VAT - General Rules & Completion of VAT Returns
1. You must register for VAT if:
- At the end of any month your total turnover in the past 12 months or less has exceeded £54,000. Turnover includes fees, sales and reimbursed expenses.
- At any time there are reasonable grounds for believing that your turnover in the next 30 days will exceed £54,000.
There are severe penalties for not registering if either of the above situations occurs and you do nothing. If in doubt, seek help. We’ll be pleased to advise.
2. Once you are registered for VAT:
- you should ensure that your Vat Returns are completed and payment sent to HM Customs & Excise by the end of the month following the end of the VAT quarter. So, if your VAT quarter ends on 31 August you must have got your VAT return to Customs and Excise, and have made payment of the VAT due, by 30th September. It is not enough to have sent it by 30th September; it must actually be with them by that day. Failure to do so can result in severe penalties.
- put the correct information on your sales invoices. A VAT sales invoice should show the following information:
- your VAT number
- your name and address
- customers name and address
- date(tax point)*
- a description of the goods or services supplied
- the amount charged excluding VAT
- the rate of VAT charged(see below)
- the amount of VAT charged
- the total amount due including VAT
- details of any discount the customer can claim
- *There are detailed VAT rules regarding tax point and if you are in any doubt as to this you should refer to us or HM Customs & Excise.
calculate VAT correctly. If you raise an invoice for £100 net of VAT then the VAT due is 17.5% x £100 which is £17.50. The net amount is £100, the VAT is £17.50 and the gross amount is £117.50.
calculate the VAT you can reclaim correctly. To calculate the VAT on a supplier invoice, where this has not been done, you apply the fraction 7/47 or 17.5/117.5 to the gross value.
For example:
7/47 x 50.00 = 7.44
Note that this should only be needed for receipts for less than £100.
Note that it is not correct to multiply the value of the invoice by 17.5% in this case to find out what the VAT is. That will always result in you claiming too much VAT.
Remember there may also be other reasons why a particular invoice has no VAT shown. For example, some items have VAT at 0% (zero rates) and others are not liable to VAT at all (exempt). In these cases no VAT should be analysed in your bank payments book or petty cash book.
A list of these items which are zero rated or exempt is in the VAT Guide (published by Customs and Excise) and is updated with changes in legislation. A broad outline of the relevant items is attached as appendix 1 to this book.
- Only reclaim VAT when you’re allowed to. VAT works on the basis that you have to pay Customs and Excise the VAT paid to you on your sales invoices but you can reclaim from Customs and Excise the VAT charged to reclaim even though you have been charged it. VAT cannot be reclaimed on the following items:-
- Entertaining. If you ever buy a meal or drinks for someone who does not work for your company you are entertaining them. The VAT cannot be reclaimed.
- Non business items bought for your personal benefit. Some things such as mobile bills have a business benefit and a private benefit. You can only claim back the VAT on the business part of the bill. Customs can ask you to prove how you calculated that part, so you might need a log of calls to prove the point.
- New and used cars.
- Some second hand goods. If in doubt check any invoice you get with care and seek advice.
- You may not wish to reclaim VAT on petrol. See the notes on petty cash as to what you can do instead to make life easier and cut red tape.
If in doubt check in the VAT guide issued by HM Customs & Excise.
3. Completing your VAT return under the cash accounting scheme:
- You have to prepare a VAT return once a quarter when you’re VAT registered unless you register for the annual scheme. Most people don’t like the annual scheme because it creates uncertainty about how much VAT you really owe.
- You must prepare a VAT summary to show where all the numbers on your VAT return have come from. An example of this is shown below:
| Vat summary to 31 August 2002 | ||||
| Sales | Information source | Net value £ |
VAT £ |
Gross Value £ |
| Bank receipts June |
7,450.00 | 1,303.75 | 8,753.75 | |
| Bank receipts July |
3,700.00 | 647.50 | 4,347.50 | |
| Bank receipts August |
7,525.00 | 1316.88 | 8,841.88 | |
| Total | 18,675.00 | 3,268.13 | 21,943.13 | |
| Box 6 | Box 1 | |||
| Payments | Bank payments June | 4220.72 | 384.86 | 4,605.58 |
| Bank payments July | 3,877.52 | 360.59 | 4,238.11 | |
| Bank payments August | 3,820.82 | 100.60 | 3921.42 | |
| Payments to self June to August | (5,924.00) | 0.00 | (5,924.00) | |
| Total | 5,995.06 | 846.05 | 6,841.11 |
| Petty cash | Petty cash June | 146.86 | 14.44 | 161.30 |
| Petty cash July | 100.05 | 8.81 | 108.86 | |
| Petty cash August | 374.42 | 11.69 | 386.11 | |
| TOTAL | 621.33 | 34.94 | 656.27 |
- Note that all the figures are from the examples in this book.
- You will see a rather odd adjustment in the payments section. The “net” column only needs details of business payments in it. Payments to your self aren’t business payments so there’s no need to include them in the total. The figure deducted is the total of the “self “ column for the three months.
- These figures then need to be transferred to the VAT return. The Figure for Box 1 is the VAT owing to Customs. This comes straight from the summary of the bank receipts book for the quarter. The figure is £3,268.13.
- There is only a figure in box 2 of the VAT return if you have imported goods or services in the VAT quarter. If you have there are special rules for this and you will need detailed advice. This is not covered in this book. Ask us or Customs and Excise for that advice.
- Box 3 is the same figure as box 1 if there is nothing in box 2.
- Box 4 is the total VAT that can be reclaimed from Customs and Excise This combines the figures for VAT on the bank payments summary and the petty summary i.e. in this it is £846.05 + £34.94 = £880.99.
- Box 5 is box 3 less box 4, i.e. this case it is £3,268.13 less £880.99 = £2,387.14.
- Box 6 is the value of the sales on which VAT has been declared in this quarter, which again comes from the bank receipts summary. This is £18,675.00.
- Box 7 is the purchases on which VAT has been, or might have been, reclaimed. This is the net total of the bank payments summary and the petty cash summary i.e. £5,995.06 + £6,616.39.
- Boxes 8 and 9 won’t be used if you don’t import or export. If you do, you will need specialist VAT advice to make sure you get this right. This is not within the scope of this book.
- So, after these calculations the VAT return information will look like this:
| Box 1 | £3,268.13 |
| Box 2 | 0.00 |
| Box 3 | £3,268.13 |
| Box 4 | £880.99 |
| Box 5 | £2,387.14 |
| Box 6 | £18,675.00 |
| Box 7 | £6,616.39 |
This business owes £2,387.14 of VAT this quarter. The cheque and the VAT return have to be with Customs and Excise by 30 September to avoid a penalty.
The systems described in the book let you prepare a complete VAT return.
There are of course more VAT rules than described here. Refer to the VAT Guide Published by Customs and Excise or us for advice on:
- mistakes
- petrol
- imports and exports
- rules for retailers
- rules for builders
- and anything else about which you are in doubt
But the important point to note is that if you can keep the books described in this guide you can keep Customs and Excise happy, and should help us prepare your year end figures for the Inland Revenue at lower cost than would otherwise be the case.
For further information, please contact us on +44 113 389 6200 or email enquiries@kirknewsholme.co.uk
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