Here you go - everything you wanted to know about VAT, but were to scared to ask :
Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man.
It is also charged on goods, and some services, imported from places outside the European Union and on goods and some services coming into the UK from the other EU countries. All goods and services that are VAT rated are called 'taxable supplies'. You must charge VAT on your taxable supplies from the date you first need to be registered. The value of these supplies is called your 'taxable turnover'.
Some examples of taxable supplies:
* selling new and used goods, including hire purchase
* renting and hiring out goods
* using business stock for private purposes
* providing a service, for example hairdressing or decorating and
* charging admission to enter into buildings.
If you are VAT registered, you will charge VAT on many goods and services you supply to customers in the UK and Isle of Man. VAT does not apply to certain services because the law says these are 'exempt' from VAT. These include loans of money, some property transactions, insurance and certain types of education and training. Supplies that are exempt from VAT do not form part of your taxable turnover.
There are three rates of VAT in the UK:
* 17.5% (standard-rate)
* 5% (reduced rate) and
* 0% (zero-rate).
You will probably have to register for and charge VAT if:
* your taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
* you have taken over a business as a going concern or
* you acquire goods from other European Union countries.
The current VAT registration threshold is £58,000. But you can opt to register for VAT if your taxable turnover is less than this, if what you do counts as a business for VAT purposes. Turnover is the amount of money going through the business, not just the profit.
Do I have to register for VAT? If you are in business and your taxable turnover, not just your profit, goes over the registration threshold you become a 'taxable person'. You must then register for VAT. If you don't register at the correct time you could be fined. You must register for VAT if: at the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £58,000 and at any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold in the next thirty days alone.
These rules also apply when you take over a business as a going concern (see Notice 700/9 Transfer of a business as a going concern). It doesn't matter whether the last owner was registered: if the business is trading at a level above the limit then you'll need to register and your date of registration will be the day you take over the business.
To register for VAT you must complete Form VAT 1, which you must send to Customs and Excise within 30 days of any of the above.
What is taxable turnover? All goods and services which are liable to VAT at the standard, reduced or zero-rate are called 'taxable supplies', whether you are registered for VAT or not. The total value of these supplies is called your 'taxable turnover'. If you are in business and your taxable turnover reaches or is likely to reach the registration threshold you will probably have to register for VAT. You must charge VAT on your taxable supplies from the date you first need to be registered.
If you receive certain services from abroad, for example advertising, data processing, consultancy or legal, accounting or professional services, these will be treated as if you supplied them and you must include the value in your taxable turnover.
What are input tax and output tax? Input tax is the VAT that you pay out to your suppliers for goods and services that you purchase for your business. It is VAT on goods or services coming IN to your business. Input tax is the VAT that registered businesses can reclaim. Output tax is the term used to describe the VAT on your sales of goods or services. Output tax is the VAT on goods or services going OUT of the business. Output tax is the VAT you collect from your customers on each sale that you make.
Why would I want to register for VAT if my taxable turnover is below the threshold? If your taxable turnover is below the registration threshold you can apply for 'voluntary registration', if you can prove that what you do is a business for VAT purposes. There are advantages and disadvantages to registering voluntarily. Before you apply weigh up carefully whether it will benefit you.
Benefits include increased credibility for your business and, if your business makes standard or zero-rated supplies, you'll be able to claim back input tax. However, once registered for VAT, you'll have to:
* account for output tax on all your taxable supplies
* keep proper VAT records and accounts and
* send in VAT returns regularly.
For more information call the C&E National Advice Service 0845 010 9000
What are the exceptions? No VAT is charged on taxable supplies made by a business which is not, and is not required to be, registered for VAT. These are known as 'outside the scope' supplies. VAT does not apply to certain services because the law says these are 'exempt' from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation).
Supplies that are exempt from VAT do not form part of your taxable turnover. If the only services you supply are exempt supplies, you can't normally be registered for VAT. If you are registered for VAT and have some exempt supplies you may not be able to get all your input tax back.
What if all my goods are zero-rated? If you only supply goods that are zero-rated, you may not have to register for VAT even if your taxable turnover goes above the registration threshold, but you do have to tell C&E first and apply to be 'exempt from registration'.
I'm a small business - is there anything that will make VAT simpler? There are a number of simplified arrangements to make VAT accounting easier for small businesses:
Cash accounting. If your taxable turnover is under £660,000 a year you can arrange to account to Customs for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
Annual accounting. Most businesses work on quarterly VAT periods and send in four VAT returns every year. However, if your turnover is under £660,000 you can join the annual accounting scheme and send in just one return a year.
If you use the scheme you do have to make regular payments throughout the year. This can help financial planning and cash flow.
Retail schemes. If you are a retailer there are schemes, which offer you an alternative if it's impractical for you to issue invoices for a large number of supplies direct to the public.
Bad debt relief. If you make supplies of goods or services to a customer but you are not paid you may be able to claim relief from VAT on the debts.
Flat rate scheme. You're likely to be eligible if your turnover is under £150,000. This new flat-rate scheme was introduced in the 2002 Budget. It lets you save on administration because you don't have to account internally for VAT on each individual "in and out". You just pay over a set percentage of your total turnover. The rate depends on your business type.
What records must I keep for VAT purposes? You must keep:
* a record of all standard-rated goods and services you receive or supply as part of your business
* separate record of any exempt supplies you make and
* a VAT account.
You must also keep a record of all zero-rated goods and services you receive or supply as part of your business. You don't have to keep these records in any particular way, but they need to be complete, up to date and the figures you use to fill in your VAT return must be easy to find.
What is a VAT account? This is simply a summary of the totals of your output and input tax. You should add up the VAT in your records and transfer the totals to your VAT account under separate headings for VAT deductible (input tax) and VAT payable (output tax). You can then use this information to help you complete your VAT return at the end of each accounting period.
What about invoices? Whenever you supply standard-rated goods or services to another VAT registered person, you need to give them a document showing certain information about what you are supplying. The document is called a VAT invoice. Normally you must issue a VAT invoice within 30 days of the date you make the supply.
Invoices are important for both you and the people you do business with. You may be able to reclaim the VAT your suppliers have charged you on goods and services for business but only if you keep all the VAT invoices you receive. In the same way if your customers are registered for VAT they may be able to reclaim the VAT you have charged them if they have an invoice from you.
Can I keep my records on computer? Yes, but you must make sure that you meet your legal obligations to:
* account for VAT properly
* provide information to us when we come to see you and
* keep records in the required detail for the required length of time.
How long do I need to keep records? You must keep all your business records for at least 6 years. If the 6 year rule causes you serious storage problems or undue expense we may allow you to keep some of your records for a shorter period. You should contact our National Advice Service on 0845 010 9000 for further information about this.
What is distance selling? Distance selling occurs when a taxable person in one EC Member State (Member State of origin) supplies and delivers goods to a non-taxable person in another EC Member State (Member State of destination). The most common type of distance selling occurs through mail order transactions. A non-taxable customer may be a private individual, public body, charity or any business which is too small to register or whose activities are totally exempt. It is important to note that distance selling can only occur between Member States, so that mail order sales to the UK from outside the VAT territory, for instance from the Channel Islands, are not distance sales.
How does distance selling work? When a business established in another Member State exceeds the distance-selling threshold in the UK, they become liable to be registered here. Once registration is effected, all distance sales to the UK are taxed here.
How do I account for distance sales? The threshold limit is based on sales made during a calendar year from 1 January to 31 December. Taxable persons must keep records showing the value of their distance sales to each Member State, and must notify the fiscal authorities in the relevant State once their particular threshold has been reached. Under UK law, a liability to register for UK VAT arises from the day that sales exceed our threshold.
What if I make distance sales to more than one Member State? Distance sales are usually taxed in the member state of origin until you exceed the distance selling threshold of the destination member state, you will then be required to register with the member state in question.
What if a distance sale involves excise goods? There is no threshold where sales involve goods subject to excise duty. Such goods are always taxed in the country of destination. An EC supplier who arranges the delivery of excise goods to a non-VAT registered customer in the UK must register here when the normal registration turnover (currently £48,000) is reached and account for UK VAT as necessary.
Can I register before I reach the threshold? Where a person is making distance sales to the UK, they may elect to have such sales taxed in the UK before they reach the distance-selling threshold, by opting to make the place of supply the UK. You can register at any time before your sales reach the UK VAT distance selling threshold.
Can I register before I start making distance sales? Where a person is not yet making any distance sales to the UK but has either opted or intends to opt to make the place of supply the UK, there will be an entitlement to register on an intending trader basis. The applicant must provide written evidence to show that they have notified the fiscal authority in their home State that they have exercised an option to make the place of supply the UK.
What if I do not have a UK business establishment? Distance sales made by an individual are usually taxed in the member State of origin until the total value of supplies to the member State of destination exceeds the latter's distance selling threshold. Each member State can set it's own threshold within parameters laid down in European legislation. The UK threshold for distance sales, as laid down in the VAT Act 1994 Schedule 2 paragraph 1, is £70,000.
When a business established in another member State exceeds the distance selling threshold in the UK, they become liable to be registered here. Once registration is effected, all distance sales to the UK are taxed here. The threshold limit is based on sales made during a calendar year from 1 January to 31 December. A liability to register for UK VAT arises from the day that sales exceed the threshold.
Under what circumstances may I be asked to appoint a tax representative? You may need to appoint a tax representative if you are someone who is not normally resident in the UK, has no business establishment here and, in the case of a limited company, is not incorporated here. You will need to complete form VAT1TR in order to appoint a tax representative. More information about tax representatives can be found in Notice 700/1 Should I be Registered for VAT?
How will my registration date be decided? If you need to register because the value of your distance sales in the year or part year from January 1 exceeded the distance sales threshold, your registration date will be the date your sales exceeded the threshold.
When do I need to notify you of my liability to be registered? You must send your completed VAT1(A) form within 30 days of the date your distance sales exceeded the threshold.
When am I liable to become registered? You are liable to register if at any time during the calendar year from 1st January your total distance sales exceed the distance sales threshold.
British Limited Company Formations. Incorporate a Limited Company in the United Kingdom. Same-Day Private Company Formation VAT and EU:
The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
Value added tax is:
* a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
* a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.
* charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
* collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
* paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.
What is a taxable person? For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business. However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.
How is it charged? The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage. Registered VAT traders are given a number and have to show the VAT charged to customers on invoices. In this way, the customer, if he is a registered trader, knows how much he can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing. The system operates as follows:
Example
Stage 1. A mine sells iron ore to a smelter. The sale is worth €1000 and, if the VAT rate is 20%, the mine charges its customers €1200. It should pay €200 to the treasury, but as it has bought €240 worth of tools in the same accounting period, including €40 VAT, it is only required to pay €160 (€200 less €40) to the treasury. The treasury also receives the €40 and now gets €160 making €200 - which is the correct amount of VAT due on the sale of the iron ore.
* Supply: €1000
* VAT on supply: €200
* VAT on purchases: €40
* Net VAT to be paid: €160
Stage 2. The smelter has paid €200 VAT to the mine and, say, another €20 VAT on other purchases, such as furniture, stationery, etc. So when the smelter sells €2000 worth of steel it charges €2400 including €400 VAT. The smelter deducts the €220 already paid on his inputs and pays €180 to the treasury. The treasury receives this €180 from the smelter plus €160 from the mine, plus €40 paid by the supplier of tools to the mine, plus €20 paid by the furniture/stationary supplier to the smelter.
* Supply: €2.000
* VAT on supply: €400
* VAT on purchases: €220
* Net VAT to be paid: €180
€180 (paid by the smelter) + €160 (paid by the mine) + €40 (paid by the supplier to the mine) + €20 (paid by the supplier to the smelter) = €400 or the correct amount of VAT on a sale worth €2000.
VAT coverage and VAT rates. Given that EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (only for supplies of goods and services referred to in an exhaustive list), actual rates applied vary between Member States and between certain types of products. In addition, certain Member States have retained separate rules in specific areas.
The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country's VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.
VAT on imports and exports. For the purpose of exports between the Community and non-member countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price.
However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the Community. Taxable people registered for VAT will be allowed to deduct this VAT in their next VAT return.
VAT on goods moving between Member States. No frontier controls exist between Member States and therefore VAT on goods traded between EU Member States is not collected at the internal frontier between tax jurisdictions.
Goods supplied between taxable persons (or VAT registered traders) are exempted with a right to deduct the input VAT (zero-rated) on despatch if they are sent to another Member States to a person who can give his VAT number in another Member State. This is known as an "intra-Community supply". The VAT number can be checked using the VAT Information Exchange System (VIES).
The VAT due on the transaction is payable on acquisition of the goods by the taxable customer in the Member State where the goods arrive. This is known as "intra-Community acquisition". The customer accounts for any VAT due in his normal VAT return at the rate in force in the country of destination.
How do the Member States apply VAT? The detailed application of VAT varies according to the administrative customs and practices of each Member State within the framework set out by Community legislation.
Why do all Member States use VAT? At the time when the European Community was created, the original six Member States were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that Member States would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation.
It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. As explained in VAT on imports and exports, VAT allows for the certainty that exports there are completely and transparently tax-free.
The history of VAT in the European Union until 1993. On 11 April 1967 the first two VAT Directives were adopted, establishing a general, multi-stage but non-cumulative turnover tax to replace all other turnover taxes in the Member States. However, the first two VAT Directives laid down only the general structures of the system and left it to the Member States to determine the coverage of VAT and the rate structure.
It was not until 17 May 1977 that the Sixth VAT Directive was adopted which established a uniform VAT coverage. This guarantees that the VAT contributed by each of the Member States to the Community's own resources can be calculated. It still however, allowed Member States many possible exceptions and derogations from the standard VAT coverage. Moreover, it did not set out the rates of VAT to be applied in Member States with the result that these differ widely even today. Currently, there is a standard rate of between 15% and 25% (the maximum is based on a political commitment) and Member States may apply 1 or 2 reduced rates of at least 5%. There are a number of temporary derogations, e.g. zero rates in the United Kingdom and Ireland. The VAT coverage also still differs from one Member State to another.
VAT and the Single Market - 1993 to now. The realisation of the single market in 1993 resulted in the abolition of controls at fiscal frontiers. To achieve this, the Commission proposed moving from the pre-1993 "destination based" system, where VAT is effectively charged at the rate of VAT applicable where the buyer is established, to an "origin based" system, with VAT being charged at the rate in force where the supplier is established. This would have effectively abolished fiscal frontiers within the EU.
This was, however, not acceptable to Member States as rates of VAT were too different and there was no adequate mechanism to redistribute VAT receipts to mirror actual consumption.
Therefore, until the conditions were right the Community adopted the Transitional VAT System which maintains different fiscal systems but without frontier controls. The intention is still eventually to have a common system of VAT where VAT is charged by the seller of goods - an origin based VAT system. The transitional system is an origin based system for sales to private persons who can go and buy tax paid anywhere they like in the Union and take the goods home without having to pay VAT again. There are some exceptions to this general rule however (e.g. the purchase of new means of transport and distance selling). For transactions between taxable persons it is still a destination based VAT system.
