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					VAT Basics
Ian M Harris
Leicester City Council
VAT & Taxation Advice Office
VAT & Taxation Advice Office

   Who are we?
    – Ian Harris: Taxation Officer
    – Part of Financial Services Division
   Where are we?
    –   Room B2.09(B), New Walk Centre
    –   Extension: (29)7470 (0116-252-7470)
    –   Fax: 0116-255-2443
    –   Mobile/Text: 07980-339581
    –   E-mail: vattax@leicester.gov.uk
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      £1.75     £1.75
timber mill   £1.75    £17.50    £15.75
manufacturer £17.50    £70.00    £52.50
retailer     £70.00   £148.80    £78.80
                                £148.80

 Which equals the amount paid by the
 customer
The success of VAT
 Intrinsicallysimple
 A self-assessed tax
 A self-policed tax
 Extremely efficient cost of
  collection
The success of VAT
 VAT   raises over £80billion pa
– 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
   17.5% (but increasing to 20% from
    4 January 2011)
   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
 17.5%   VAT so:
   17.5/117.5ths = VAT amount
   simplifies(!) to 7/47ths
   it’s about 15% (14.89%)
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
–   the shipping agent’s invoice is not a VAT Invoice
   Can only reclaim the 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
 Alsoyou 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
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)
   caravans and houseboats
   gold
   bank notes
   drugs, medicines and aids for the handicapped
   imports and exports
   deleted (was tax-free shops)
   charities
   young children’s clothing and footwear and certain
    protective clothing and footwear
   (up to 31 October 2010) emissions allowances
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
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: (29)7470
         – Direct dialling: 0116-252-7470
         – Fax: 0116-255-2443
         – Mobile/Text: 07980-339581
         – E-Mail: vattax@leicester.gov.uk

				
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