{m}.{s}.1Value Added Tax: General Rules

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.

{m}.{s}.2VAT rates

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:

  • Standard Rate: 17.5% from 1 April 1991 (in late 2008 this was changed by the government to 15%, but this is expected to be a temporary change in rate)
  • Zero Rate: 0%
  • There is also a third rate of 5% applied to domestic fuel.

 

{m}.{s}.3 VAT charge to customer

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
Address

Date:      
    
 Invoice Number:
£
 
 Goods200 
 Net200 
 + VAT @ 15% 30 
 Gross230 
    

[{m}.{s}a]

The total charge to the customer is £230 - the gross amount.

 

Note the following points:

  • The extra £30 is collected by the business on behalf of HM Revenue & Customs. This amount is due to be paid over (subject to deduction of input VAT) and thus never belongs to the business.
  • Assuming a normal invoicing and payment system (invoicing within 14 days of delivery and payment after the issue of the invoice) the business is accountable to HM Revenue & Customs for the £30 at the time the goods are invoiced. The timing of the payment by the customer is irrelevant. (Note that under the cash accounting system, the situation will be different.)
  • If this invoice is received by another business, the actual expense to that business is £200. The £30 is recoverable from HM Revenue & Customs, and is thus not an expense to the business. Again, it is the timing of the invoice, not the payment to the supplier, that is relevant for the recovery of the VAT.

{m}.{s}.4VAT: Zero rated sale

Where a business supplies zero rated goods or services, the output VAT charged is zero:

A Company, Address
INVOICE
 
 

A Customer
Address

Date:      
    
 Invoice Number:
£
 
 Goods200 
 Net200 
 + VAT @ 0% 0 
 Gross200 
    

[{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:

  • Basic foodstuffs
  • Books, newspapers
  • Public transport
  • Children's clothes
  • Exports (outside the EU)

But these items are Standard rated:

  • Alcohol, sweets, chocolates
  • Private hires
  • Adults' clothes

{m}.{s}.5VAT return

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
     
[{m}.{s}c]

 

{m}.{s}.6VAT calculations

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
   
[{m}.{s}d]

 

 

 

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
     
[{m}.{s}e]

For example: if gross = £230

  • Net = £230 x 100/115 = £200
  • VAT = £230 x 15/115 = £30

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%.

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