VAT input tax checklist

September 2nd, 2011

Checklist for VAT input tax

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VAT Input tax and the Flat Rate Scheme

September 2nd, 2011

Flat Rate Scheme
 
A business using the Flat Rate Scheme should not claim input tax on its VAT Returns.

Input tax may however be claimed on individual purchases of capital expenditure goods with a VAT inclusive cost of £2,000 or more. Note that Input tax cannot be claimed on expenditure which relates to work performed on a capital item, for example the refurbishment or extension of premises.

A business which has newly registered for VAT may also claim VAT on stock and assets on hand at the time of registration subject to the normal rules for such claims.

If a business using the FRS is required to account for acquisition tax on the purchase of goods from a supplier elsewhere in the European Union (EU) this cannot be claimed as input tax unless it relates to the purchase of capital expenditure goods costing £2000 or more including the related VAT.

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Areas of risk within VAT input tax

September 2nd, 2011

Areas of risk within VAT input tax

The main areas of risk within VAT input tax broadly fall into the following categories:

Record keeping

Good record keeping is essential otherwise your VAT Return may be prepared on the basis of inaccurate or incomplete information.

Where a business operates from more than one location it is also important that procedures are in place to ensure that all relevant accounting information needed for completing the return is reported to the person that prepares it in time for inclusion on the return.

Even when records are well kept, mistakes, duplications and omissions may occur, resulting in input tax being claimed too early, too late or in the incorrect amount. If a computer package is used to calculate VAT Return values, care should be taken to ensure that correct date ranges are set and that all relevant transactions within the period date range are included.

The requirement to add back input tax if the related expenditure remains unpaid six months after the date of the supply or the due date for payment (whichever is the later) is also often overlooked.

Private and non-business use

In many businesses personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.

A ‘Business purpose’ can be a complex area in relation to input tax.

When expenditure has a mixed business and private/non-business purpose the related VAT should generally be apportioned and only the business element claimed.

When a business purchases an asset, or services resulting in the construction of a new asset, which has mixed business and private use (but not mixed business and non-business use other than private use), the VAT may currently be claimed in full at the time of purchase but output tax must subsequently be declared to reflect private use.

The application of this “Lennartz” approach to new purchases of land, property, boats and aircraft will be restricted from 1 January 2011

When goods on which a business has claimed input tax in full (such as an item of stock or an office computer) are subsequently put to private or non-business use, there is a deemed supply for VAT purposes and output tax is normally due on the cost of the supply. The deemed supply is one of goods if the change of use is permanent and of services if temporary.

Partial exemption

When a business has expenditure which relates wholly or partly to existing or intended exempt supplies it becomes partly exempt and can only claim the related input tax if it is below the prescribed de minimis limit.

The partial exemption standard method determines how much input tax can be claimed unless an individual special method has been approved by HMRC. Many businesses do not recognise that they are partly exempt or carry out partial exemption calculations incorrectly, for example by using an unapproved special method or by omitting to carry out a longer period calculation.

If certain assets (computers or land/building works over specified values) have been purchased for use in the business, those assets are subject to adjustments under the Capital Goods Scheme (CGS) to reflect changes in the degree of taxable use. The need to consider CGS adjustments is often overlooked.

Business entertainment

Input tax is often claimed in error on the provision of business entertainment.

Business entertainment includes the provision of hospitality or entrance to theatres, concerts and sporting events and similar expenditure. Entertainment costs analysed to expense headings such as advertising or marketing are often overlooked and the related VAT claimed in error.

Cars and motoring expenses

Input tax errors frequently occur in relation to the purchase or lease of cars and to motoring expenses in general. Input tax cannot be claimed on the purchase of most cars while the recovery of VAT incurred in leasing a car which is available for private use should generally be restricted to 50 per cent.

If a business supplies fuel for cars, an output tax scale charge is generally due for each car unless records are maintained to demonstrate that fuel has only been provided for business journeys.

Input tax claimed in respect of business mileage payments must be restricted to the fuel element of the mileage rate and be supported by original fuel purchase invoices.

International transactions

There are distinct mechanisms for the payment and recovery of VAT on goods purchased from suppliers outside the EU (imports) and inside the EU (acquisitions).

If these are not applied correctly input tax error can result.

The purchase of many services from overseas suppliers requires the UK recipient to account for both output tax and input tax on the supply (the reverse charge), applying any appropriate restrictions to input tax recovery – this requirement is often overlooked or incorrectly performed.

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What is Value Added Tax?

July 28th, 2011

Value Added Tax: An Introduction

VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them.

The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.

We highlight below some of the areas that you need to consider. It is however important for you to seek specific professional advice appropriate to your circumstances.

Scope

A transaction is within the scope of VAT if:

1. there is a supply of goods or services
2. made in the UK
3. by a taxable person
4. in the course or furtherance of business.

Inputs and outputs

Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly VAT is charged on most goods and services purchased by the business. This is known as input VAT.

The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them.

However the input VAT suffered on the goods and services purchased can be deducted from the amount of output tax owed. Please note that certain categories of input tax can never be reclaimed, such as that in respect of third party UK business entertainment and for most business cars.

Supplies

Taxable supplies are mainly either standard rated (20%) or zero rated (0%).  The standard rate was 17.5% prior to 4 January 2011.

There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable supplies.

There are certain supplies that are not taxable and these are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.

If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.

Registration – is it necessary?

You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (£73,000 from 1 April 2011).

If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.

If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start up expenses can be recovered.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered.

For the purpose of VAT registration a person includes:

• individuals
• partnerships and LLPs
• companies, clubs and associations
• charities.

If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

Once registered you must make a quarterly return to HMRC showing amounts of output tax to be accounted for and of deductible input tax together with other statistical information. For businesses whose turnover is more than £100,000 (excluding VAT) returns must be filed online. In addition, smaller businesses which registered for VAT on or after 1 April 2010 have to file online, regardless of turnover. By April 2012 all other businesses will have to file online.

Returns must be completed within one month of the end of the period it covers, although generally an extra seven calendar days are allowed for online forms.

Electronic payment is also compulsory for those businesses filing online.

Businesses who make zero rated supplies and who receive repayments of VAT may find it beneficial to submit monthly returns.

Businesses with expected annual taxable supplies not exceeding £1,350,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only have to complete one VAT return at the end of the year.

Record keeping

It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses.

In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for six years.

Inspection of records

The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. From time to time therefore a VAT officer may come and inspect the business records. This is known as a control visit.

The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.

However, you should not assume that in the absence of any errors being discovered, your business has been given a clean bill of health.

Offences and penalties

HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be levied in respect of the following:

1. late returns/payments
2. late registration
3. errors in returns.

Cash accounting scheme

If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoice dates.

Retail schemes

There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.

Flat rate scheme

This is a scheme allowing smaller businesses to pay VAT as a percentage of their total business income. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT, but for some businesses it can also result in a reduction in the amount of VAT that is payable.

Posted in Business Tax, companies, Guidance notes, Input tax, Limited Companies, Limited Liability Partnership, LLP, Output tax, Partnership, Partnerships, Self employment, Sole Trader, Starting in Business, types of business, Value Added Tax, VAT | | Comments: Comments Off