1. What Is VAT?

VAT NOTES OF GUIDANCE

1. What is VAT?

VAT, or Value Added Tax, is as its name suggests a tax on the value a trader adds to an item.

Traders pay VAT on their purchases. This is their input tax, which they later get back from Customs and Excise.

They use these purchases to produce goods, which they in turn sell, adding VAT to their sale price. This is their output tax, which they pay to Customs and Excise.

So long as they make a profit, their output tax will exceed their input tax resulting in a net payment to Customs & Excise.

The tax is levied not on payments as such but on the supply of goods or services. If a supply doesn’t take place VAT isn’t charged.

2. VAT Categories

The basic simplicity of this system is upset by the desire not to tax all items at the standard rate which, since 2011 has been 20%. Thus, there are several different categories of VAT. These are:

Standard Rate

20%

Standard (Reduced) Rate

5%

Zero Rate

Although 0%, tax is still regarded as having been paid.

SUPPLEMENT D

Example

A manufacturer buys timber valued at £1,000, which it uses to make furniture, which it then sells, to a retailer for £2,000. The retailer sells the furniture for £3,000. The following VAT transactions take place.

1. The Timber Company receives £1,000 plus £200 VAT (at the current rate). It keeps the £1,000 and pays the £200 to Customs and Excise.

2. The Manufacturer pays £1,000 plus £200 VAT to the Timber Company. It subsequently charges £2,000 plus £400 VAT to the retailer. It will make a net payment of £200 (£400 minus £200) to Customs & Excise.

3. The Retailer pays £2,000 plus £400 VAT to the Manufacturer. It subsequently charges £3,000 plus £600 VAT to customers. It will make a net payment of £200 (£600 minus £400).

4. The retailer’s customers pay a total of £3,600 (£3,000 plus £600 VAT) for the furniture but as they are not traders and are not VAT-registered they cannot recover the £600 from Customs & Excise.

5. Customs & Excise have received a total of £600, which is 20% of the final selling price, from three different traders.

Applies to all taxable (VAT) goods and services unless they clearly fall within one of the other categories.

Applies only to supplies of fuel for domestic use and to very small-scale supplies for commercial use.

Includes books, children’s clothing and footwear, residential buildings, drugs, medicines and aids for the handicapped etc., unprepared food, works on protected buildings, public transport and most sewerage services and water where a specific charge is made.

Exempt

No VAT charged on the selling price but input tax cannot usually be recovered from Customs & Excise either.

Outside Scope or Non-Business

Where there has not been a supply of goods or the supply is purely internal, or the supply is by a local authority and it is the result of a statutory requirement rather than made in the course of business.

3. Position of Local Authorities

When fulfilling its statutory obligations a local authority can recover the input VAT incurred but does not charge output VAT.

A Local Authority can also currently recover input VAT relating to its lettings and other exempt supplies.

When a local authority provides goods or services which compete with the private sector then the normal VAT classification and rates apply.

No VAT is charged on supplies made to other Directorates or establishments within the same VAT registration.

4. Tax Invoices

Customs & Excise insist that all transactions involving VAT is properly documented using tax invoices. These must include certain specified information. If a payment has already been made, a VAT receipt, containing the same information may be issued instead.

Includes burial (but not cremation), certain cultural services, certain education, training and research services, financial services, health and welfare where not required by statute, insurance, non-residential land transactions, some hire of premises, postal services, certain sporting services and activities by trade unions and professional bodies.

Includes provision of statutory education and library services, most environmental protection work, provision of housing under the Housing Acts, planning fees, default and emergency works carried out under specific legal provisions, grants, payment of costs to third parties, on street parking, sewerage work where no specific charge is made, license and registration fees, most police work, Council Tax and business rates, benefits and internal charges within the Council.

This VAT can only be recovered if it forms less than 5% of the total VAT incurred by the local authority during each year. To ensure that Bridgend County Borough Council does not exceed the 5% limit, any new exempt schemes or activities (see section 2) should be notified to the VAT Accountant.

1. Supply of goods to other local authorities are seen as by way of business and therefore taxable. The VAT liability of services supplied to other local authorities will depend on the type of service. Most services will continue to be treated as non-business, provided they are not in competition with the private sector. Further details of the liability of services can be obtained from the VAT Accountant based at Ravens Court, Bridgend.

1. Goods supplied by County Borough Supplies are subject to VAT.

If possible, always obtain a tax invoice before making a payment. However if this cannot be done, code the full amount of the payment, including VAT, to your budget. Subsequently, when you obtain a tax invoice or receipt, this can be corrected (See section 8).

It is unlawful for the Council to reclaim tax from Customs & Excise unless there is a tax invoice or receipt to support it. Therefore, before coding expenditure as standard or the reduced rate you must have received a tax invoice.

Not all traders automatically issue tax invoices. Many retailers assuming their customers can’t reclaim VAT don’t bother issuing a tax invoice unless specifically asked to. However, if VAT has been charged, a trader has a legal duty to issue one to a customer upon demand.

5. Tax Points

This is the date on which the VAT is due to be paid to Customs & Excise.

You may feel that for very minor items, particularly payments made out of petty cash, it isn’t worth pursuing the question of a tax invoice. This is a decision for management, but it must be appreciated that if a tax invoice is not obtained, you won’t be able to recover the VAT you have paid. In other words, you will be paying 20% more than necessary.

The essential requirements of a tax invoice are listed below. Less detailed invoices may be used if the charge is £250 or less. However, a full tax invoice is needed for all zero-rated and exempt supplies whatever the charge. Items required or not required on invoices are marked with a ‘ü‘(required) or a ‘û‘(not required).

Full
Invoice / Less detailed Invoice
·  An identifying number / ü / û
·  The supplier’s name, address and VAT identification number / ü / ü
·  The date of supply / ü / ü
·  The Council’s name and address / ü / û
·  The type of supply, i.e. sale, hire, exchange, sale or return etc. / ü / û
·  A description of the goods or services supplied / ü / ü
·  and for each description:
·  The quantity of goods or the extent of the services / ü / û
·  The charge made, excl VAT (if £250 or less, incl. VAT) / ü / ü
·  The rate of VAT / ü / ü
·  The total charge made, excl. VAT / ü / û
·  The rate of any cash discount offered / ü / û
·  The total VAT payable / ü / û

The Basic Tax Point is the date when goods are:

·  sent to the customer, or

·  handed to the customer, or

·  made available for the customer’s use.

However, this date is sometimes difficult to ascertain so the Actual Tax Point is used. This is either:

·  If a VAT invoice is issued before the Basic Tax Point -the invoice date or the date of receipt of the payment, whichever is earlier, or

·  If a VAT invoice is issued up to 14 days after the Basic Tax Point, the date of issue, or

·  If a VAT invoice is issued more than 14 days after the Basic Tax Point, unless special approval has been received from Customs & Excise, the Basic tax Point becomes the Actual Tax Point.

It is important that transactions are processed in such a way as to ensure the VAT is accounted for during the right month.

Any delay in declaring to Customs & Excise the VAT that is due to them will result in interest being charged and, perhaps penalties applied.

6. Mixed Supplies

When a price covers the supply of a package of related services of varying VAT categories, the VAT treatment will be based upon the category of the dominant element of the package.

7. Discounts & Non Monetary Considerations

Discounts for prompt payment

Unconditional Discounts

Contingent Discount

Consideration not wholly in money

Consideration for a supply may be non-monetary (a barter transaction) or partly in money and partly in something else (part exchange). The tax value of the supply is its open market value. That is, the price that would have to be paid in a normal monetary transaction. In the case of the payment being made in two or more instalments (excluding deposits), it is the date of the first payment (or tax invoice) which determines the tax point.

However, where there is a continuous supply of goods, including building contracts where payment is made in stages according to the progress of the work, a new tax point is created for each payment made.

With cash income, which isn’t derived from the issue of invoices, the tax point is the date of receipt. It is, therefore, imperative, for income to be promptly banked if the VAT is to appear on the VAT output tax ledger code during the correct month.

When charged separately, books are zero-rated and postage and packing are standard rated. However, when postage and packing is included in the price of a book, the entire supply is zero rated.

VAT should be calculated on the total amount minus the discount, even if the discount is not taken. However, if the terms allow payments to be made in instalments, the VAT should be calculated on the amount actually paid.

If the discounted amount is paid, the VAT is based on the discounted amount.

If a discount is offered on condition that something will later happen, the VAT is based on the full amount. If the customer later earns the discount, the VAT amount is reduced and this can be adjusted by issuing a credit note.

Whenever a barter or part exchange is effected, the purchase and sale should be reported as separate transactions, so that any restriction on recovery of input tax is correctly identified

8. Correcting Errors

VAT accounting errors must be corrected as soon as they are detected. The VAT Accountant can do this, or you can do it yourself by means of a journal.

9. Specialist Types of Invoice

This section deals with some of the more unusual types of invoice sometimes used.

Pro-Forma Invoices

These are used by companies offering goods to potential customers and only take effect if the customer agrees to accept the goods offered.

Self-Billing Invoices

These can be used, subject to approval, when the creditor is in a better position than the debtor to know the amount due.

Authenticated Receipts

Used for staged payments in the construction industry.

If you can do on-line journals and the error relates to the current month you can correct it yourself. If you don’t already know them, ask the VAT Accountant for details of codes to use. Afterwards, send the VAT Accountant copies of all relevant documents along with a note of the journal reference number.

If you cannot do on-line journals or the error relates to a previous month send the VAT Accountant a note explaining the error, copies of the invoices or other documentation involved and, if possible, a COA Financials print showing the offending items.

Pro-forma invoices are invalid as tax invoices, as they are not evidence of a supply actually having been made. Any payment of VAT made in respect of one, even if it contains all the information required of a tax invoice, must be coded as ‘non-business’ and a correction subsequently carried out if a proper tax invoice or receipt is received.

A typical situation where a self-billing invoice would be used is where Trader A sells goods and is obliged to pay a commission to Trader B in respect of them. At the end of each period, Trader A, knowing how many goods have been sold, sends Trader B a sales statement and a cheque for the commission payable. As VAT is payable on this commission, a tax invoice is needed and this is done in the form of a self-billing invoice issued by A to B but actually addressed from B to A.

Self-billing arrangements must not be entered in to without approval in advance from Customs & Excise, following consultation with the VAT Accountant.

In the construction industry, payments are usually made in stages as the work on a project proceeds. Payments are based upon Quantity Surveyors’ reports on the value of the work completed to date. As these aren’t valid tax documents the contractor, upon receiving a payment, issues an Authenticated Receipt which is then used by the client as a substitute for a tax invoice.