accounting on VAT pertaining to the different rates applied in VAT ,VAT impact to income statement and balance sheet and how to show VAT in the books of accounts

Below topic discuss on the accounting on VAT pertaining to the different rates applied in VAT ,VAT impact to income statement and balance sheet and how we show VAT in the books of accounts:

Accounting for VAT
( A ) RATES APPLICABLE TO VAT:Rates Used for Standard, zero-rated and exempt supplies:Supplies are categorized into either standard, zero-rated or exempt.

·  Supplies are categorised into three areas, standard, zero-rated and exempt. Standard and zero-rated are classed as taxable supplies. The standard rate is 17.5%.

The zero rate is 0% and ‘exempt’ simply means that there is no VAT chargeable on the supply. There is a lower rate of 5% on certain items, e.g. domestic power, but this will not be examinable.

[ PS: If a trader makes taxable supplies then any input tax on the related purchases may be reclaimed. If the trader only makes exempt supplies then he cannot register for VAT, must not add VAT to his supplies and therefore cannot reclaim the input tax on the related purchases.]

·  VAT chargeable sales by registered businesses are referred to as its ‘outputs’, and the VAT charged as ‘output tax’. In a VAT context, purchases are ‘inputs’ and the VAT charged on them ‘input tax’. The standard rate of VAT is currently 17.5 per cent. It does not apply to all goods since some are either zero-rated (food, for example) while others are outside its scope (exempt). And certain goods and services enjoy a reduced rate. For example, domestic fuel is now subject to a 5 per cent rate. 




 ·         Since registered businesses in effect act as a collecting agent for HM Customs and Excise, VAT charged by them does not form part of their turnover, nor VAT payable part of their costs


 (C) IMPACT TO THE BALANCE SHEET – CREDITOR/DEBTOR. Any outstanding amount will, however, appear on the business balance sheet. In most circumstances HM Customs and Excise will be a creditor. Some businesses, book publishers for example, may be able to regularly claim back more VAT paid than charged. And in these circumstances the VAT repayment due will be a debtor. 


(D) HOW TO SHOW IN THE BOOKS OF ACCOUNTS:All this can be accommodated within the double-entry book-keeping system.  



·         The layout of day books need to include separate columns to derive totals for gross, VAT and VAT net amounts.



Personal accounts are debited or credited as appropriate with the individual gross amounts, including VAT, of invoices received or issued, since these are the settlements required.



·  The VAT system is invoice driven. Usually, if there is no invoice then there is no refund of VAT available.

·    Invoices are not, however, required for payments up to £25 (inclusive of VAT), which are for telephone calls, parking fees or coin-operated machine purchases.A valid invoice must contain certain information including (among others) the details of the item sold, the tax point and VAT registration number. 



·    The cash book will also have a VAT column for amounts that do not pass through sales or purchase ledgers. So again, in the case of purchases, the total of VAT paid on such items will be debited to the VAT account and the net-of-VAT amount debited to the appropriate expense account. 




·    Inputs and input tax column totals (net and VAT) will be posted separately – one to a cost account, the other to the VAT account. Outputs and output tax will be treated in similar fashion – the net total to a sales account, the VAT total to the VAT account.·    Likewise, receipts that do not pass through the sales ledger will be split between VAT and net elements, the first being credited to the VAT account and the latter to an appropriate income account.

·     In this way the VAT account should always show the net amount payable to or reclaimable from HM Customs and Excise.  




A VAT exclusive figure of £100 is given.The VAT is therefore £100 x 17.5% = £17.50.This gives a VAT inclusive figure of £117.50 (£100 + £17.50).The VAT in the inclusive figure can be found by using the VAT fraction, i.e. £117.50 x 7/47 = £17.50. 


 ·        A normal VAT period is three calendar months. Customs and Excise notify the trader of his periods in the certificate of registration. The trader can change these periods to suit his own accounting period. A return for each of these periods (along with payment of any VAT amount due) is to be completed and returned to Customs and Excise within one month of the end of the relevant period.

  • Traders whose supplies are zero-rated are, in the main, usually in a VAT refund position. These traders can, if they wish, make monthly returns to improve their cash flow position. Certain traders can also make annual returns – this will be looked at later under the heading of special schemes.
  • be used for sales up to £100 including VAT. 

 Bad debts
VAT can be reclaimed on bad debts providing they are written-off in the books and are more than six months old, counting from the date the debt was due.

VAT is calculated after all discounts, even if the customer does not eventually take the actual discount available.


Sales of £110 (net of VAT) with a £10 discount if paid within 30 days.
VAT is calculated as: (£110 – £10) x 17.5% = £17.50.VAT is not recalculated if payment is actually received after the 30-day discount period.


Motor cars
VAT on cars is not reclaimable unless they are purchased 100% for business purposes or for resale, used in or leased to a taxi business, a driving school or self-drive car hire business.


VAT on expenditure for entertainment of customers or suppliers is not refundable. However, if the expenditure is for entertaining staff then the VAT can be reclaimed.


Private use
VAT cannot be reclaimed on items purchased for total private use. If they are used partly for business and partly for private purposes then only a proportion of the VAT can be reclaimed (the proportion of the VAT relating to business usage).

When fuel is supplied for an individual’s private use, the full amount of input tax can be reclaimed. However the trader must then account for output tax using set fuel scale charges based on the cc of the car. These amounts will be given in the examination.

Examination Questions commonly asked in VAT:
·       Examination questions will expect students to be able to check both registration tests and to be able to advise traders of notification and registration/deregistration dates. The implications of registration are also examinable. Group and divisional registration is not required knowledge.·      Inclusive v exclusive
Many students lose easy marks either because they do not read the question carefully or because they do not understand the difference between a VAT inclusive and a VAT exclusive price. If the question states that the figures given are exclusive of VAT then the VAT rate of 17.5% should be applied to the figure to get the VAT. However, if the figure is inclusive then the fraction of 7/47 should be used to find the VAT included in the amount given.
·    Examination questions in this area require students to be familiar with the difference between, and therefore the implications of, zero-rated and exempt supplies. You must be capable of completing basic VAT calculations and know return and invoice details. Note: partial exemption is not in the syllabus. 
Refer to Illustration

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