Value Added Tax (VAT)-Introduction, Basic Principles & Scope

·       It was introduced in the UK in the early 1970s when it replaced another indirect tax, ‘purchase tax’. VAT is administered by HM Customs and Excise. The legal basis is found in the Value Added Tax Act of 1994 (VATA 94) as amended by subsequent Finance Acts, the latest being FA2003.

 Basic principles of VAT

·   VAT is a tax on turnover and is added at every stage of manufacture or process, based on the value added at each stage.

·    In general, VAT taxes individuals, not businesses. So that while registered businesses must charge VAT to their customers, they may also reclaim (with a few exceptions) any VAT they pay to suppliers. The net amount is paid over to HM Customs and Excise.[ In short, a trader nets the VAT paid on purchases (input tax) against that collected on sales (output tax) and either pays the excess output tax to Customs and Excise or claims a refund if there is an excess of input tax.]

·       VAT is therefore generally not a cost to a registered trader. The trader is, in effect, an unpaid tax collector working on behalf of Customs and Excise by collecting the tax due which will eventually be suffered by the final user only. VAT, however, is not reclaimable on a few blocked items

 ·      A trader who is not registered cannot reclaim input tax and as such suffers the full cost of purchases, including the VAT element. This point is of vital importance when deciding the amount on which capital allowances can be claimed. If the trader is registered then the VAT exclusive figure is used. If the trader is not registered then the VAT inclusive figure should be used as the VAT is then a cost to the trader. The term ‘trader’ in this article should be taken to include individuals, partnerships, and companies.

·       VAT legislation requires registered businesses to maintain proper records, including copies of invoices on which VAT is charged or payable, and to make regular returns.

·        VAT accounting is usually on an accruals basis – that is to say outstanding invoices are taken into account – although again smaller businesses (those with a turnover below £600,000) may by concession account on a ‘cash’ basis (when only VAT amounts actually paid and received are accounted for).

·    Smaller unregistered businesses, those making only ‘exempt’ supplies (such as banks) and individuals cannot reclaim or set off any VAT paid – and it becomes a cost to them.

The scope of VAT·        VAT is charged on taxable supplies of goods and services made in the UK by a taxable person in the course or furtherance of any business carried on by him. This statement is taken to include all supplies including trading stock, utilities supplied such as gas and electricity, and capital items.

Compulsory registration
A trader must register for VAT if his cumulative taxable turnover exceeds £56,000. There are two occasions on which a trader would need to check this. Firstly, at the end of every month a trader must check his cumulative turnover to date. This cumulative period must not exceed 12 months. When the turnover exceeds £56,000, the trader must notify Customs and Excise within 30 days. Customs and Excise will then register the trader from the start of the month following the period when the £56,000 was exceeded. The trader may request an earlier date if he wishes. Registration is not required if the trader can satisfy Customs and Excise that his turnover in the following 12 months will not exceed £54,000.Secondly, a trader will also be required to register if he expects the £56,000 threshold to be exceeded in any 30-day period. This test of measurement is on the 30-day period alone and not the cumulative turnover to date. Again the trader has 30 days to notify Customs and Excise but here he will be registered from day 1 of the 30-day period.A trader must notify registration using form VAT 1. Telephone calls and letters are not accepted methods of registration. On receipt of form VAT 1, Customs and Excise will issue a certificate of registration, which states the effective date of registration, the VAT periods, and the VAT registration number. The registration number is to be quoted on all future invoices and communication with the VAT authorities.

Voluntary registration
A trader may voluntarily register at any time whatever the level of his turnover. This has the advantage of allowing him to claim input tax and gives his business more credibility.

Deregistration
A trader can voluntarily deregister at any time if he believes that his taxable turnover in the following 12 months will not exceed £54,000. Deregistration will be effective from the date of request or at a later date if requested. Compulsory deregistration is also required when the trader stops making taxable supplies or there is a change in legal status.

The tax pointThe tax point of each individual supply is the actual deemed date of supply. The tax point is generally the earliest of the date the goods are taken, the invoice date, or the date that cash is received. The tax point is important in determining the period in which the supply is made, the rate of tax to be applied and the category (standard, zero-rated or exempt) to be taken. There is a 14-day rule, which allows the invoice date to be used if this is issued within 14 days of the goods being taken.