Value Added Tax (VAT) is a tax which is levied in all countries of the European Union. It is charged on most goods, the main exceptions being financial services; these are classed as being exempt.
It is called Value Added Tax because it is charged on the Value which a merchant adds to his merchandise i.e. the difference between the selling price and the cost price or cost of materials if manufactured. To achieve this aim, the merchant charges VAT at the appropriate rate on Sales (Output Tax) and pays this to the Customs and Excise after deducting the VAT which he has paid on his purchases (Input Tax). The exception to this rule is that VAT paid on the purchase of cars may not be deducted as Input Tax.
Customs and Excise publish a leaflet called Should I be registered for VAT ? (VAT Notice 700/1). This gives a very full explanation of the regulations regarding registration. Traders with a turnover above the Registration Threshold (£52,000 in 2000/01) MUST register for VAT; those with a turnover lower than the threshold may register if they wish.
Most businesses must register, and it will almost certainly be to your advantage to register even if you do not have to; Independence will do all the donkey work for you, including the Cash Accounting Scheme. Your clients will probably be VAT registered themselves so will be able to reclaim the VAT which you charge them, and you will be able to reclaim any VAT which you pay on office equipment and supplies, petrol etc.
You should only consider not registering (if you do not have to) if your customers are mostly members of the public (your prices will be lower) or financial institutions who cannot reclaim VAT. In this calculation you need to estimate what proportion of your sales are represented by taxed purchases and what proportion by labour. This is definitely a question to discuss with your accountant. There are special rules about reclaiming VAT on goods bought for the business just before it was registered.
The main rules which govern the administration of VAT are contained in The VAT Guide (VAT Notice 700).
Registered traders are referred to as merchants, and on registration are issued with a VAT Registration Certificate VAT4. This assigns a unique number called the VAT Registration Number e.g. 477 7139 05. This number must be quoted on all sales invoices.
Merchants must charge VAT on all their sales at the appropriate rate and account to Customs and Excise for the amounts charged quarterly according to the cycle advised on the VAT Registration Certificate. At the end of each quarter a VAT Return must be completed and sent with a cheque for the appropriate amount to HM Customs & Excise at Southend.
VAT is charged at several different rates depending on the type of goods and services. A large class of goods, mainly food but also childrens clothes, books and exports are zero rated (in the UK). There is a significant difference for the merchant between goods which are exempt (financial services) and those which are zero-rated, although the sale price may, at first glance, appear the same. Suppliers of exempt goods will frequently not even be registered for VAT; this means that they are unable to reclaim the VAT on the goods that they buy and it therefore forms part of their costs. Merchants supplying zero-rated goods such as food retailers, can reclaim the VAT that they have paid on fuel, commercial vehicles, fixtures etc.
Independence will prepare your returns for you, including the Cash Accounting Scheme (which is recommended).
Details are given in the Customs and Excise leaflet ‘Cash Accounting’ (VAT Notice 731).
Customs and Excise allow merchants to pay VAT on the basis of the sales and purchase invoices which have been paid in the quarter rather than those which have been issued.
If you invoice monthly, then the invoice for the last month will not have been paid within the quarter. You are, therefore, allowed to pay the VAT on that invoice with the following quarter’s return. When you pay that, you probably will not have received the last month’s payment for that quarter either. You therefore pay each quarter for three months sales, but for the last month of the previous quarter and the first two months of this quarter. Whether you think this is worthwhile is up to you; if you are paid weekly it is not relevant. This method also has the benefit that if you never receive payment for an invoice, you will not have paid over the VAT so will not need to reclaim it.
that if you adopt this scheme for sales you must also adopt it for
Independence will, of course, do all the calculations for you. You simply have to tick a box when you enter your VAT number etc.
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Revised: Oktober 23, 2003 .