8. Accounting for VAT Flashcards
What is VAT?
Value added tax (VAT) is an indirect tax on the supply of goods and services.
Tax is collected at each transfer point in the chain from prime producer to final consumer.
Eventually, the consumer bears the tax in full and any tax paid earlier in the chain can be recovered by a registered trader who paid it.
How is VAT collected?
Although it is the final consumer who eventually bears the full VAT, the sum is collected and paid by the traders who make up the chain, provided they are registered for VAT.
Each trader must assume that his customer is the final customer:
They must collect and pay over VAT at the appropriate rate on the full sales value (known as output tax) of the goods sold.
They are normally entitled to reclaim VAT paid on their own purchases of goods, expenses and non-current assets (known as input tax) and so makes a net payment to the HMRC equal to the tax on value added by themselves.
What is an non-registered trader?
Traders whose sales (outputs) are below a certain level need not register for VAT although they may do so voluntarily.
Unregistered traders neither charge VAT on their outputs nor are entitled to reclaim it on their inputs. They are in the same position as a final consumer.
How may the outputs of registered traders be classified?
All outputs of registered traders are either taxable or exempt.
What is an exempt activity?
Traders carrying on exempt activities (such as banks) cannot charge VAT on their outputs and consequently cannot reclaim VAT paid on their inputs.
Taxable outputs are chargeable at what three rates?
- Zero rate (on printed books and newspapers for instance)
- Reduced rate (5% on domestic fuel)
- Standard rate: 20%
What is input VAT?
VAT suffered on purchases
What is output VAT?
VAT charged on sales
What is meant by gross amount regarding VAT?
Gross includes VAT
What is meant by net amount regarding VAT?
Net excludes VAT
What is the formula to convert between gross and net amount?
GROSS = NET X 1.2
NET = GROSS / 1.2
What is the general principle for the treatment of VAT in the ledger accounts?
As a general principle, the treatment of VAT in the trader’s ledger accounts should reflect the trader’s role as tax collector, so VAT should not be included in income or expenses, whether of a capital or a revenue nature.
How should irrecoverable VAT be treated in the statement of profit or loss?
Where a trader suffers irrecoverable VAT as a cost, VAT should be included as an expense (it cannot be claimed as an input tax).
How will a trader not registered for VAT be affected by it?
Traders not registered for VAT will suffer VAT on inputs as a cost. This will increases their expenses and the cost of any non-current assets they purchase.
How may a registered trader carrying on exempted activities be affected by VAT?
Registered traders who also carry on exempted activities may suffer VAT on certain inputs. This will increase the expense in respect of these inputs.