VAT Basics

Ian M Harris BA(Hons) FIIT CTA MAAT

Leicester City Council
VAT & Taxation Advice Office
VAT & Taxation Advice Office
 Who are we?
– Ian Harris BA(Hons) FIIT CTA MAAT
– Taxation Officer
– Part of Financial Services Division
 Where are we?
– Room B2.09(B), New Walk Centre (at the moment!)
– Extension: (37)4060 (0116-454-4060)
– Fax: 0116-255-2443
– Mobile/Text: 07980-339581
– E-mail: [email protected]
The Introduction of VAT
 Started on 1 April 1973
 Not intended to impact on local authorities’
statutory activities
 Refund system in place for such ‘non-
business’ activities
 But when acting in a business capacity
‘normal’ VAT rules apply to local authorities
 EU law lays down a requirement to avoid
distortion of competition
VAT - The European Tax
 EC Principal VAT Directive lays
down the basis
 Applies to all EU Member States
 Details the scope of VAT, meaning of
taxable person, time and place of
supply, exemptions from VAT, etc
VAT in the UK
 UK implements the Directive by
way of the VAT Act 1994
 Secondary legislation: VAT
Regulations 1995 and numerous
other SIs
 UK has certain derogations, eg
the retention of zero-rating
The Role of Customs
 Administration of VAT in the UK
 Network of local VAT offices
 Ensure VAT is correctly accounted for
 By assessing for underdeclared VAT, plus
interest and penalties!
 If disagree have right of appeal
 All communication with Customs must go
through the VAT & Taxation Advice Office
VAT - How Does It Work?
 Taxable person - someone who is (or
who ought to be) registered for VAT
 Taxable supply - a supply of goods or
services which is liable to VAT
 A taxable person charges VAT on
his/her taxable supplies and reclaims
VAT incurred in connection with
making those supplies
How it Works: An Example
VAT VAT net
incurred charged VAT
forester nil £2.00 £2.00
timber mill £2.00 £20.00 £18.00
manufacturer £20.00 £80.00 £60.00
retailer £80.00 £166.50 £86.50
£166.50

Which equals the amount paid by the

customer
The success of VAT
 Intrinsically simple
 A self-assessed tax
 A self-policed tax
 Extremely efficient cost of
collection
The success of VAT
 VAT raises over £90billion pa
 VAT accounts for over 15% of Government
revenue
– at a cost of less than 1p per Pound
 Income Tax raises somewhat more
– but at a cost of over 5p per Pound
 Corporation Tax raises only about half as
much
Rates of VAT
 Standard-rate
 20%
 Lower-rate
 5%
 and
 Zero-rate
 0%
 Note that zero-rate is different to
exemption from VAT
Output Tax and Input Tax
 VAT charged by a taxable
person is his/her output tax
 VAT incurred by a taxable
person is his/her input tax
 Output tax less input tax =
amount payable to Customs
The VAT Return
 Total output tax for the period (A)
 Total input tax for the period (B)
 A - B = amount due TO Customs
 Or, if A - B is negative (input tax is
higher than output tax), then A - B
= amount due FROM Customs
Input Tax - General Rules
 To reclaim input tax you must:
 hold a VAT invoice
– though there are certain cases, eg payphones
and purchases from coin-operated vending
machines, where you simply must demonstrate
that VAT has been incurred on the expenditure
 receive the supply
 use the goods or services supplied for official
purposes
VAT Invoices - Full Invoices
 Used by most businesses such as
wholesalers and manufacturers
 Require certain specified information
 For businesses - must be issued
within 14 days of the supply
 For local authorities - must be issued
within 2 months of the supply
VAT Invoices - Full Invoices
 To be valid a full VAT invoice must contain:
- a sequential identifying number
- the date of the supply (the tax point)
- the name, address and VAT-registration number of the supplier
- the name and address of the customer
- a description of the goods or services supplied
- the quantity of the goods, extent of the services, unit price, rate
of VAT applicable and net amount payable
- the total amount payable excluding VAT
- any discount offered
- the total amount of VAT payable in UK Pounds
VAT Invoices - Less Detailed
 Issued by retailers and other VAT-
registered persons selling to the public
 Often referred to as a ‘VAT receipt’
 Minimal information required
 Must be able to demonstrate that a
VATable supply has been received
from a VAT-registered supplier
The VAT Fraction
 To calculate the VAT amount
from a VAT-inclusive amount
 20% VAT so:
 20/120ths = VAT amount
 simplifies to 1/6th
Imports from Within the EU
 Effectively importer charges self VAT
by accounting for UK VAT as
acquisition tax (equivalent to output
tax)
 Declare on VAT Return and recover as
input tax
 Copy all such invoices to the VAT and
Taxation Advice Office
Imports from Outside the EU

 UK VAT payable at point of importation

 Shipping agent usually pays UK VAT on
importation then claims reimbursement
 but
– shipping agent’s invoice is not a VAT Invoice
 Can only reclaim VAT on imports on
basis of C79 Certificate from Customs
‘Imported Services’
 Cross-border B2B services normally VATable where
customer located
 Customer effectively charges self VAT by accounting for UK
VAT as output tax, declaring on VAT Return and
recovering as input tax
 There are some exceptions though:
– notably services supplied where performed or consumed, eg land related
services, hotel accommodation and restaurant and catering services
 Copy all invoices for services procured from non-UK
suppliers to VAT and Taxation Advice Office
 Cross-border B2C services normally VATable where
supplier is located
 There are similar exceptions though
Irrecoverable Input Tax
 You cannot recover VAT incurred on:
 certain second-hand goods (including goods
bought at auction)
 supplies made under the Tour Operators
Margin Scheme (TOMS)
 purchases of motor cars (or 50% of VAT on
leased cars)
 purchases in respect of business
entertainment
Irrecoverable Input Tax
 Also you cannot recover VAT
incurred on:
 purchases from suppliers who are
not registered for VAT
 supplies purchased on behalf of
someone else
Credit Notes
 Credit notes must be issued to correct any
overcharge of VAT
 The customer must then repay the VAT
shown on the credit note to Customs
 A credit note should be treated as a
‘negative invoice’
 Credit notes cannot be used to write off bad
debts
Outputs and Output Tax
 An output is a supply of goods or services
 Goods - supply made when title passes
 Services - to do something (or refrain from
doing something) for payment
 Remember payment does not have to be in
money - there could be a barter or part-barter
 The supply will bear VAT at standard, lower or
zero-rate or be exempt from VAT or be outside
the scope of VAT (eg a non-business activity)
Tax Points - The Time of Supply
 The tax point is the time at which you must account for
VAT and is determined by when the supply is made
 A supply is made when:
 in the case of goods, they are delivered to or removed by
the customer
 in the case of services, the service is complete or, for
ongoing services, a payment is received
 But where an invoice is issued the date of the invoice
usually becomes the tax point
 Unless payment is received first which triggers a tax
point
Non-Business Activities
 Supplies made for no consideration or, in
the case of land, where the consideration is
no more than a ‘peppercorn’
 Supplies made by a public body under a
statutory regime
 Certain ‘traditional’ local authority
activities which do not ‘compete’ with the
private sector
Non-Business Activities
 For a local authority activity to be non-
business it must be -
- free at the point of delivery
or
- subject to a special legal regime
and
- not likely to cause any significant distortion of
competition
Business Supplies
 Supplies which are not non-business must be
business supplies and may be:
– standard-rated
– lower-rated
– zero-rated
– exempt from VAT
 Business supplies do not have to be made for
a profit
Exemption from VAT
 Determined by Schedule 9 of the VAT Act
 land (including lettings, leases, etc)
 insurance
 postal services (by the Post Office)
 betting, gaming and lotteries
 finance
 education (other than statutory education)
 health and welfare (other than statutory social care)
Exemption from VAT
 burial and cremation
 subscriptions to trade unions, professional and
other public interest bodies
 sports, sports competitions and physical education
 works of art, etc
 charity fund raising events
 cultural services
 goods on which input VAT was irrecoverable
 investment gold
 services by a cost sharing group to its members
Zero-Rating
 Determined by Schedule 8 of the VAT Act
 food
 sewerage and water
 books and printed matter
 talking books for the blind and handicapped and
wireless sets for the blind
 construction of certain new buildings
 certain protected buildings
 international services
Zero-Rating
 transport (notably public transport fares)
 residential caravans and houseboats
 gold
 bank notes
 drugs, medicines and aids for the handicapped
 imports and exports
 charities
 young children’s clothing and footwear and certain
protective clothing and footwear
Lower-Rating
 Determined by Schedule 7A of the VAT Act
 domestic fuel or power
 installation of energy saving materials
 grant-funded installation of heating equipment or
security equipment
 women’s sanitary protection products
 children’s car seats
 residential conversions
Lower-Rating
 renovations and alterations of dwellings
 contraceptive products
 advice or information to promote welfare of elderly,
disabled or children
 installation of mobility aids for the elderly
 smoking cessation products
 caravans over 7m long not suitable as a permanent
residence
 cable-suspended passenger transport systems
Your Responsibilities
 Follow the VAT rules
 Remember VAT affects both income
and expenditure
 Consider the VAT implications of
decisions made
 Refer to the VAT Manual
 If unsure, seek advice don’t guess
The VAT & Taxation Advice Office

 If in doubt contact:
– THE VAT & TAXATION ADVICE OFFICE
– Room B2.09(B), New Walk Centre
– Extension: (37)4060
– Direct dialling: 0116-454-4060
– Fax: 0116-255-2443
– Mobile/Text: 07980-339581
– E-Mail: [email protected]