2. VAT and Transfers Flashcards
Is VAT a consumer or business tax and why?
VAT is consumer tax because the ultimate burden falls on the final consumer because they are not VAT registered.
VAT registered businesses offset any VAT they pay (Input VAT) against any VAT they charge (output VAT) and so do not bear the burden of tax.
If the output VAT exceeds the input VAT, the firm will be liable to pay the difference to HMRC
If the Input VAT exceeds the output VAT, HMRC will pay the firm a VAT refund.
How often do firms need to submit a VAT report?
What happens as a result?
Every Quarter (3 months) firms must submit a VAT return
If the output VAT exceeds the input VAT, the firm will be liable to pay the difference to HMRC
If the Input VAT exceeds the output VAT, HMRC will pay the firm a VAT refund.
What is output VAT?
VAT the firm has charged, for their professional services
What is input VAT?
VAT the firm has paid, when buying things or services for the business
Do firms need to charge VAT on clients expenses they pay?
It depends on if
- The Disbursement is for VAT purposes (And so not subject to VAT purposes)
Or
- The Disbursement is subject to vat
What type of expense is a disbursement for VAT purposes, and so not subject to VAT?
How are they treated on the firms invoice to the client?
These are ‘Expenses that are deemed separate from the legal services by the firm.’ Such as:
1. Stamp Duty 2. Land Registry Registration fee 3. Probate Fees 4. Court fees
In these cases, the expense is shown separately on the firms invoice, without the vat.
What are the 2 types of expenses that are disbursements subject to VAT?
How are they treated on the firm’s invoice to the client?
- Expenses Treated as part of the firms overheads in providing the legal services. Such as:
1. Postage 2. Travel expenses 3. Photocopying 4. Printing Or - Expenses deemed to be integral to the legal services provided by the firm, e.g where the firm provides legal advice on a service supplied by a third party. Such as:
1. Some conveyancing searches 2. Expert Fees
INVOICE
1 In these cases, the expenses are normally included with the firms bill, with the VAT
2 In these cases, the expense and VAT is normally showed separately on the firms invoice to the client
What are the Journal Entries required for the payment of Disbursements not subject to VAT (Disbursements for VAT Purposes)?
Paid From the Clients Account
Debit Entry - Client Ledger, Client Collum
Credit Entry - Cash Sheet, Client Account
Paid From the Business Account (if there are insufficient funds in the client account)
Debit Entry - Client Ledger, Business Collum
Credit Entry - Cash Sheet, Business Account
The Accounting requirments for Dibursements Subject to VAT can be dealt with in 2 ways.
What are the 2 methods, and when are they used?
Agency Method - Used when client’s name is on invoice, or for counsel Fees
Principal Method - Used when the firms name is on the invoice
What is the agency method?
The Law firm has acted as an agent in arranging for a third party to supply services on behalf of the client, and so the services are supplied to the client rather than the firm.
Accordingly, the third party VAT is issued to the client, and it is the client who is liable for the VAT, and so there is no need for the firm to make any entries on its HMRC VAT Ledger.
What is the Principal Method?
The Law firm has acted as the principal when ordering services for a supplier on behalf of the client, and so the services are supplied to the firm rather than the client.
Accordingly, the firm is therefore liable for the VAT, and will pass on the charges to the client. Both Input Tax (paid by the firm to the supplier) and Output tax (charged to the client by the firm) must be recorded in the firms HMRC Ledger.
When the agency method is used, do firms need to record VAT entires on its HMRC VAT Leger?
No.
The law firm has meerley acted as an agent, and so the VAT is issued to the client, not the firm
When the Principal Method is used, do firms need to record entires on its HMRC VAT Ledger?
Yes, the law firm is charged and so subject to VAT.
They have to record Both Input Tax (paid by the firm to the supplier) and Output tax (charged to the client by the firm)
What Journal Entries are used when paying a disbursement via the agency method?
Paid from the client account (Where sufficient funds are available)
Debit Entry - Client Ledger, Client Collum
Credit Entry - Cash Sheet, Client Colum
Paid from the business account (where insufficient funds in client account)
Debit Entry - Client Ledger, Business Collum
Credit Entry - Cash Sheet, Business Collum
NB: One entry for both the disbursement and VAT together (ie £600 fee + £120 VAT = 1 single payment of £620)
No entries in firms HMRC as it is clients bill and VAT, not firms
When using the agency method, and the disbursement and vat is paid by the client, how is vat recorded?
VAT is inclusive, and in one entry with the fee.
For example, if the fee is £600 and the VAT is £120
You would enter £720
When using the Principal method, and the disbursement and vat is paid by the client, how is VAT recorded?
VAT is dealt with seperatley.
Thus you will have 1 pair of journal entries in relation to the fee
and a second in relation to the VAT alone.
When using the principal method, how is the invoice paid? 2 steps?
- The Firm Pays the Disbursement + VAT
- The firm recharges the Disbursement + VAT when bringing for profit costs.
When using the principal method, how is the journal entries updated?
- The Firm Pays the Disbursement + VATa) Disbursement
Debit Entry - Client Ledger, Business Account Collum
Credit Entry - Cash sheet, Business Account Collumb) VAT
Debit Entry - VAT Ledger, (only has Business Account
Collum) (input tax)
Credit Entry - Cash Sheet, Business Account - The Firm recharges disbursement + VAT to the client when bringing for-profit costsa) Profit Costs
Debit Entry - Client Ledger, Business Account
Credit Entry - Profit Costs Ledgerb) VAT (on both profit costs (services) and disbursement) Debit Entry - Client Ledger, Business Account Credit - VAT Ledger (output tax)
Can client money be used to pay an invoice in the firms name (principal method)?
No, the bill is in the firms name.
The business account must be used, and then the firm must bill the the client and recoup the costs from them
What is a cash transfer?
What will the Ledgers always be?
A cash transfer is a transfer from the client account to the business account or vice versa.
The Ledgers will always be the Client Ledger, and the Cash Ledger
What is an Inter Client Transfer? What are the 2 Circumstances?
What will the Ledgers Always be?
An inter-client transfer always involves client money, which remains client money. This occurs in 2 circumstances:
1. Transferring funds from 1 client to another
2. Transferring 1 clients funds from 1 of their matters to
another.
The Ledgers will always be 2 separate Client Ledgers.
What are the 2 steps that must be taken for a cash transfer from the client account to the business account?
What are their journal entries?
- Transferring Money Out of the Client’s Bank Account
Debt Entry - Client Ledger, Client Collum
Credit Entry - Cash Sheet, Client Collum - Transferring Money Into the Business Bank Account
Credit Entry - Client Ledger, Business Account Collum
Debit Entry - Cash Sheet, Business Account Collum
What are the 2 steps that must be taken for a cash transfer from the business account to the client account?
What are their journal entries?
- Transferring Money out of the Business Account
Debit Entry - Client Ledger, Business Collum
Credit Entry - Cash Sheet, Business Collum - Transferring Money into the Client Account
Credit Entry - Client Ledger, Client Collum
Debit Entry - Cash Sheet, Client account collum
What is a mixed reciept?
How is this dealt with?
- This is where the firm may receive a payment that is a mixture of client money and business money.
- If received, the whole amount will be paid into either one account (either the business or client account), and then the remaining amount needing to be separated is transferred. Rule 4.2 requires mixed receipts are dealt with promptly.
If paid by cheque, the bank can split the cheque so that the correct requirements go into the right accounts.
