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Chapter 19 Value added tax

Chapter 19 Value added tax. Learning objectives. After you have studied this chapter, you should be able to: Enter up VAT in all the necessary books and accounts Distinguish between taxable businesses and other businesses Make out sales invoices including charges for VAT

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Chapter 19 Value added tax

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  1. Chapter 19Value added tax

  2. Learning objectives After you have studied this chapter, you should be able to: Enter up VAT in all the necessary books and accounts Distinguish between taxable businesses and other businesses Make out sales invoices including charges for VAT Complete a VAT return form

  3. What is VAT? VAT is a tax charged on the supply of most goods and services in the UK. Some goods and services are not taxable, for example postal services and some businesses are exempted. VAT is administered in the UK by HM Revenue and Customs. VAT is the tax paid by the ultimate consumer of the goods but everyone in the supply chain must account for and settle their net VAT bill each quarter.

  4. The VAT system

  5. VAT rates Currently 20%. There is a reduced rate of 5% for domestic fuel and power, and the installation of some energy-saving materials. There is a zero rate on items like some food sold in a supermarket. The VAT on the value of goods and services sold is known as output tax. The VAT on the value of goods and services supplied is known as input tax.

  6. The VAT account All registered businesses must account for VAT on all the taxable supplies they make and all the taxable goods and services they receive at each rate. A summary must also be kept of the totals of input and output tax for each VAT period. Guidance is given in the HMRC notice 700/21.

  7. A VAT account

  8. VAT in the accounts and statements Exempted businesses do not record VAT and it does not appear in the statements. Standard-rated businesses record VAT and it will appear as a current asset or current liability. Partially exempt businesses record all VAT but must distinguish between expenditure relating to taxable supplies which can be reclaimed, and expenditure relating to exempt supplies which cannot be reclaimed. Zero rated businesses record all input VAT which will appear as a current asset.

  9. VAT on a sales invoice

  10. VAT in the sales day book

  11. VAT in the sales ledger

  12. VAT in the general ledger

  13. VAT on a purchase invoice

  14. VAT in the purchase day book

  15. VAT in the purchases ledger

  16. VAT in the general ledger

  17. VAT and cash discounts

  18. Where VAT is included in the gross amount Therefore, if the gross sales figure was £1,650 and the rate of VAT was 10%, the formula would look like this:

  19. VAT return forms There are nine boxes on a VAT return form: Box 1 – contains the VAT due on sales and other outputs. Box 2 – shows the VAT due (but not paid) on all goods and related services acquired in this period from other EC member states. Box 3 – contains the total of boxes 1 and 2.

  20. VAT return forms (Continued) Box 4 – contains the total input tax you are entitled to claim for the period. Box 5 – is the difference between boxes 3 and 4. If the amount in box 3 is greater, the difference is payable to HMRC. If the amount in box 4 is greater, the difference is owed by HMRC. Box 6 – contains the total sales excluding any VAT.

  21. VAT return forms (Continued) Box 7 – contains the total purchases excluding any VAT. Box 8 – contains the total value of all supplies of goods to other EU member states. Box 9 – contains the total value of all acquisitions of goods from other EC member states.

  22. VAT return forms (Continued)

  23. Learning outcomes You should have now learnt: That UK businesses with a turnover exceeding £70,000 in a 12-month period must register for VAT. Other businesses may do so if they wish That businesses which are registered for VAT with a low turnover (at the time of writing, below £68,000 in a 12-month period) may deregister for VAT

  24. Learning outcomes (Continued) How to prepare a VAT account as recommended by HM Revenue and Customs That the VAT account should show the balance owing to, or by, HM Revenue and Customs That the VAT account prepared for HM Revenue and Customs is a memorandum item that is not part of the double entry system and is not the same as the ledger account for VAT

  25. Learning outcomes (Continued) That if a business cannot get a refund of VAT on its costs, then the VAT will be included in the costs transferred to the trading account and the profit and loss account, or be included in the cost of non-current assets in the statement of financial position. VAT does not appear as a separate item in either financial statement

  26. Learning outcomes (Continued) That although businesses show VAT separately on sales invoices, the VAT is not regarded as part of the sales figure in the trading account That VAT is calculated on the sales value less any cash discount offered How to complete a VAT return

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