Exceptions to these general rules include:
1. Exempt goods and services
Where a business supplies exempt goods or services, the business is exempt from the VAT system. Thus it does not charge any output VAT.
(Note the difference between not charging any VAT (exempt) and charging VAT at 0% (zero rated)).
As the exempt business is outside the VAT system, it cannot recover any VAT.
Goods and services supplied by businesses will fall into one of the two categories:
Exempt items include: Betting |
But these items are standard rated: Gaming machine takings |
2. Business not registered for VAT
A business gets included in the VAT system by registering with HM Revenue & Customs. It does not, however, have to register until turnover reaches a certain limit.
Businesses that are not registered are totally outside the VAT system.
They do not charge VAT on outputs but they cannot recover VAT on inputs.
3. Accounting for VAT on a cash basis
We have considered above the usual situation, where VAT must be taken account of according to the invoice date. The timing of the receipt, or payment of the invoice, is irrelevant (as long as the receipt/payment follows, not precedes, the invoice).
It is possible for small businesses to account for VAT instead on a cash basis. In this situation output VAT is accounted for when the cash is received from the customer. Similarly, input VAT is accounted for when the payment is made to the supplier.
VAT is always dealt with in this tutorial using the normal basis (i.e. accounting for VAT according to invoice date) and not the cash basis.
4. Non-deductable input VAT
Certain categories of input VAT cannot be recovered by a business. The main such items are:
Thus if a business receives an invoice for entertainment:
A Company, Address INVOICE | |||
---|---|---|---|
A Customer |
Date: | ||
Invoice Number: | |||
Entertainment | 200 | ||
Net | 200 | ||
+ VAT @ 15% | 30 | ||
Gross | 230 | ||
The expense of the business is recorded as £230, not £200 as would be the case for most business expenses.
VAT applies, at differing rates, to all the countries within the European Union. Special rules now apply to trading within the Union.
Taxes similar to VAT, but under different names, apply in many other countries. While the rates and rules for these taxes will be different to those for VAT, the accounting in general will be the same. Thus most of our accounting considerations here will apply to these taxes also.
VAT rates in different countries will be different. Also, in any one country the rates will be changed from time to time.
The purpose of our considerations here is to learn the accounting treatment for VAT, not the detailed rules regarding the tax itself. Exactly the same accounting treatment will apply whatever the exact VAT figure is in reality. Thus for clarity we will be using a VAT rate of 10% for the rest of this tutorial.