the amount of the increase between the purchase and the other costs plus profit – i.e. the value added to the cloth. This is why it’s called Value Added Tax.
What are the different schemes?
Prelude deals with a number of schemes – Standard Invoicing Accounting, Standard Cash Accounting, Standard Flat Rate, Cash Flat Rate and elements which are not really schemes – Reverse Charge Accounting for transactions with the EC.
Other schemes which will be introduced as the need arises are: Margin Scheme for second hand goods and covering things like artistic works; Margin Scheme for second hand cars, which is slightly different; Retail schemes – there are five of these and the Domestic Reverse Charge for the construction industry that should have been introduced in October 2019 but has been postponed to October 2020. All of these schemes and others are covered by VAT notices. The introduction of making tax digital in April 2019 is itself covered by VAT notice 700/22.
What are the various VAT Rates and what do they cover?
This topic is huge and we can only give an idea – if your sales or purchase are out of the ordinary please refer to your accountant for advice.
Zero rated VAT – VAT Code 0 in most systems. This is actually a chargeable VAT code – and could rise from 0.00 to any rate. It is used primarily for foodstuffs (not cooked) and not confectionery. It is also used for imports and exports to countries outside the EC, books, safety wear and some clothing. If you are in catering or retail you will need to know what is and isn’t zero rated.
VAT Code 0 does not include a lot of expenses that go through the cash book – bank charges, wages, HMRC payments etc. Generally speaking, if you don’t have a VAT invoice for the payment or receipt you process it with VAT Code N.
Standard Rated VAT – VAT Code 1 in most systems. This is generally the most used if you are VAT registered. Currently the rate of VAT is 20% but can change. Most purchases and sales within the UK are charged at standard rate.
Reduced Rate VAT – VAT Code 2 in Prelude but Vat Code 5 in many other systems. This is limited to utilities such as Gas and Electricity and certain fuels. Currently this is 5% ,but can change.
VAT on EC Sales – no fixed code in Prelude but often VAT code 4 in other systems. The rate is 0.00% and is chargeable on sales to EC countries. The VAT is not included on the VAT return but the Nett sales are – VAT Return Box 8. Details of these sales are also submittted quarterly on an EC Sales List.
VAT on EC Purchases – no fixed code in Prelude but often VAT code 7 in other systems. The rate is 0.00% and is chargeable on purchases from to EC countries. The VAT is effectively not included on the VAT return but the the value of purchases which is shown on the VAT return (VAT Return Box 9) is deemed to be taxable and the value of tax at standard rate is shown in the tax return Box 2 and added to Box 4 to offset it. Prelude Desktop and Cloud use the Default Purchase Ledger Code so please ensure it uses the standard rate.
Some services and purchases from the EC are classed as reverse charges. These are treated in a different way to other purchases. These are not included in Box 9 and two but are added to Boxes 1, 4, 6 and 7. To cater for this, these are posted as VAT code S. There are other reverse charge arrangements for Gold and Mobile phones, which are treated in the same way but have their own VAT codes. The VAT on these is calculated at the standard rate.
Exempt VAT – A huge topic with companies who supply exempt supplies and partially exempt. Generally expenses for insurance, finance, education and memberships of trade organisations. In Prelude, as in most other systems, it is VAT code E. There is no VAT chargeable on these expenses and they DO NOT appear on the VAT return.
Outside scope of VAT – Certain items, such as MOTs, Road Fund Licences, Postage, are outside the scope. this is recorded in Prelude as VAT code N. There is no VAT chargeable on these expenses and they DO NOT appear on the VAT return. Purchases from exempt suppliers and non-registered suppliers are also outside the scope but the purchases are included in Box 7. Use the standard VAT Code but enter Nil VAT. Inter-company transactions are not included in Box 7 and should be VAT Code N.
- The date you despatch your goods is the date of taxable supply and is the date you should put on your invoice.
- Every invoice and credit note should show your VAT registration number. If you trade with EC you should prefix your VAT number with GB.
- If you import you should ensure your supplier shows their VAT number on their invoice or you may become liable for VAT.
- For small amounts you can show VAT-inclusive prices and not show the VAT – however the invoice must show the VAT number and date. You may well receive such invoices and whatever VAT is included you can claim back.
This article is not to be read as being a true guide, as VAT is constantly changing and if you become VAT registered you have a responsibility, under law, to account for it properly. There is considerable information on the web and your accountant can guide you. There is also a lot of futher information in these help pages. The paragraphs highlighted above are where most errors ocur.