VAT Administration and overseas aspect

1. VAT computation
2. VAT return and payment procedures
3. VAT records
4. Normal VAT invoices
5. Less detailed VAT invoices
6. The default surcharge
7. Errors on VAT returns
8. Default interest
9. The cash accounting scheme
1
10. Annual accounting
11. The flat rate scheme Shashi Jayatissa
12. Overseas aspect of VAT ACCA, MBA (UK)

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

VAT computation
2

All registered traders have to complete a VAT return every return period and pay net VAT due to HMRC
or reclaim net VAT repayable from HMRC.
Details of output and input VAT must be included, together with claims for relief for impairment losses
and any errors made on earlier returns below a de minimis limit.
Illustration 1 page 854
TYU 1 page 855

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 VAT return and payment procedures
3
Normal VAT accounting
VAT return periods are normally three months long, but traders who regularly receive repayments, can opt to have
monthly return periods to receive their repayments earlier. All businesses must file their VAT return(includes total output
VAT and total input VAT for the period) and pay VAT electronically.
The deadline for filing and payment online is One month and seven days after the end of the quarter.
Government’s Making Tax Digital (MTD) project requires businesses that exceeds taxable turnover above the VAT
threshold (£85000) to keep VAT records digitally. Digital records must be used, in conjunction with MTD compatible
software, to automatically compile a digital VAT return. The business is then required to review the digital VAT return and
confirm that it is correct and can be submitted to HMRC.
VAT refunds
• VAT refunds are normally made within 10 days.
• Where it is discovered that VAT has been overpaid in the past, the time limit for claiming a refund is four years from the
date by which the return for the accounting period was due.
 Substantial traders: those with a VAT liability exceeding £2.3 million p.a.
• Monthly payments on account are required (Other methods can be agreed with HMRC for calculating the payments on account.)
• Payments at the end of months 2 and 3 in every quarter are 1/24th of the annual liability for the previous year.
• Shashi
AnyJayatissa.
additional amounts
ACCA, MBA (UK) are paid with the normal VAT return. 02/22/2022
VAT records
4

 Businesses with taxable turnover above the VAT threshold (£85000) are required to keep the records
required to complete the VAT return digitally. Other businesses below the VAT threshold that are
registered voluntarily, no particular form is specified, but they must be sufficient to allow the VAT
return to be completed and to allow HMRC to check the return.
 Records must be kept of all goods and services received and supplied in the course of a business.
Records must be kept up-to-date and must be preserved for six years.
 Main records that must be kept are:
• Copies of all VAT invoices issued.
• A record of all outputs (e.g. a sales day book).
• Evidence supporting claims for the recovery of input VAT (e.g. invoices).
• A record of all inputs (e.g. purchase day book).
• VAT account.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

Normal VAT invoices
5

 A VAT invoice must be issued when a standard rated supply is made to a VAT registered business
(issued within 30 days of the date that the taxable supply is treated as being made), which can be
sent electronically if customer agrees. No invoice is required if the supply is exempt, zero rated or to
a non- VAT registered customer.
 Original VAT invoice is sent to the customer and forms their evidence for reclaiming input VAT, and a
copy must be kept by the supplier to support the calculation of output VAT.
 VAT invoice must contain:

• VAT registration number • Supplier’s name and address

• Date of issue • Sequential and Unique Identifying Number
• Tax point • Rate of any discount offered
• Customer’s name and address • Amount payable exclusive VAT
• Rate of VAT • Amount of VAT payable
• Description of goods and services with quantity• Total VAT inclusive amount
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
Less detailed VAT invoices
6

 VAT registered businesses can provide UK customers with an invoice which is less detailed than
normal, if the consideration for the supply is < £250 (VAT inclusive).
 Less detailed VAT invoice must contain:

• Supplier’s name and address

• Date of supply
• Description of goods and services with quantity
• Consideration for the supply
• Rate of VAT in force at the time of supply.
TYU 2 page 859

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

The default surcharge
7

A default occurs if a VAT return is not submitted on time or a payment of VAT is made late.
Step 1: On the first default, HMRC will serve a surcharge liability notice on the trade. (notice specifies a surcharge period,
starting on the date of the notice and ending on the 12 month anniversary of the end of the VAT period to which the default
relates.)

Step 2: a further default during the surcharge period, there are two consequences:
i. surcharge period is extended to the 12 month anniversary of the VAT period to which the new default relates.
ii. If the default involves the late payment of VAT, then the trader will be subject to a surcharge penalty.(no surcharge
penalty where a late VAT return involves the repayment of VAT, or if the VAT payable is £Nil.)

Calculating the surcharge penalty

• Rate of surcharge penalty depends on the number of defaults in the surcharge period.
• Surcharge liability period will only end when a trader submits four consecutive quarterly VAT returns on
time, and also pays any VAT due on time.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
The default surcharge Cont..
8

Default in the surcharge period Surcharge as a percentage of the unpaid VAT due
First 2% (not made for amounts < £400)
Second 5% (not made for amounts < £400)
Third 10% - surcharge is higher of:
i) £30 or
ii) actual amount of the calculated surcharge.
Fourth 15% - surcharge is higher of:
i) £30 or
ii) actual amount of the calculated surcharge.

Illustration 2 page 860

TYU 3 page 860

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

Errors on VAT returns
9
Self-assessment
VAT is a self-assessed tax. The trader calculates their own liability or repayment.
HMRC make occasional control visits to check that returns are correct. HMRC have the power to enter
business premises, inspect documents, including statements of profit or loss and statements of financial
position, take samples, and inspect computers records.
Errors found on earlier VAT returns
If a trader realizes that there is an error, this may lead to a standard penalty (covered in Chapter 13) as
there has been a submission of an incorrect VAT return. However, if the error is below the de minimis
level and voluntarily disclosed, no default interest will be charged.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Errors on VAT returns Cont..
10 ERRORS

Found by trader and disclosed voluntarily Found by HMRC

De minimis limit of error = greater of:

i) £10000, and
ii) 1% of turnover (subject to an upper
limit of £50000)

Net error ≤ de minimis limit: Net error > de minimis limit: Issue assessment within 4 years of relevant VAT
include on next VAT return Separate notification period (increase to 20 years if deliberate error)

Tax payer: option to request

review of decision by HMRC
Standard penalty for submission review officer
Default interest (discussed later)
of an incorrect VAT return

Appeal to tribunal (within 30 days)

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Default interest
11

 This is also known as penalty interest, charged, if HMRC raise an assessment, or an error is voluntarily
disclosed by the trader, and the net value of errors exceeds the de minimis limit.
 Interest is charged from the date that the outstanding VAT should have been paid, to the actual date
of payment.
 Any interest charged by HMRC is limited to a maximum of three years, prior to the date of the
assessment or voluntary disclosure.
Illustration 3 page 862
Illustration 4 page 863
TYU 4 page 863

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The cash accounting scheme
12
Purpose of the scheme
Normally VAT is accounted for on the basis of invoices issued and received in a return period. Output VAT
is paid to HMRC by reference to the period in which the invoice is issued regardless of whether payment
has been received from the customer while input VAT is reclaimed from HMRC by reference to the
invoices received in the return period, even if payment has not been made to the supplier..
This can give cash flow and impaired debt problems for small businesses. Therefore, smaller businesses
may optionally use the cash accounting scheme if the conditions are met. Under the cash accounting
scheme VAT is accounted for on the basis of cash receipts and payments, rather than on the basis of the
dates of invoices issued and received. Tax point becomes the time of receipt or payment.
Advantages of cash accounting scheme Disadvantages of cash accounting scheme
• Businesses selling on credit do not have to pay output VAT • Input tax cannot be claimed until the invoice is paid. This
to HMRC until they receive it from customers. delays recovery of input VAT.
• Automatic relief for impaired debts. • Not suitable for businesses with a lot of cash sales or zero
rated supplies which would simply suffer a delay in the
recovery of input VAT.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The cash accounting scheme cont..
13
Conditions
The scheme is aimed at smaller businesses:
• trader must be up-to-date with VAT returns and must have committed no VAT offences in the
previous 12 months.
• taxable turnover, including zero rated sales, but excluding sales of capital assets, must not exceed
£1,350,000 p.a.
• trader must leave the scheme once taxable turnover (excluding VAT) exceeds £1,600,000 p.a.
• cash accounting scheme cannot be used for goods that are invoiced more than six months in advance
of the payment date, or where an invoice is issued prior to the supply actually taking place.
TYU 5 page 864

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Annual accounting
14
Purpose of the scheme
Smaller businesses may find it costly or inconvenient to submit (the normal) four quarterly VAT returns.
An ‘annual’ accounting scheme is available, whereby, a single VAT return is filed for a 12 month period
which helps relieve the burden of administration.
How the scheme works
Only one VAT return is submitted each year, but VAT payments must still be made regularly. The scheme
works as follows:
• Annual return must be filed within two months of the end of the annual return period.
• Normally, nine payments on account of the VAT liability for the year, are made at the end of months 4
to 12 of the year. Each payment represents 10% of the VAT liability for the previous year (A new
business will base its payments on an estimate of the VAT liability for the year). However, businesses
may apply to HMRC to agree quarterly payments on account instead of the normal nine monthly
payments.
• Regular payments aid budgeting and possibly cash flow if the VAT liability is increasing year on year.
• A balancing payment (or repayment) is made when the return is filed.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Annual accounting cont..
15
Conditions
The scheme is aimed at smaller businesses:
• Businesses can join the scheme provided their taxable turnover (excluding the sale of capital assets)
does not exceed £1,350,000 p.a.
• Business must be up-to-date with its VAT returns.
• Businesses must leave the scheme once taxable turnover exceeds £1,600,000 p.a
TYU 6 page 865

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The flat rate scheme
16
Purpose of the scheme
The optional flat rate scheme simplifies the way in which very small businesses calculate their VAT liability.
OUTPUT VAT = TOTAL TURNOVER X (FLAT) %
This removes the need to calculate and record output VAT and input VAT and can save the business money.
How the scheme works
• Flat rate percentage is applied to the gross (VAT inclusive) total turnover figure (inclusive of zero rated and
exempt supplies); with no input VAT being recovered.
• The percentage varies according to the type of trade that the business is involved in, and will be given in the
exam. A higher flat rate of 16.5% applies to all types of business with limited, or no purchases of goods. You
will not be expected to identify when to use this percentage but it could be provided to you in a question
• The flat rate scheme percentage is only used to calculate the VAT due to HMRC.
In other respects, VAT is dealt with in the same way:
• A VAT invoice must still be issued to customers and VAT at the rate of 20% is still charged on standard rated
supplies.
• A VAT account must still be maintained.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 The flat rate scheme cont..
17
Conditions
The scheme is aimed at smaller businesses:
• To join the scheme the expected taxable turnover (excluding VAT) for the next twelve months must
not exceed £150,000.
• A business has to leave the scheme if total VAT inclusive turnover (including taxable and exempt
supplies) exceeds £230,000.
• The business must have committed no VAT offences in the previous 12 months.
• The flat rate scheme can be used with the annual accounting scheme. .
• It is not possible to join both the flat rate scheme and the cash accounting scheme. However, it is
possible to request that the flat rate scheme calculations are performed on cash paid/received.
TYU 7 page 867

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Overseas aspect of VAT
18
VAT is a tax levied within the European Union (EU) only. It is therefore necessary to distinguish imports
and exports from outside the EU from transactions within the EU.
Imports from outside the EU
Goods Services
VAT is charged on goods imported from outside the EU as if it were a customs The treatment of services purchased from outside the
duty. It is normally collected direct from the importer at the place of importation, EU is generally the same as services purchased within
such as a port or airport. EU (discussed later).

• Approved traders can pay all of their VAT on imports through the duty
deferment system. In order to set up an account with HMRC the trader must
arrange a bank guarantee. This allows all VAT on imports to be paid on the
15th of the month following the month of importation. This assists the
trader's cash flow and is more convenient than having to pay the VAT at the
point of import.
• VAT paid on importation can be reclaimed as input VAT on the VAT return
for the period during which the goods were imported.
• net effect of importing goods is therefore the same as if the goods were
bought within the UK.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Overseas aspect of VAT cont..
19
Exports outside the EU
Goods Services
Export of goods outside the EU is a zero rated supply. Supply of services outside the EU is outside the
It is a favorable treatment for the exporter as it allows them to recover input scope of VAT.
tax. It also means the customer is not charged VAT.
Transactions within the EU
1. Goods: VAT treatment when trading goods where both supplier and customer are VAT registered
(B2B).

Transactions Accounting for VAT

• Supply is zero rated in country of origin • Supplier does not account for output VAT – supply zero rated.

• VAT chargeable at the appropriate rate in force in country of • Customer must account for output VAT on their VAT return at
destination (reverse charge procedure) the rate in force in customer’s country.

• VAT suffered by customer may be reclaimed by them as input

VAT in the appropriate quarter.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Overseas aspect of VAT cont..
20
• output VAT on purchases from the EU must be accounted for by the customer in their VAT return for the
date of acquisition. (date of acquisition is the earlier of the date of the VAT invoice, and the 15th day of
the month following the month in which the goods came into the UK)
• Both the output VAT and input VAT are therefore likely to be on the same VAT return and will cancel out,
unless the business makes exempt supplies and therefore cannot reclaim input VAT.
Note: VAT on purchases from within the EU and outside the EU is collected via different systems.
However, both leave the UK business in the same overall financial position.
2. Services: rules governing VAT on the supply of services are complex (only basic principles are
required for the exam). For services, VAT is generally charged at the place of supply. For business
customers the place of supply is where the customer is established. Rules can be applied to B2B
transactions involving a UK business as follows:

UK business Accounting for VAT

Supplies services to overseas • Place of supply is overseas (customer’s place)
business customer. • Outside the scope of UK VAT
Receives services from overseas • Place of supply is UK
business. • Reverse charge procedure: UK business accounts for 'output VAT' at standard UK rate on
VAT return and this VAT can be reclaimed as input VAT.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Overseas aspect of VAT cont..
21
Time of supply for cross border supplies of services
For single supplies, the tax point will occur on the earlier of:
i. when the service is completed, or
ii. when it is paid for.
TYU 8 page 869
TYU 9 page 870
TYU 10 page 872
TYU 11 page 872
TYU 12 page 872
TYU 13 page 873
TYU 14 page 873
TYU 15 page 874

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022