Chapter 3: Dealing with VAT Flashcards
What is output tax?
Output tax is charged by a business to its customers
E.g. Law firm charging vat on their profit costs
What is input tax?
Tax paid to a business by its suppliers for certain goods and services
E.g. Furniture company would charge vat to a law firm for office furniture supplied
Do firms need to charge their clients VAT on disbursements?
No
What type of expenses are recognised as disbursements for VAT purposes?
Services that are deemed to be separate from the legal services provided by the firm, i.e. the firm merely arranges for the supply of the third party service to the client
Are the costs of postage, property search fees, travel expenses, photocopying and printing recognised as disbursements for VAT purposes?
No
Most firms will not show separate items on its bill for expenses and will include them in its overall profit costs. What is the exception to this?
- Property search fees.
- Also debited on the client ledger
When will the agency method apply?
When an invoice is addressed to the client
If the agency method applies, how is the invoice paid?
The supply is treated as having been made to the client. The firm pays the entire amount of the expense, including VAT
How would a transaction involving the agency method be recorded?
Debit the client ledger, client account
Credit the cash sheet, client account
Only one payment is made which encompasses both the fee for the service plus the associated VAT. Therefore, the VAT element is not accounted for separately
When will the principal method apply?
When an invoice is addressed to the firm and is treated as having been made directly to the firm
An invoice is addressed to a firm for the use of a surveyor for £1,200 plus £240 vat. How would payment be recorded?
STAGE 1: Firm pays disb + vat
Debit £1,200 client ledger, business account
Credit £1,200 cash sheet, business account
Credit £240 cash sheet, business account
Debit £240 HMRC / VAT ledger, business account
STAGE 2: Firm recharges disb when billing for profit costs
Debit £1,200 client ledger, business account
Credit £1,200 cash sheet, business account
Debit £240 client ledger, business account
Credit £240 HMRC / VAT ledger
What is the exception to the principal method?
If a firm receives an invoice from legal counsel in the firm’s name, it can cross out its own name and replace it with the client’s
