1 AN INTRODUCTION TO VAT

2 What is VAT? Value Added Tax (VAT) is a form of indirect taxation It is one of many forms of taxation in the United Kingdom, used by the Government to raise income

3 The government body responsible for the administration of VAT is HM Revenue & Customs (HMRC) Goods and services liable to VAT are known as ‘taxable supplies’

4 Rates of VAT There are Three rates of VAT. 1. The Zero Rate (0%) 2. The Reduced Rate (5%) 3. The Standard Rate (20%) (Food (But not meals in restaurants or hot takeaways), Children’s clothing, Books, Newspapers, Water) (Gas, Electricity, Children’s car seats) (All goods and services not zero rated, at reduced rate, or Exempt from VAT) Some goods and services are exempt from VAT. (Postage stamps, Education, Health services, insurance, providing credit (loans and credit cars))

5 Some goods and services are outside the scope of VAT (Rates, Wages and salaries paid to employees and donations to charities)

6 VAT and Businesses A business must register for VAT if its turnover (excluding VAT) is over £70,000. (2010/11) Registered Businesses supplying goods or services not exempt from VAT must charge VAT on their sales at the appropriate rate (0%, 5%, 20%) These businesses can claim VAT on goods or services they purchase as part of their business. Businesses supplying goods or services exempt from VAT cannot register for VAT and do not charge VAT on their sales. These businesses cannot claim VAT on goods or services they purchase as part of their business. Now turn to page 2 of your supplementary chapter

7 Types of VAT Output TAX is the VAT charged on sales and other outputs. (Which we would then owe to HMRC) Input TAX is the VAT paid on purchases and other inputs. (Which we could then reclaim from HMRC) The difference between Output tax and Input tax is either paid to HMRC or reclaimed from HMRC. As businesses typically charge more for the goods they sell than they pay for the supplies they purchase the net result is a payment to HMRC. See example on page 4 of the supplementary chapter

8 Reporting of VAT Typically, businesses will report details of their Output VAT and Input VAT to HMRC every three months. This is done using the Form VAT 100. This is known as the Standard VAT Accounting Scheme.

9 All business documents must be kept for at least six years If you are a VAT registered business when sending out documents to your customers you must always have the VAT registration number on your invoices