|
|
Liability
to value added tax (VAT) VAT is charged on the value of
supplies of taxable goods and services made in the UK,
including some exports to EU countries. It is also chargeable on imports of
goods from outside the EU.
The main rates are zero and 17.5%, but a few supplies are
charged at 5%.
Registration
All traders must
register for VAT if they make taxable supplies which exceed the set limits.
Where the value of taxable supplies in the previous 12
months was more than £61,000, or is likely to exceed this annual limit
within the next 30 days, the trader has to register within 30 days. Failure
to notify on time attracts penalties.
The VAT system
A registered trader
must charge customers output VAT on any sales. The value of input VAT can
be offset against output VAT and the excess output VAT is paid over to
Customs and Excise. Where there is an excess of input VAT, tax may be
reclaimed.
Some input VAT
cannot be reclaimed:
- Purchases
of motor cars, except cars bought wholly for business purposes.
- Business
entertainment expenses.
Most businesses have to account for VAT at the
date that the invoice for the supply is raised. However, traders can claim
VAT bad debt relief on debts more than six months old that have been
written off.
Traders with a turnover of not more than £660,000 may
account for VAT on a cash basis rather than an invoice basis, thereby
obtaining automatic relief for any bad debts. This limit is due to be increased to
£1,350,000 probably from 1 April 2007, subject to EC approval.
Exempt supplies
Certain supplies are
exempt from VAT. Output VAT is not charged on such supplies and, in
principle, input VAT attributable to such supplies cannot be reclaimed (or
the claim is restricted).
Relatively small businesses may be able to reclaim all
their input VAT - even for their exempt supplies. The input VAT
attributable to their exempt supplies must not exceed £7,500 a year and
must be no more than half the VAT on all their purchases.
- Exempt
supplies include: insurance, finance, health, education, and burial
and cremation services.
- In
general, leases and sales of non-domestic land and buildings, other
than newly built ones, are exempt, unless the option to tax has been
exercised.
- A
taxable person may choose to charge output VAT on supplies of existing
buildings and land (including rents) that are not used for residential
or charitable purposes.
- Sales
of new buildings are standard-rated unless they are used for
residential or charitable purposes.
Zero-rated
supplies
If a business makes
zero-rated supplies, it does not charge VAT on supplies but can reclaim
input VAT.
Zero-rated supplies include:
- Most
food and some drinks - but not catering, restaurant meals or hot
take-away food.
- Domestic
supplies of water and sewerage.
- Books
and most other publications.
- Sales
of new residential buildings and buildings for use by charities.
- Supplies
of services by contractors when constructing new residential buildings
or buildings for charities.
- Alterations
to some buildings where listed building consent is needed.
- Public
transport of passengers.
- Drugs,
medicines and aids for the disabled.
- Clothing
and footwear for children.
- Exports
of goods and certain services to non-EU countries.
Reduced
rate supplies
Some supplies are
charged at a rate of 5%. They include:
- Domestic
power and fuel and certain energy saving materials for residential or
charitable use.
- The
grant funded installation of heating equipment and the connection of a
mains gas supply in the sole or main residence of an individual aged
60 or more or in receipt of social security benefits.
- Woman's
sanitary protection products.
- Children's
car seats.
- Cycle
helmets.
- Conversions
of residential property into a different number of dwellings, certain
conversions into care homes or multiple occupancy dwellings, and
certain renovations or alterations of property that has not been lived
in for three years.
EU
single market
Where sales are made
to businesses that are registered in other EU countries, the supplier need
not charge VAT.
- The
customer's VAT number must be shown on the sales invoice.
- The
customer is then responsible for accounting for output VAT on the
goods on its own VAT return, but may claim input VAT if the goods are
for use in making taxable supplies.
- However,
output VAT must be charged on sales to private individuals in other EU
states. Where such sales exceed that state's registration threshold,
the trader must register for VAT in that state.
Collection
of VAT
Registered traders
normally have to submit VAT returns, and pay any VAT due, every three months.
- Traders
who regularly reclaim VAT from Customs and Excise may apply to submit
monthly returns.
- Some
large companies have to pay monthly.
- Tax
on imports from outside the EU has to be paid at the time of
importation, unless special arrangements are set up.
- Traders
with a turnover of £1,350,000 a year or less can complete annual returns
only, making nine monthly VAT payments on account, with a final
payment due along with the year-end return.
- Very
small businesses can simplify their accounting by applying to pay VAT
at a flat
rate
on total turnover without deducting input tax. The business must have
taxable turnover (including exempt supplies) up to £150,000 and total
turnover of not more than £187,500. The rate is determined by trade
sector.
- Penalties are charged for late or
incorrect VAT returns.
- A
default surcharge of between 2% and 15% of the VAT payable is charged
where returns are late.
- A
penalty of 15% is charged for serious or persistent misdeclarations.
- A
penalty of between 5% and 15% is charged where a person is late in
registering for VAT. There is an amnesty until 30 September 2003, subject
to conditions.
- Interest
can also be charged on VAT paid late.
The Dyer Partnership, 17 Westminster Court,
Hipley Street,
Old Woking, Surrey GU22 9LG
Copyright © 2002 - 2006 The Dyer
Partnership Limited
|
