The Value Added Tax System Flashcards
Each year the government makes changes to the tax legislation in the ___ ___
Finance act
Describe the difference between indirect and direct tax
- Direct tax is one paid directly to the government by the persons on whom it is imposed, e.g., income tax, corporation tax, and transfers taxes such as inheritance tax. A company will pay its corporation tax liability for its accounting period directly to HMRC.
- Indirect tax, e.g., VAT is a tax on transaction, i.e., spending.
Describe Value Added Tax (VAT)
- VAT is a a sales tax; this is a tax on consumer spending and provides an important source of revenue for the government.
- The final consumer of the goods or services supplied will be the bearer of the VAT charge. The VAT processes begins with the supplier registering for VAT. The supplier then makes a supply of taxable goods on which VAT must be charged.
Describe output VAT
Each time a VAT registered business make a sale it must charge VAT on the value of goods/services it provides (OUTPUT TAX).
It is charged on top of the sales price.
Describe Input VAT
When a VAT registered business makes purchases on which they pay VAT, they can reclaim this VAT.
This is known as input tax.
As individuals we cannot reclaim VAT we have suffered so we are not eligible to register for VAT.
Describe administration
- It would be too time consuming to pay VAT each time we made a sale and collected the output VAT and then to make a reclaim on each item of input VAT we have suffered on a purchase.
- Therefore we operate a system to gather VAT transactions on a VAT return.
- Usually quarterly.
- Input VAT and Output VAT are netted off against each other.
For the purpose of the assessment VAT is always rounded down to…
The nearest penny
Describe the VAT return process
Every quarter (normally) the VAT registered business will complete a VAT return. This will detail the total of the input and output VAT, and agree to the final amount paid to/reclaimed from HMRC.
- Output VAT>Input VAT — Net amount payable to HMRC
- Input VAT>Output VAT — Net reclaimable from HMRC
Who suffers VAT?
The final end consumer
VAT is charged on ___ ___ by ___ ___
- Taxable supplies
- Taxable persons
Describe exempt supplies
Exempt supplies are non-taxable, i.e., have no VAT. This is not a rate of VAT but a category of supply, e.g., postal services and insurance.
Some information must be kept to support the amounts in the VAT return. This will be the ___, ___, and ___ we have used to complete the return.
- Books
- Records
- Information
HMRC can request an inspection of the records at __ __ during a __ __.
- Any time
- Control visit
Records must be kept for…
6 years
What records must we retain relation to sales?
- Sales invoices and credit notes: These should be issues to customers detailing the goods/services, any discounts, and the VAT applied.
- Sales day book and cash book receipts: These are the records usually kept by the business to show the net sales and VAT charged, and the date on which the customer actually pays the invoice. The sales day book shows credit sales only and cash book will show cash received from credit sales and cash sales.
What records must we retain relation to purchases?
- Purchase invoices: all purchase invoices should be kept to support any input tax paid (Including any amounts paid from petty cash), the fees exceptions are (only if expense is £25 or less inclusive of VAT):
— Telephone calls
— Purchases through coin operated machines
— Car park charges - Purchase day book and cash payments book: these are also accounting records kept by the business. The purchase day book will show the net credit purchases and the VAT paid, and the cash payments will show cash purchases with associated VAT and the actual payment date for credit purchases.
