Accounting For VAT Flashcards
For output VAT, as well as retaining copies of sales invoices, which documents will be held?
- Orders
- Delivery notes
- Credit notes (copy)
- Sales and sales returns day book
- Bank records (statements)
- Till rolls or other computerised records of daily sales/cash sales
When a VAT invoice is raised, a business must ensure that it is sent within __ days of __ taking place.
- 30
- Supply
If the charge for goods/services is less than £250 (VAT inclusive), then a less detailed invoice can be issued. This is often referred to as a…
Simplified invoice
- Shows total amount including VAT
What is not included on a simplified invoice?
- No customer details
- Invoice number is not required
Describe a modified invoice
- A modified invoice is similar to a full invoice but also includes the VAT inclusive unit price of each product/service, and the total amount including VAT.
- May be issued for retail supplies exceeding £250 (vat inclusive), it can only be used if customer agrees to it.
Describe electronic invoices
Electronics invoices may be used instead of paper copies but contain all the same info as paper invoices do.
- If invoices are sent in batches, common data can be included once per computer file rather than once per invoice, e.g., customer name and address in full on the batch header and in an abridged version on each invoice.
To be eligible for electronic invoices businesses must…
- Transmit invoices in a secure format, e.g., PDF
- Ensure authenticity of the original, integrity of the invoice data, and legibility of invoice consent.
What are not VAT invoices?
- Proforma invoices
- Invoices for only zero-rated/exempt supplies
- invoices that state ‘this is not a VAT invoice’
- Statements of account
- Delivery notes
- Orders
- Letters, emails, or other correspondence
Describe proforma invoices
- Often used when the supplier required payment up from before dispatch of goods.
- If sent out, it should be marked ‘this is not a VAT invoice’.
- A proper VAT invoice must be issued when goods are sent. This will be needed for customer to reclaim the input VAT.
- If goods are accepted the invoice must be sent within 30 days of the receipt of the payment.
What are situations where VAT invoices are not required (3)?
- A VAT registered business is not required to issue a VAT invoice to a non-registered business or to a member of the public, but it must do so if requested.
- Item is a free sample or gift.
- If the purchaser is on a self-billing system,.
Describing how to round when calculating VAT
- When calculating VAT on invoices, there are different rules for rounding when a calculation results in more than two decimal places.
- Normal treatment is to round down the total VAT to the nearest penny.
- Businesses such as retailers, who issue invoices with lots of separate items listed, can choose to work out VAT separately for each line.
- In exam, apply normal mathematical rules unless specified otherwise.
Describe the effect of VAT: Sales invoices
- When a sales invoice is issued by a business who is VAT registered, this will increase the output VAT.
- Therefore increases the amount the business owes to HMRC.
- We collect VAT on behalf of HMRC, it doesn’t belong to the business.
- Issuing a sales invoice will increase the amount due to HMRC, which represents a liability.
Describe the effect of VAT: Purchase invoices
- When a purchase invoice is received by VAT registered business, this will include the input VAT which can be reclaimed by the business.
- So the input VAT is the amount owed to the business by HMRC.
- The receipt of a purchase invoice for which input tax as been paid will increase the amount owed by HMRC, which will be an asset of the business.
To manage the process of netting off input and output VAT to ensure the correct amount is paid/refunded from HMRC we use…
A VAT control account
A VAT registered business can only reclaim the VAT on purchases if a valid __ __ has been received, and if the purchase is for __ __.
- VAT invoice
- Business purposes
Describe the VAT control account
- Every quarter the business needs to know how much VAT is payable/due from HMRC in order to put it onto a VAT return.
- The accounting record is the VAT control account.
- This collects the figures for all input and output tax for the quarter to establish a net balance.
- The control account is a SFP position that will represent either an asset or a liability.
What items does a VAT control account need?
- Output tax (VAT due to HMRC) — derived from sales day book (for credit sales) and cash receipts book (for cash sales), these figures will net off any sales credit notes issued, these net output tax will be on the credit side of the VAT control account (liability).
- Input tax (VAT reclaimable from HMRC) — derived from purchase day book (for credit purchases) and cash payments book (for cash purchases), these will net off any purchase credit notes received, will be on debit side of account as it’s an asset.
- Will be slightly more complex as we need to account for returns, payments made, and refunds received as well as an opening debit/credit balance.
Describe the replacement of returned goods
- Once goods have been sold a VAT invoice is issued and it is recorded through the accounting records of the business.
- However, the customer may return the goods, a refund may be made, or perhaps replacement goods are sent.
— If goods are returned, a credit note is issued.
— If goods are returned and replacement goods to the same value are issues, there are two options…
1. Allow the original invoice to stand
2. Issue a credit note against the original invoice and then issue a new invoice
— If goods are returned and replacement goods are issued at a lower price, then a credit note can be issued to account for the difference in price and VAT.
— If goods are returned and replacement goods are issued at a higher price, then the additional VAT can be accounted for by issuing a further invoice for the additional amount only.
What are 3 common things/errors to check for before submitting a VAT return?
- Do the accounting records cover the correct VAT period?
- Do we have the correct documentation to verify the transactions?
- Are the calculations correct?
