In looking at transactions so far we have ignored Value Added Tax (VAT). Before progressing to consider the recording of particular types of transactions, we will now look at VAT.
Subject to certain exceptions, the following situation applies:
When a business provides goods or services, it must charge VAT in addition to the selling price of the goods - this is output VAT.
Similarly, when a business buys goods or services, it is charged VAT by the supplier - this is the input VAT of the business.
Where output VAT exceeds input VAT, the difference is paid over periodically to HM Revenue & Customs.
Where input VAT exceeds output VAT, the difference is recovered periodically from HM Revenue & Customs.
The VAT charged by a business is as a percentage of the selling price.
There are currently (2008/2009) two main rates of VAT in the UK:
Thus, if a business wishes to charge £200 for a standard rated item, the full cost to the customer will be:
A Company, Address INVOICE | |||
---|---|---|---|
A Customer | Date: | ||
Invoice Number: | |||
Goods | 200 | ||
Net | 200 | ||
+ VAT @ 15% | 30 | ||
Gross | 230 | ||
[{m}.{s}a]
The total charge to the customer is £230 - the gross amount.
Note the following points:
Where a business supplies zero rated goods or services, the output VAT charged is zero:
A Company, Address INVOICE | |||
---|---|---|---|
A Customer | Date: | ||
Invoice Number: | |||
Goods | 200 | ||
Net | 200 | ||
+ VAT @ 0% | 0 | ||
Gross | 200 | ||
[{m}.{s}b]
The total charge to the customer is £200 - the gross amount.
The same rules still apply, so input VAT will be recoverable in full.
Zero rated items include:
But these items are Standard rated:
The period for which VAT is paid over to (or recovered from) HM Revenue & Customs is normally three months e.g. the period 1 June - 31 August.
Over this period, output VAT is totalled and the figure is entered on the VAT return. Input VAT is also totalled and entered on the return.
If output VAT exceeds input VAT, the difference is due to be paid over within one month e.g. for the period 1 June - 31 August, VAT should be paid over by 30 September.
VAT RETURN | ||
Period to 31 August | ||
OUTPUT VAT | 5,000 | |
INPUT VAT | 2,000 | |
AMOUNT DUE | 3,000 | |
We have seen that, to add VAT to a net figure, we calculate 15% of the net:
Net | 200 |
+VAT @ 15% (200 x 15/100) | 30 |
Gross | 230 |
Sometimes we need to work the other way round - to start with the VAT inclusive figure of £230, and work out the net and VAT figures.
Let's look at percentages first:
% | ||
Net | Net = Gross x 100/115 | 100.0 |
VAT | VAT = Gross x 15/115 | 15.0 |
Gross | 115.0 | |
For example: if gross = £230
Remember:
Net + VAT = | Gross |
|
100% + VAT Rate % | (100% + VAT Rate%) |
|
So, If VAT = 15% | 100 + 15 = | 115 |
If VAT = 17.5% | 100 + 17.5 + | 117.5 |
We will now look at some calculations using the standard rate of 17.5%. Therefore the net amount is 100%, the VAT amount 17.5% and the gross amount 117.5%.