Tax Processes Flashcards by Rhona Henderson

Introduction to VAT (CH1)

Define VAT

Value Added Tax is a tax on the sale of goods and services.

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Introduction to VAT (CH1)

What type of tax is VAT?

It is an indirect tax charged on consumer expenditure.

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Introduction to VAT (CH1)

How is VAT regulated?

VAT Law

VAT is regulated and collected in the UK by HMRC

They do so through following laws and regulations such as:
* EU Directives
* VAT Act (1994)
* Finance Act
- VAT Guide (Notice 700) issued by HMRC

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Introduction to VAT (CH1)

When must a business register as a Taxable person?

If a supplier’s taxable turnover for the previous 12 months exceeds the annual threshold of £85,000, they must register with HMRC as a Taxable Person.

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Introduction to VAT (CH1)

What is the effect of registering with HMRC as a Taxable Person?

• Must charge VAT on chargeable supplies (i.e. goods and services) - Output tax.
• Can reclaim VAT paid on most business supplies received - known as Input tax.

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Introduction to VAT (CH1)

What is Output Tax?

When VAT is charged on Goods & Services.

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Introduction to VAT (CH1)

What is Input Tax?

VAT that can be reclaimed from Business purchases.

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Introduction to VAT (CH1)

When is a VAT payment due to HMRC?

When Output Tax exceeds Input Tax.

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Introduction to VAT (CH1)

When can a VAT Refund be Claimed?

When Input Tax is greater than Output Tax.

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Introduction to VAT (CH1)

What are the 3 Main Types of Supplies?

Taxable Supplies
Exempt (e.g. Education, Betting)
Outside The Scope (e.g. Motorway tolls, Charitable Donations)

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Introduction to VAT (CH1)

What are the 3 Rates of VAT?

Zero rate (0%) - No VAT is charged, but it is taxable. (e.g. on most foods)
Reduced Rate (5%) - Some supplies are charged at a lower rate, mainly for domestic and charitable purposes.
Standard Rate (20%) - Any taxable supply not charged at the other two rates.

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Introduction to VAT (CH1)

Zero Rated Supplies

VAT charge at 0%
Businesses that supply only zero rated supplies can still reclaim Input VAT

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Introduction to VAT (CH1)

Examples of Zero Rated Supplies

Water
Most food in shops
Books and newspapers
Public Transport
Children’s clothes and shoes
New Housing/building

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Introduction to VAT (CH1)

Exempt Supplies

No VAT Charge
Businesses that supply only exempt supplies cannot reclaim Input VAT

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Introduction to VAT (CH1)

Examples of Exempt Supplies

Health & dental care
Insurance
Postal Services
Finance (e.g. Making loans)
Education (not for profit)
Betting and lotteries

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Introduction to VAT (CH1)

When must a business register for VAT?

A business must register within 30 days if taxable supplies have exceeded, or are likely to exceed, the annual threshold (85,000).

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Introduction to VAT (CH1)

When is VAT registration not compulsory?

When turnover exceeds threshold temporary due to significant one-off sale.

However the business must notify HMRC within 30 days to request an exception.

Otherwise it will have to register and then apply to be de-registered.

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Introduction to VAT (CH1)

How are penalties for failure to Register calculated.

Calculated as a percentage of the potential lost revenue (PLR)

The percentage depends on:
- Whether the failure to register was deliberate or not
- Whether the business was prompted by HMRC to register,
- How long it is since the VAT was due.

No penalties if there is a reasonable excuse.

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Introduction to VAT (CH1)

Benefits of voluntary registration

Claiming back input tax on purchases

It may be possible to reclaim VAT on purchases of goods and capital assets held on the effective date of registration.

There is normally a time limit of three years for goods, and six months for services.

NOTE: Suppliers of only VAT Exempt goods/services cannot reclaim input VAT

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Introduction to VAT (CH1)

Drawbacks of voluntary registration

Voluntary registration carries with it all the responsibilities of a VAT registration:

keeping all the required VAT records and
submitting a VAT Return on the due dates.

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Introduction to VAT (CH1)

When can a business voluntarily De-register?

If a business finds that annual turnover falls, or is likely to fall, below 83,000.

This can be done online or by completing a paper-based VAT 7 form.

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Introduction to VAT (CH1)

When is De-registration Compulsory?

the business stops making taxable supplies
the business is sold
the legal status of the business changes (e.g. from sole trader to partnership or limited company).
a VAT group the business is a member of is disbanded or the business joins a new VAT group
the business joins the Agricultural Flat Rate Scheme

The process for deregistration when it is compulsory is the same as for voluntary deregistration. Application for deregistration should be made within 30 days of the event which caused the change.

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Introduction to VAT (CH1)

What measures do HMRC have in place to regulate VAT?

HMRC acts as a regulator and enforcer for all matters connected with VAT:

Registration
Submission of VAT Returns and other documentation
Keeping of VAT records (6years)
Inspecting the records of registered businesses
Inspectors are regularly sent out to ensure compliance

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Introduction to VAT (CH1)

When must a business notify HMRC for changes to a VAT registration?

Name, Trading Name or Address - Within 30 days
Partnership Members - Within 30 days
Agent’s details - Within 30 days
Business Activity - Within 30 days
Bank Account details - 14 days in advance

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VAT and Business Documents (CH2)

How long does a VAT-registered supplier have to give an invoice to a customer?

When a VAT-registered supplier sells goods or services, they must give the purchaser a VAT invoice within 30 days.

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VAT and Business Documents (CH2)

What should a VAT Invoice show?

A VAT invoice must show:
• an invoice number
• the seller’s name or trading name, and address
• the seller’s VAT registration number
• the invoice date
• the time of supply (also known as the tax point) if this is different from the invoice date
• the customer’s name or trading name, and address
• a description of the goods or services supplied to the customer which enable the customer to identity what is being charged for

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VAT and Business Documents (CH2)

What should a VAT Invoice show in relation to the goods / services supplied?

the unit price or rate (e.g. for a service), excluding VAT
the quantity of goods (e.g. items) or the extent of the services (e.g. hours)
the rate(s) of VAT that applies to what is being sold
the total amount payable, excluding VAT
the rate of any settlement (cash) discount
the total amount of VAT charged

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VAT and Business Documents (CH2)

When is a VAT Invoice not required?

where the seller is not registered for VAT
where the buyer is not registered for VAT (although a customer can ask for one)
where the seller is a retailer (although a customer can ask for one)
where the item is a free sample and normally subject to VAT
if the purchaser is on a self-billing system (i.e. the purchaser issues the invoice and sends it with the payment)

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VAT and Business Documents (CH2)

Which type of invoice shows only the VAT Inclusive amount?

A Simplified VAT Invoice.

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VAT and Business Documents (CH2)

Which type of invoice shows both the VAT Inclusive and Exclusive amount?

A Modified VAT Invoice.

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VAT and Business Documents (CH2)

When can a Simplified Invoice be used?

Simplified Invoices: There are also situations where invoices may only show the VAT-inclusive amount:

where the transaction total is less than £250 gross
where the buyer, in agreement with the customer, issues an invoice in a modified format

A simplified invoice cannot include any exempt supplies

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VAT and Business Documents (CH2)

What should a Simplified Invoice include?

the supplier’s name, address and VAT registration number
the date of supply (tax point)
a description of the goods or services
the total charge payable for each item, including VAT
the VAT rate applicable to each item where the supply includes items at different VAT rates

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VAT and Business Documents (CH2)

When is a Modified Invoice issued and what does it include?

A modified invoice is only issued for goods and services totalling more than £250.
Includes the price of the product both inclusive and exclusive of VAT.
Can only be issued if the customer agrees to the invoice including the total VAT amount.
Generally issued by retailers that sell products direct to customers rather than to other businesses.

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VAT and Business Documents (CH2)

What is a Pro-forma Invoice?

Pro-forma invoice - a document issued by a seller offering goods at a certain price and inviting the buyer to send a payment in return for which the goods will then be supplied and invoiced in the normal way.

A pro-forma invoice does not relate to a firm sale so cannot be used as evidence to reclaim input tax.

Pro-forma invoices should be clearly marked ‘THIS IS NOT A VAT INVOICE’.

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VAT and Business Documents (CH2)

What should a VAT Receipt show?

Name, Address and VAT Registration number of the retailer
Items charged at different VAT rates listed separately

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VAT and Business Documents (CH2)

What is Reverse Charge Invoicing?

The reverse charge is a mechanism for accounting for VAT whereby the customer charges themselves VAT, rather than the supplier charging VAT.

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VAT and Business Documents (CH2)

What is Construction Industry Scheme (CIS)?

Under the Construction Industry Scheme (CIS), the reverse charge makes it the customer’s responsibility to account for VAT which means that there is no opportunity for the supplier to disappear without paying the VAT to HMRC.

The invoice must be raised by the sub-contractor (the supplier) without including any VAT. Most accounting software will have the capability to produce reverse charge invoices.

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VAT and Business Documents (CH2)

How does Reverse Charge Invoicing affect the VAT Return?

To Account for this on its VAT Return:

The Customer must charge itself (Output VAT - Box 1)
And Reclaim the VAT. (Input VAT box 4)
The net value should be reported in Box 7.
The Supplier should report the net sale, excluding the VAT, in Box 6.

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VAT and Business Documents (CH2)

VAT Calculation Rules.

Always round down to the nearest penny.
Divide total amount by 6 to find the VAT value.

Or:

total amount including VAT
—————————————— X VAT%
(100% + VAT %)

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VAT and Business Documents (CH2)

How is VAT calculated when there are discounts?

HMRC requires that VAT is calculated on the invoice amount after any trade discount has been deducted.

Regarding prompt payment discounts, a business must account for VAT on the money actually received.

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VAT and Business Documents (CH2)

What is a Tax Point?

The tax point of a taxable supply is the date of supply that it is recorded as taking place for the purposes of the VAT Return.

HMRC makes a distinction between the Basic Tax Points and Actual Tax Points.

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VAT and Business Documents (CH2)

What is the Basic Tax Point for a supply of goods?

the supplier sends them to the customer, or
the customer collects them, or
the supplier makes them available for the customer to use

Whether a business supplies goods or services, the rules for basic tax points can be set aside if an actual tax point is created.

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VAT and Business Documents (CH2)

What is the Basic Tax Point for a supply of services?

the date when the service is carried out or
the date when all the work is completed

Whether a business supplies goods or services, the rules for basic tax points can be set aside if an actual tax point is created.

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VAT and Business Documents (CH2)

Actual Tax Point - Advance Payments

If a VAT invoice is issued or payment is received before the basic tax point then the date of the VAT invoice or the payment — whichever happens first becomes the actual tax point.

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VAT and Business Documents (CH2)

Actual Tax Point - 14 Day Rule

If a VAT invoice is issued up to 14 days after the basic tax point, the date of issue of the invoice becomes the actual tax point.

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VAT and Business Documents (CH2)

Actual Tax Point - Continuous Supply

If a business supplies a service to a customer on a continuous basis 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 everytime an invoice is issued, or a payment is made - whichever happens first.

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VAT and Business Documents (CH2)

Actual Tax Point - Sale or Return

Sometimes a retail customer will have an arrangement with a supplier where it only pays the supplier for the goods it actually sells, with any unsold goods being returned to the supplier.

Goods supplied on a sale or return basis remain the property of the supplier until the customer indicates they are intending to keep them.

A time limit may be fixed for the sale or return, in which case the tax point is determined as follows:

where the time limit is 12 months or less, the tax point is the date the time limit expires
where the time limit is more than 12 months, or there is no fixed time limit, the tax point is 12 months from the date the goods were sent
where the customer adopts the goods before the fixed period has expired, the tax point is the date the goods are adopted.

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VAT and Business Documents (CH2)

Actual Tax Point - Receiving 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. On that date a business should account for the VAT on the full value of the goods.

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VAT and Business Documents (CH2)

Why is a Tax Point important

The principle of the tax point is important to the VAT-registered business:

It results in a consistent and accurate method of recording VAT transactions
It can help cash flow in a business - an early tax point helps a business purchasing goods because the input tax can be reclaimed earlier

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Inputs, Outputs, and Special Schemes (CH3)

Output VAT and Input VAT

The VAT amount due to HMRC =
Output tax-Input tax

HMRC will therefore want to ensure that a VAT-registered business:

Charges the correct amount of output tax
Claims the correct amount of input tax to offset against the output VAT it charges

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Inputs, Outputs, and Special Schemes (CH3)

What is the “Deminimis” Limit?

If a VAT registered business makes both taxable and exempt goods, it can only reclaim input VAT on the goods that are taxable.

However, if the VAT incurred on the exempt supplies is below a certain amount (the Deminimis Limit) then input VAT can be reclaimed in full.

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VAT - What can be claimed (L1)

What is Output VAT?

A VAT registered business must charge VAT on the sale of taxable goods and services (output VAT).

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VAT - What can be claimed (L1)

What is Input VAT?

The reclaim of VAT charged on its purchases and other expenses (input VAT).

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VAT - What can be claimed (L1)

How do you know if VAT is to be paid or received from HMRC?

Input VAT is deducted from output VAT and the difference is the amount due to or from HM Revenue & Customs (HMRC):

Output VAT - input VAT = amount payable (or repayable)

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VAT - What can be claimed (L1)

Which business can reclaim VAT?

The general rule is that input VAT can be reclaimed by businesses on goods and services bought for the business, as long as the business makes standard, reduced or zero-rated supplies.

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VAT - What can be claimed (L1)

What 4 things can VAT not be reclaimed on?

VAT can’t be reclaimed on the following:

goods and services that are for non-business or personal use
business client entertaining
the purchase of a car (with a few exceptions)
goods and services that relate to exempt supplies.

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VAT - What can be claimed (L1)

How is a business that sells only exempt supplies affected?

If a business only makes exempt supplies, it can’t register for VAT and therefore can’t claim any input VAT back, so this is an additional cost to the business. It typically affects charities and education providers.

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VAT - What can be claimed (L1)

What is the procedure for businesses that sell a mixture of taxable and exempt supplies?

Some VAT registered businesses sell a mixture of taxable (standard, reduced or zero-rated) and exempt supplies. They are known as partially exempt businesses and must follow the rule below relating to claiming back input VAT.

Purchases that relate to exempt supplies = exempt input VAT.

Amount of exempt input VAT below the ‘de minimis’ amount = exempt input VAT can be
reclaimed in full.

Amount of exempt input VAT above the ‘de minimis’ amount = exempt input VAT cannot be reclaimed

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VAT - What can be claimed (L1)

What is the “de-minimis” amount?

The meaning of the ‘de minimis’ amount is:

The exempt input VAT must be less than £625 per month (on average).
The exempt input VAT must be less than half of the total input VAT claimed.

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VAT - What can be claimed (L1)

When can VAT not be reclaimed on business entertaining?

VAT cannot be claimed on business entertaining, which is the free or subsidised entertainment or hospitality to non-employees (customers, potential customers and suppliers).

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VAT - What can be claimed (L1)

When can businesses claim VAT on entertainment?

A business can reclaim VAT on employee expenses and entertainment expenses, if those expenses relate to travel and subsistence or where the business entertains employees only.

If a business entertains both employees and non-employees, the business can reclaim the proportion of VAT that relates to the employees.

The exception is that input tax can be reclaimed in respect of entertaining overseas customers, but not UK or Isle of Man customers.

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VAT - What can be claimed (L1)

When can businesses claim VAT on vehicles?

The input VAT on the purchase of a car may be claimed if it is used mainly by:

a taxi driver
a driving instructor
a business that is renting out cars for self-drive hire.

If a VAT registered business buys a commercial vehicle (such as a van lorry or tractor) and uses it for business purposes, they will usually be able to reclaim the VAT back.

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VAT - What can be claimed (L1)

How is VAT on fuel treated?

If a VAT registered business pays for fuel, the VAT charged can be dealt with in one of four ways:

if the fuel is used for business purposes only, reclaim all of the VAT
if the fuel is used for both business and private purposes, reclaim all of the VAT and pay the appropriate fuel scale charge (which is dependent on CO2 emissions added to output VAT on VAT returns).
if the fuel is used for both business and private purposes, reclaim only the VAT that relates to business mileage proportion of total mileage (accurate mileage records must be kept)
don’t reclaim any VAT.

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VAT - What can be claimed (L1)

What is Bad Debt Relief?

VAT that has been paid to HMRC and which has not been received from the customer can be reclaimed as bad debt relief.

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VAT - What can be claimed (L1)

When can VAT on bad debt be reclaimed?

The conditions are that:

the debt is more than six months and less than four years and six months old
the debt has been written off in the VAT account and transferred to a separate bad debt account
the debt has not been sold or handed to a factoring company
the business did not charge more than the normal selling price for the items.

These conditions are included in the Tax Processes for Business reference material.

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VAT - What can be claimed (L1)

How is Bad Debt Relief claimed?

If the business is entitled to claim bad debt relief, add the amount of VAT to be reclaimed to the amount of VAT being reclaimed on purchases (input tax) and put the total figure in Box 4 of the VAT return (VAT reclaimed in the period on purchases and other inputs).

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VAT - Registration and Deregistration (L2)

When is VAT registration Compulsory?

If the turnover of VAT taxable goods and services supplied within the UK in the past 12 months is more than £85,000.
If the business expects to go over the VAT threshold of £85,000 in the next 30 days.

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VAT - Registration and Deregistration (L2)

What are the 4 types of Tax on goods and Services?

Standard Rate
Reduced Rate
Zero Rate
Exempt

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VAT - Registration and Deregistration (L2)

What are Standard Rate supplies?

these goods and services attract VAT at the current rate of 20%.
they are included in the turnover of VAT taxable goods and services.

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VAT - Registration and Deregistration (L2)

What are Reduced Rate supplies?

these goods and services attract VAT at the current rate of 5%.
they are included in the turnover of VAT taxable goods and services.

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VAT - Registration and Deregistration (L2)

What are Zero Rate supplies?

these goods and services do not attract VAT because the rate is 0%.
however, they are still included in the turnover of VAT taxable goods and services.

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VAT - Registration and Deregistration (L2)

What are Exempt supplies?

these goods and services do not attract VAT because they are exempt.
they are not included in the turnover of VAT taxable goods and services.

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VAT - Registration and Deregistration (L2)

Why may a business consider voluntary registration even if its taxable turnover is less than the VAT threshold?

The taxable supplies of a business are zero-rated and the related purchases are standard-rated. Registration would result in a VAT refund.
A business has paid for a major project, for example a refurbishment, and has paid a lot of VAT in the process. Registration would mean that the VAT incurred could be claimed back.
When a business is first set up it may initially incur a lot of costs and little (if any) sales. Registration would mean that any VAT incurred on the costs could be claimed back.

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VAT - Registration and Deregistration (L2)

When can a business Voluntarily De-register?

A VAT registered business may apply to deregister voluntarily for VAT if the turnover of VAT-able goods and services supplied within the UK for the past 12 months is below the current deregistration threshold of £83,000.

The business must notify HMRC of the date that they wish the registration to cease, but the business must continue to charge VAT until it receives confirmation of the cancellation. After cancellation it cannot reclaim VAT on purchases.

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VAT - Registration and Deregistration (L2)

Compulsory Deregistration

Compulsory VAT deregistration will occur in the following instances:

the business ceases or intends to cease to make taxable supplies
the business is sold
the legal status of the business changes, for example a sole trader registers as a limited company.

You can apply to transfer a VAT registration if there is a change of business ownership or legal status.

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VAT - Registration and Deregistration (L2)

What Business Records must a VAT registered business keep?

annual accounts, including statements of profit or loss
bank statements and paying-in slips
cash books and other account books
orders and delivery notes
purchases and sales books
records of daily takings such as till rolls
relevant business correspondence and sales day books.

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VAT - Registration and Deregistration (L2)

What VAT Records must a VAT registered business keep?

records of all goods and services that are bought and sold regardless of whether they are taxable or exempt.
copies of sales invoices issued except simplified invoices under £250 (including VAT).
all purchase invoices including simplified invoices under £250, (including VAT)
all credit notes and debit notes you issue and receive
records of any goods you export
any adjustments, such as corrections to your accounts or amended VAT invoices
a VAT account.

VAT - Registration and Deregistration (L2)

How long must VAT Records be kept?

6 years.

VAT - Registration and Deregistration (L2)

How long do businesses have to submit their Quarterly VAT Returns?

One month and 7 days after the end of the VAT period.

VAT - Registration and Deregistration (L2)

What is the Cash Accounting Scheme?

Businesses are eligible to use this scheme if their estimated taxable turnover is less than £1.35m per annum. The scheme can be used until the taxable turnover reaches £1.6m per annum.

Under the cash accounting scheme businesses will pay VAT on the amounts received from customers. Input VAT can be claimed on goods and services used once payment has been made.

The due date for payment and submission of the VAT return is the same as the normal rules.

Under this scheme there is no adjustment for bad debts as the VAT has not been paid over in the first place so this gives automatic relief on bad debts.

VAT - Registration and Deregistration (L2)

How is VAT paid under normal rules?

Under the normal VAT rules, businesses will pay VAT quarterly, regardless of whether the customer has paid. Input VAT can be claimed on goods and services even if payment has not yet been made.

The due date for submitting the VAT return and paying electronically is one month and seven days after the end of the VAT period.

If the business chooses to allow HMRC to take the payment (if payment is due) by direct debit, then the business has a further three working days before payment is taken, though the due date for the return is unchanged.

Under the normal rules, VAT on bad debts can only be reclaimed once the debt is over six months old.

VAT - Registration and Deregistration (L2)

What is the Annual Accounting Scheme?

Businesses are eligible to use this scheme if their estimated taxable turnover is less than £1.35m per annum. The scheme can be used until the taxable turnover reaches £1.6m per annum.

Under the annual accounting scheme one VAT return is completed each year, rather than the usual four.

Payments to HMRC are made by instalments, based on the previous year’s return. Once the annual return is complete a balancing payment is made or a balancing refund received.

The due date for payment and submission of the VAT return is two months after the period end date.

VAT - Registration and Deregistration (L2)

What is the Flat-Rate Scheme?

Businesses are eligible to use this scheme if their taxable turnover is less than £150,000 per annum. The scheme can be used until the taxable turnover reaches £230,000 per annum.

Under the flat rate scheme, the VAT paid is a fixed percentage of the gross turnover (after including 20% VAT) of a business. This will include zero-rated and exempt sales.

For Example, a £100 sale + £20 VAT = £120 gross. The VAT percentage for example 10% is calculated on the £120.

The percentage will vary depending on the type of work the business carries out. There will be no claim for input VAT, unless it relates to non-current assets over £2,000 (including VAT).

The due date for payment and submission of the VAT return is the same as the normal rules.

VAT - Registration and Deregistration (L2)

What is a Limited Cost Business and what is their flat rate percentage?

If the business is a limited cost business the flat rate percentage is 16.5%, regardless of the work it carries out. A business is classified as a limited cost business if its goods cost less than either:

2% of its turnover
£1,000 per annum (if costs are higher than 2% of turnover).

The due date for payment and submission of the VAT return is the same as the normal rules.

VAT invoicing - Tax Points and Dates of Issue (L3)

What date should be used on an invoice for a supply of Services?

To fix the date of physical supply of services, take the date all the work is completed.

VAT invoicing - Tax Points and Dates of Issue (L3)

What date should be used on an invoice for a supply of Goods?

For goods, the time when the goods are considered to be supplied for VAT purposes is the date when one of the following happens.

the supplier sends the goods to the customer.
the customer collects the goods from the supplier.
the goods (which are not either sent or collected) are made available for the customer to use. For example, if the supplier is assembling something on the customer’s premises.

VAT invoicing - Tax Points and Dates of Issue (L3)

What is a Pro-Forma Invoice?

If you need to issue a sales document for goods or services you haven’t supplied yet, you can issue a ‘proforma’ invoice or a similar document to offer goods or services to customers.

A proforma invoice is not a VAT invoice, and you should clearly mark it with the words “This is not a VAT invoice”.

If your potential customer accepts the goods or services you’re offering them and if you actually supply them, then you’ll need to issue a VAT invoice within the appropriate time limit.

A proforma invoice is not a VAT invoice, so it can’t fix the tax point.

VAT invoicing - Tax Points and Dates of Issue (L3)

What is a Tax Point?

The time of supply, known as the ‘tax point’, is the date when a transaction takes place for VAT purposes. This date is not necessarily the date the supply physically takes place.

VAT invoicing - Tax Points and Dates of Issue (L3)

When might the Tax Point be Earlier than the date of supply?

If either:

payment is received earlier
invoice is issued earlier.

Actual tax point becomes the earlier of these two dates.

VAT invoicing - Tax Points and Dates of Issue (L3)

When might the Tax Point be Later than the date of supply?

If:

invoice is issued within 14 days of despatch/service (and advance payment didn’t apply).

VAT invoicing - Tax Points and Dates of Issue (L3)

Four extra key points to remember about Tax Points.

deposits are treated separately to final payment and so may have a different tax point.
the tax point is always the date of payment if cash basis is being applied.
where services are being supplied on a continuous basis over a period in excess of a month but invoices are being issued regularly throughout the period, a tax point is created every time an invoice is issued or a payment is made, whichever happens first.
goods on sale or return will have a tax point date either on adoption (the customer indicates they will keep the goods) or 12 months after removal of the goods where this is earlier.

VAT invoicing - Tax Points and Dates of Issue (L3)

What is the Time Limit on issuing VAT invoices?

There is a strict time limit on issuing VAT invoices. You must normally issue a VAT invoice (to a VAT-registered customer) within 30 days of the date you supply the goods or services - or if you were paid in advance, the date you received payment. This is so your customer can claim back the VAT on the supply, if they’re entitled to.

VAT invoicing - Tax Points and Dates of Issue (L3)

Two Key Rules to remember

where a VAT invoice is issued the tax point is usually the date of issue, provided this is either before, or within 14 days of, the date of supply
VAT invoices must be issued within 30 days of whichever is earlier: the date of supply or the date of payment.

VAT invoicing - Tax Points and Dates of Issue (L3)

What is the Tax Point when a Part-payment is made in advance?

There will be two Tax Points.

VAT Invoices and Discounts (L4)

Why are VAT invoices needed?

A VAT invoice shows certain VAT details of a supply of goods or services. It can be either in paper or electronic form. An electronic invoice (e-invoice) is only valid if it is in a secure format, for example a “pdf”.

A VAT-registered customer must have a valid VAT invoice from the supplier in order to claim back the VAT they have paid on the purchase for their business.

VAT Invoices and Discounts (L4)

What things are NOT classed as VAT Invoices?

pro-forma invoices
invoices for only zero-rated or exempt supplies
invoices that state ‘this is not a VAT invoice’
statements of account
delivery notes
orders
letters, emails or other correspondence.

A registered business can’t reclaim the VAT it has paid on a purchase by using these documents as proof of payment.

VAT Invoices and Discounts (L4)

What are the things a VAT invoice MUST contain?

Invoice Number, Date and Tax Point.
Seller’s Name, Address and VAT registration number.
Customer’s Name and Address.
Quantity, Description, Price and VAT Rate.
Net and VAT.

VAT Invoices and Discounts (L4)

How do Discounts to customers on supplies affect the VAT?

If a trade discount is offered, this amount is deducted before the VAT is calculated.

If a prompt payment discount is offered, the VAT is calculated on the amount, or consideration, actually paid, irrespective of when payment is actually made.

Communication within VAT and Payroll (L5)

What is the Time Limit for Paying and Submitting a VAT return to HMRC?

The latest that a VAT return can be submitted to HMRC is one month and seven days after the end of the VAT quarter. It can be submitted earlier if it is ready.

The payment sent to HMRC is usually to the same timescale as the submission, that is one month and seven days.

The exceptions to this timescale are:
* the Annual Accounting Scheme.

If a Direct Debit has been set up, then HMRC will take the money three working days after the last submission date.

Communication within VAT and Payroll (L5)

When can errors in a VAT Return be corrected?

Any current errors discovered can be corrected before the VAT Return is submitted.

Previous period errors and omissions are also corrected in the current VAT Return subject to certain conditions.

Communication within VAT and Payroll (L5)

When do errors in a VAT Return not need to be disclosed to HMRC?

The errors can be corrected in the current VAT Return and not disclosed to HMRC if they are:

below the reporting threshold
not deliberate.

For an accounting period that ended less than 4 years ago and where the net value of the errors is:

Below £10,000
Or between £10,000 - £50,000 and less than 1% of Box 6

then these may only need signing off by your manager.

Communication within VAT and Payroll (L5)

When MUST errors in a VAT be disclosed to HMRC?

However, you must disclose (report) the following types of errors:

between £10,000 and £50,000 (and greater than 1% of box 6)
greater than £50,000
an error you made on purpose (a ‘deliberate error’).

You can’t make an adjustment to your VAT Return to correct these types of inaccuracies but you must notify HMRC instead. For this magnitude of error, a higher management signature may be needed.

Communication within VAT and Payroll (L5)

How is a Penalty for Inaccuracies in the VAT Return measured?

Penalties are charged for any inaccuracies on the VAT Return. The amount is a percentage of lost revenue and the percentage used is based on whether the error was:

careless and deliberate

and whether

disclosure was voluntary or prompted, or deliberately concealed.

Communication within VAT and Payroll (L5)

What are the Penalty Percentages for Unprompted Disclosure of inaccuracies?

Reasonable Care = 0%
Careless = 0-30%
Deliberate = 20-70%
Deliberate and Concealed = 30-100%

Communication within VAT and Payroll (L5)

What are the Penalty Percentages for Prompted Disclosure of inaccuracies?

Reasonable Care = 0%
Careless = 15-30%
Deliberate = 35-70%
Deliberate and Concealed = 50-100%

Communication within VAT and Payroll (L5)

What happens if a VAT Return is not submitted?

Finally, if a VAT Return isn’t submitted on time, HMRC will issue a ‘VAT notice of assessment of tax’ which will state how much HMRC thinks is owed.

If HMRC issue an assessment that is too low, a 30% penalty can be charged for not telling them it is incorrect within 30 days.

Communication within VAT and Payroll (L5)

In what ways does HMRC communicate VAT rates and other regulatory changes?

HMRC will communicate any changes in VAT rate in as many ways as possible.

These include:
* email
* letter
* television and radio
* HMRC website
* social media.

Communication within VAT and Payroll (L5)

What changes must a Business notify HMRC of?

Businesses are required to notify HMRC of any changes in their operations that affect their VAT status.

For changes in:
- name, trading name or address
- partnership members
- agent’s details
- business activity.

Notification to HMRC must be within 30 days.

For changes in bank details 14 days’ notice must be given.

Communication within VAT and Payroll (L5)

What is the Annual Accounting Scheme?

This scheme allows a business to submit annual, rather than quarterly, VAT returns.

Emphasis should be placed on the cashflow implications of this scheme. Monthly amounts will have to be paid to HMRC which may be easier for a small business to manage, but the downside is that any rebate due will only be sent at the end of the year, i.e. on receipt of the VAT Return.

Note that the estimated amount of VAT due as prescribed by HMRC must be one that the business sees as fair.

Communication within VAT and Payroll (L5)

What makes a business eligible for the Annual Accounting Scheme?

Estimated annual turnover less than or equal to £1.35 million.

Communication within VAT and Payroll (L5)

Advantage of the Annual Accounting Scheme

Amount to be paid to HMRC, whether monthly or quarterly, is determined in advance. This aids cashflow projections.

Communication within VAT and Payroll (L5)

Disadvantage of the Annual Accounting Scheme

Any refund due is delayed as it is calculated on submission of the annual VAT Return.

Communication within VAT and Payroll (L5)

What is the Cash Accounting Scheme?

This scheme allows businesses to account for the VAT on transactions when they are received or paid, rather than using the tax point dates. The VAT returns are still submitted quarterly, the same as the normal accounting scheme.

Again, if this is the scheme that the business decides to use then application can be through GOV.uk website or by post.

Communication within VAT and Payroll (L5)

Advantages of the Cash Accounting Scheme

Pay VAT on sales on receipt of monies.

Reclaim VAT on purchases when suppliers are paid.

No adjustment needed for claiming VAT on irrecoverable debts.

Communication within VAT and Payroll (L5)

Disadvantages of the Cash Accounting Scheme

VAT liability can vary according to amounts received and paid.

Communication within VAT and Payroll (L5)

What makes a business eligible for the Cash Accounting Scheme?

Estimated annual turnover less than or equal to £1.35 million.

Communication within VAT and Payroll (L5)

What is the Flat Rate Scheme?

Under this scheme, a business calculates its VAT liability by applying a flat rate percentage to its VAT inclusive turnover.

Though there’s less certainty about the amount of VAT liability due, this scheme simplifies record keeping and saves small businesses a lot of time.

If the thought of simplified paperwork is attractive to the business, then application can be made through GOV.uk or by post.

Communication within VAT and Payroll (L5)

What makes a business eligible for the Flat Rate Scheme?

Estimated annual turnover less than £150,000

Communication within VAT and Payroll (L5)

Advantage of the Flat Rate Scheme

VAT liability is easy to calculate as is based solely on income.

Simplifies Record Keeping and saves small businesses a lot of time.

Communication within VAT and Payroll (L5)

Disadvantage of the Flat Rate Scheme

As VAT liability is solely based on income no adjustment can be made if a business’ spend is more than usual.

Communication within VAT and Payroll (L5)

What is Full Payment Submission (FPS)?

The FPS provides HMRC with all employee data relating to their pay.

The FPS must be submitted on or before employees pay day.

The FPS includes payments to and deductions for all employees.

Communication within VAT and Payroll (L5)

What is Employer Payment Summary (EPS)?

The EPS is used to inform HMRC that:

no employees were paid in the month
non-regular claims and adjustments are being made (for example, to claim the Employment Allowance).

It must be sent to HMRC by the 19th of the following tax month.

Communication within VAT and Payroll (L5)

When may Payroll Penalties Apply?

the FPS was late
the expected amount of FPS’s was not filed
an EPS was not filed.

Communication within VAT and Payroll (L5)

What is the Payroll Penalty for a Business with 1 to 9 Employees?

£100

Communication within VAT and Payroll (L5)

What is the Payroll Penalty for a Business with 10 to 49 Employees?

£200

Communication within VAT and Payroll (L5)

What is the Payroll Penalty for a Business with 50 to 249 Employees?

£300

Communication within VAT and Payroll (L5)

What is the Payroll Penalty for a Business with 250 or more Employees?

£400

Communication within VAT and Payroll (L5)

When may Payroll Penalties not apply?

the FPS is late but all reported payments on the FPS are within three days of the employees’ payday (unless there is regular lateness)
a new employer is late but sends the first FPS within 30 days of paying an employee
it’s a business’s first failure in the tax year to send a report on time.

Communication within VAT and Payroll (L5)

When do late Payroll payment penalties apply?

Late payment penalties apply to late payments and payments of less than is due.

The first failure to pay in a tax year doesn’t count as a default.

Communication within VAT and Payroll (L5)

What is the penalty percentage applied for 1 to 3 missed payments (defaults) in a tax year?

Communication within VAT and Payroll (L5)

What is the penalty percentage applied to the amount that is late in the relevant tax month for 4 to 6 missed payments (defaults) in a tax year?

Communication within VAT and Payroll (L5)

What is the penalty percentage for 7 to 9 missed payments (defaults) in a tax year?

Communication within VAT and Payroll (L5)

What is the penalty percentage applied for 10 or more missed payments (defaults) in a tax year?

Communication within VAT and Payroll (L5)

What is the additional penalty for a payment 6 months late?

5% of Unpaid Tax

Communication within VAT and Payroll (L5)

What is the additional penalty for a payment 12 months late?

A further 5% of Unpaid Tax

Communication within VAT and Payroll (L5)

What is the penalty that is charged as a percentage of the potential lost revenue (PLR) for a 30 day late payment?

Communication within VAT and Payroll (L5)

What is the penalty that is charged as a percentage of the potential lost revenue (PLR) for a 6 month late payment?

10%

Communication within VAT and Payroll (L5)

What is the penalty that is charged as a percentage of the potential lost revenue (PLR) for a 12 month late payment?

15%

Payroll Principles (L6)

When can and can’t a business register for payroll?

A business must register before the first payday as it can take up to 15 working days to get an employer PAYE reference number.

A business cannot register more than two months before employing anyone.

Payroll Principles (L6)

Regulations relating to Payroll Software

If a business employs fewer than ten employees it can use HMRC’s basic PAYE tools to calculate payroll, which is free.

More than ten employees a business must use a ‘paid-for software’ that has been tested and recognised by HMRC.

HMRC has lists of payroll software that is valid but does not recommend any particular one.

Payroll Principles (L6)

How long do Payroll records need to be kept?

Records need to be kept for three years from the end of the tax year they relate to.

Payroll Principles (L6)

What payroll related records must be kept?

gross pay and deductions made
reports submitted to HMRC
payments made to HMRC
employee leave and sickness absences
taxable expenses or benefits
Payroll Giving Scheme documents, including the agency contract and employee authorisation forms.

Payroll Principles (L6)

What are the main Payroll Reports sent to HMRC?

The main reports sent to HMRC are the Full Payment Submission (FPS) and the Employer Payment Summary (EPS).

Payroll Principles (L6)

What is the Full Payment Submission (FPS) used for?

The FPS provides HMRC with all employee data relating to their pay.

The FPS must be submitted electronically by RTI (Real Time Information) on or before the employees’ pay day.

The FPS includes payments to and deductions for all employees.

Payroll Principles (L6)

What is the Employer Payment Summary (EPS) used for?

The EPS is used to inform HMRC that:

no employees were paid in the month
non-regular claims and adjustments are being made.

It must be sent to HMRC by the 19th of the following tax month.

Payroll Principles (L6)

Full Payment Submission (FPS) payments due

HMRC doesn’t dictate when employees are paid, just that they’re paid the correct amount and on time according to their contract.

HMRC does however rule that payment of the statutory deductions made be paid by the 22nd of the following month, or, if making a non-electronic payment, by the 19th of the following month.

Payroll Principles (L6)

What is the deadline for providing employees with a P60?

31st May

Payroll Principles (L6)

What is the Filing deadline for expenses and benefits forms (P11D and P11D(b))

6 July

Payroll Principles (L6)

What is the PAYE and Class 1A NIC payment date deadline?

22 July if paying electronically.
19 July otherwise.

Payroll Principles (L6)

What is the deadline for PAYE settlement agreement submission date?

31 July

Payroll Principles (L6)

What is the deadline for PAYE and Class 1B NIC payment date?

22 October if paying electronically.
19 October otherwise.

Payroll Principles (L6)

What is 5 things make up Gross Pay?

basic pay
overtime
commission
bonus
any allowances.

Payroll Principles (L6)

What is Taxable Pay?

Taxable pay is gross pay minus personal allowance (PA).

(Personal Allowance is the amount that an individual is allowed to earn before tax is taken away).

Payroll Principles (L6)

What is Taxable Gross Pay?

Taxable gross pay is gross pay minus any tax-free elements, such as:

payroll giving donation
employee pension contributions.

Taxable gross pay is the figure on which the employee will pay income tax.

Payroll Principles (L6)

What is Net Pay?

Net pay is the figure paid to the employee after all statutory deductions and non-statutory deductions have been made.

Payroll Principles (L6)

What are Statutory Deductions?

HMRC rules require businesses to make statutory deductions such as:

tax
National Insurance Contributions (NICs)
pension contributions
student loan payments

and pay them to the relevant authorities within given timescales.

Payroll Principles (L6)

What are Non- Statutory Deductions?

Businesses may also be required to make non-statutory deductions. Examples of non-statutory deductions are:

payroll giving
interest free loan made to the employee by the employer
other deductions authorised by the employee.

Payroll Principles (L6)

What must be shown on a Payslip?

This is the most regular, and most recognised document.

Employers are required to show:

earnings before and after any deductions
the amount of any deductions that may change each pay period, for example tax, National Insurance and student loans
the number of hours worked if pay varies depending on time worked.

Employers must also explain any deductions, for example payroll giving and any repayment of a season ticket loan, but these can be shown either on a payslip, or in a separate written statement.

This is issued to the employee on or before every payday.

Payroll Principles (L6)

What is a P45 and what does it include?

A P45 is a tax form issued by HMRC but completed by the employer when an employee leaves employment. The form contains information such as:

personal details
leaving date
tax code
gross salary
tax deducted.

The P45 relates to just the current tax year, not the whole time the individual was in that employment.

This must be issued to the employee on leaving or the pay day immediately after.

Payroll Principles (L6)

What is a P60 and when must it be issued?

A P60 is a statement outlining the tax and National Insurance (NI) contributions that have been deducted from an employee’s pay over the tax year (6 April–5 April).

A P60 must be issued to every employee that is employed at the end of the tax year.

The latest date of issue is 31 May following the end of that tax year.

Payroll Principles (L6)

What is a P11D

A P11D form outlines the cash value of any work-related taxable expenses and taxable benefits an employee has received over the tax year (6 April–5 April).

The benefits or expenses included are those that have not already been included in an employee’s wages.

The deadline to issue the P11D to both employees and HMRC is 6th July every year.

Payroll Principles (L6)

Data Protection Act 2018

The rules on protecting employment data are set out in the Data Protection Act 2018 (the DPA).

“Employees should be informed of what data is collected about them and what is done with it in a Fair Processing Statement, also known as a Privacy Notice.”

Payroll Principles (L6)

What does Personal Data Include

Name, Age, Address etc. Plus:
credit card number
location-based data (web address, IP (Internet Protocol) address, cookie data)
health
‘sensitive data’ (race, ethnicity, religious beliefs, trade union membership, genetic and biometric data).

Payroll Principles (L6)

What are employers required to inform employees of in regards to Data Protection?

what personal data we process is held and why
the lawful basis for processing personal data
how long that personal data will be held
who the data is shared with
if any external data processors (payroll agency) is used
employee rights in relation to data processing
any transfers of personal data.

Payroll Principles (L6)

What data protection Rights do employees have?

to be told what is held and why
of access
to rectify any errors
to tell the business to erase the information
to restrict processing
to data portability
to object
in relation to automated decision making and profiling.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

What records need to be kept by businesses?

Records you must keep include:

business name, address and VAT registration number
any VAT accounting schemes used
copies of all invoices you issue
all invoices and receipts you receive (originals or electronic copies)
debit or credit notes
import and export records
a VAT account
bank statements, cash books, cheque stubs, paying-in slips and till rolls.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

How long should records be retained?

All records relating to VAT should be kept for at least six years.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

How should VAT records be retained?

Most VAT registered businesses are required to keep their VAT records digitally, under the Making Tax Digital (MTD) rules.

A business can apply for an exemption if they cannot reasonably or practically use computers, software or the internet, but this is rare.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

What is Electronic Invoicing?

Electronic invoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents and can be submitted in various formats.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

What are the advantages to electronic invoicing?

speed of delivery
security of electronic environment
easier access for auditing
decreased reliance on storage and handling costs
rapid access and retrieval
improved cash flow.

Making Tax Digital (MTG), Record Keeping and Electronic Invoicing (L7)

What is the aim of Making Tax Digital (MTD)

Making Tax Digital (MTD) is the government’s first major step in digitalising tax. The aim is two-fold:

to make tax administration more efficient
to help businesses manage their day to day finances better.

When does the Tax Year start and end?

6 April to 5 April

Payroll Principles (L6)

What is the penalty if Payroll records are not kept for three years?

Up to £3000

Payroll Principles (L6)

What is HMRC’s PAYE month end?

The 5th of each month

Payroll Principles (L6)

When can a business make Quarterly payments to HMRC for Payroll?

If the amount owed is less than £1500

Explain the Standard VAT Accounting Scheme

The standard scheme requires four returns to be made every year. The VAT is either payable or refunded quarterly and is based on the tax point of transactions to determine which tax period sales and purchases belong in.

Explain the Cash Accounting VAT Scheme

The cash accounting scheme requires quarterly returns and payment/refunds in the same way as the standard scheme.

However, the date that a transaction goes in or out of the bank account is used to determine which tax period sales and purchases belong in, not the tax point.

This means that automatic bad debt relief is given, because if a customer never pays an invoice then the business never has to pay the VAT to HMRC.

Can be used in conjunction with the Annual Accounting Scheme.

Explain the Flat Rate Scheme

The flat rate scheme simplifies VAT accounting by applying an industry standard percentage to the total VAT-inclusive turnover of a business in order to calculate its VAT payments to HMRC.

However, a limited cost business has a flat rate of 16.5%, regardless of the industry.

This means input and output tax is not offset as it is in the other schemes, and does not have to be separately recorded, so the scheme can save businesses time and smooth cashflow.

Explain the Annual Accounting Scheme

The annual accounting scheme only requires one VAT return per year.

Payments, based on the previous year’s liability, are made in nine interim monthly instalments.

Once the annual return has been submitted a balance payment or refund is made.

The annual accounting scheme cuts down on paperwork and helps manage cashflow.

What is the Penalty Point Threshold and Period of Compliance for a Business that submits VAT Returns Annually?

Penalty Point Threshold = 2 Points

Period of Compliance = 24 months

What is the Penalty Point Threshold and Period of Compliance for a Business that submits VAT Returns Quarterly?

Penalty Point Threshold = 4 Points

Period of Compliance = 12 months

When will a Penalty Point for a business that has not reached the penalty threshold be removed?

Each point automatically expires two years from the first day of the month after the month when the late submission occurred.

When will a Penalty Point for a business that has reached the penalty threshold be removed?

All points will be reset to zero if both conditions below are
met:

a period of compliance (meeting all submission obligations on time for the period of compliance),

and

all submissions due in the preceding 24 months have been made (whether or not they were on time).

What is Box 1 on a Vat Return?

VAT due on sales and other outputs

What is Box 2 on a Vat Return?

VAT due on acquisitions from other EC member states

What is Box 3 on a Vat Return?

Total VAT due (sum of boxes 1 and 2)

What is Box 4 on a Vat Return?

VAT reclaimed on purchases and other inputs (including acquisitions from EC)

What is Box 5 on a Vat Return?

Net VAT to be paid or reclaimed

What is Box 6 on a Vat Return?

Total value of sales and all other outputs (excluding VAT)

What is Box 7 on a Vat Return?

Total value of purchases and all other inputs (excluding VAT)

What is Box 8 on a Vat Return?

Total value of all supplies of goods and related costs to other EC member states (excluding VAT)

What is Box 9 on a Vat Return?

Total value of acquisitions of goods and related costs from other EC member states (excluding VAT)

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