Chapter 2 Flashcards
Full VAT invoices
A business must give or send a VAT invoice to the purchaser within 30 days of the earlier of the date of supply or services supplied. An electronic or paper copy of the invoice must be kept on file by the business.
The customer must receive a valid VAT invoice from the supplier to claim back the VAT paid on a purchase.
A full VAT invoice must show (stated in VAT guide 700):
A unique, sequential invoice number, the invoice date, time of supply, the suppliers name and address and VAT registration number, the customers name and address, a description of g/s, total net amount payable excluding VAT, total amount of VAT, the unit price excluding VAT
Time limits for issuing a VAT invoice
A VAT invoice must be issued within 30 days of the earlier of the date of supply or the receipt of payment.
Advantages of electronic invoices
Instant transfer of the invoice to the customer which can improve cash flow as customer is likely to pay more quickly, rapid access, reduced storage and postage costs, more secure transfer and easier to access in dispute handling.
Invoices for zero-rated and exempt supplies
Invoices that include zero rated and exempt supplies must show this fact on the invoice.
Invoices that are for only zero rated or exempt supplies are not VAT invoices.
Simplified invoices
If the VAT inclusive amount charged is £250 or less, a simplified invoice may be issued. This type of invoice must show:
A Unique, sequential invoice number, the suppliers name, address and VAT registration number, time of supply, description of g/s, the rate of VAT charged per item.
A simplified invoice cannot include any exempt supplies.
Modified Invoices
A modified invoice is similar to a full VAT invoice, but it also includes the price of the products inclusive of VAT. A modified invoice is only issued for goods and services totalling more than £250 that include VAT taxable products.
Only issued if the customer agrees to the invoice.
Generally issued by retailers selling products direct to customers rather than to other businesses.
Situations where VAT invoices are not needed
When the buyer is not registered for VAT, where the seller is a retailer, free sample, if the purchaser is on a self-billing system.
Pro-forma invoice
Document issued by a seller offering goods at a certain price and asking the buyer to pay first in the return for the goods. This is when a seller does not want to sell on credit.
A pro-forma invoice may well look exactly like an invoice, but because it does not relate to a firm sale, it cannot be used as evidence to reclaim input tax.
The actual tax point cannot be when a pro forma invoice is issued.
VAT receipt
People claiming the cost of fuel as a business expense will want a VAT receipt because the business can use a VAT receipt to reclaim the VAT on the fuel.
VAT receipts are not always issued by VAT registered retailers, but a customer can demand one.
Automatic calculation of VAT
Most businesses use accounting software that’s automatically calculates VAT that is included in a purchase or sales invoice. It is important to remember that the correct rate of VAT must be coded for each invoice so that the correct amount of VAT is applied.
VAT rounding
HMRC allows businesses and other organisations to round down the total amount of VAT payable on an invoice or receipt to the whole nearest penny.
Calculating VAT included in the total
Divide the total amount by 120 percent (if tax rate is 20%) and then times it by the tax rate percentage.
The VAT fraction
Another way of working out the VAT included in a total amount is to multiply the whole amount by the VAT fraction. For 20% VAT rate the VAT fraction is 6. The current VAT fractions are published in the HMRC guide.
Trade discounts and VAT
HMRC requires that VAT is calculated on the invoiced amount after any trade discount has been deducted.
Prompt payment discounts and VAT
PPD is a discounted offered by the seller to encourage the buyer to pay straight away. If the discount is settled before 7 days of the invoice date the seller will take the discount off the net invoice price.
There are two ways that a business can deal with prompt payment discounts:
Issue a credit note or statement included on the invoice which gives customer the terms of the PPD
Tax Points
The tax point of a taxable supply is the date that is recorded as taking place for the purposes of the VAT return.
Basic Tax Point
If a business supplies goods, the basic tax point is usually the date when:
The businesss despatches the goods, or the customer collects them, or the supplier makes them available for the customer to use,
If a business supplies services, the basic tax point is:
The date the service is carried out
Actual tax points
The rules for basic tax pints can be set aside if an actual tax point is created.
14 day rules: if a VAT invoice is issued within 14 days of the basic tax point the invoice date becomes the actual tax point.
Actual tax point - advance payments
If a business offers its customers the option to pay in advance and a VAT invoice is issued or payment is received before the basic tax point, the actual tax point is the earlier of the date a VAT invoice is issued or the date the business receives the advance payment.
Actual tax point - deposits
The tax point for deposits is the earlier of: the date a VAT invoice is issued for the deposit or the date the deposit is received.
The VAT on the balance is accounted for on the VAT return for the period when the actual tax point for the balance occurs which is the earlier of the invoice received or balance paid.
Actual tax point - continuous supply
If a business supplies a service to a customer over a period of time that is longer than one month, it may issue invoices regularly throughout that period. In this case a tax point is created every time an invoice is issued, or a payment is made.
Actual tax point - sale or return
This is when a customer will have an arrangement with a supplier where it only pays the supplier for goods that it actually sells, with any unsold goods being returned to the supplier. The tax point for goods on sale or return is the earlier of:
The date the customer adopts the goods (date they keep the goods)
The date payment is made by the customer (deposit doesn’t count)
12 months from the date the goods were sent
Actual tax point - payment by instalment
A business may allow a customer to pay for goods by instalments over an agreed period of time. The goods remain the property of the business until the full price is paid. This is known as a conditional sale.
The basic tax point for a conditional sale is created when the goods are handed over to the customer.
Importance of tax points
Results in a consistent and accurate method of recording VAT transactions.
Helps cash flow in a business - early tax point means that a business can reclaimed input VAT earlier on purchases.
