VAT and transfers Flashcards
When must a business be registered for VAT?
If their turnover exceeds the VAT registration threshold (currently £85000)
How often does a VAT registered business need to complete a VAT return?
Every quarter (every 3 months)
What is the agency method?
Sometimes the law firm acts as agent in arranging for a third party to supply services to the client, the firm acts as an intermediary essentially. The third party’s invoice is therefore issued to the client rather than the firm
For the agency method who is liable for VAT?
The client as the invoice is issued to the client not the firm so the firm does not need to make any entries on its VAT ledger
What is the principle method?
Sometimes the law firm acts as principle when ordering services from a supplier on behalf of the client, that is, the services are supplied to the firm rather than the client and the firm’s name will be on the invoice
For the principle method who is liable for VAT?
The firm as their name is on the invoice so they will pass on the charges to the client. Both input tax (paid by the firm to the supplier) and output tax (charged to the client by the firm) must be recorded in the firm’s VAT ledger
When using the principle method where must the disbursement be paid from?
The business account
When using the agency method where is the disbursement paid from?
If there is enough money in the client account it is usual to use client money however if there are insufficient funds available in the client account the payment can be made from the business account
What are the accounting entries to record payment of a disbursement subject to VAT using the agency method?
If paid from the client account:
1) debit client ledger client account
2) credit cash sheet client account
If paid from the business account:
1) debit client ledger business account
2) credit cash sheet business account
What are the accounting entries to record paying a disbursement subject to VAT using the principle method?
There are two stages involved:
First stage - two pairs of double entries are required:
1) disbursement
- debit client ledger business account
- credit cash sheet business account
2) VAT
- debit VAT ledger (input tax)
- credit cash sheet business account
Second stage - two pairs of double entries are required:
1) profit costs
- debit client ledger business account
- credit profit costs ledger
2) VAT (on both profit costs & disbursements)
- debit client ledger business account
- credit VAT ledger (output tax)
For a cash transfer where are accounting entries made and how many?
They are made in the client ledge and the cash sheet and two pairs of ledger entries are required for each transfer:
1) transfer out of one bank account
2) transfer into the other bank account
What are the accounting entries for a client to business cash transfer?
It requires two pairs of double entries:
1) transfer out of client account
- debit client ledger client account
- credit cash sheet client account
2) transfer into business account
- credit client ledger business account
- debit cash sheet business account
What happens if a firm receives a payment that is a mixture of client money and business money?
The whole amount will be paid into one account and then the element belonging to the other account is promptly transferred
What happens if there is the need to transfer client money from one client to another or from one matter to another of the same client?
This involves two client ledgers and the cash ledger is not involved because there is no change in the balance of client money being held in the firm’s general client account
What are the accounting entries for a transfer between clients?
- debit client A ledger client account
- credit client B ledger client account
