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VAT - Outputs and Output Tax - Getting the Liability right


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You will have read elsewhere that VAT applies at 17½% to most supplies of goods and services. That is true. However, there are a significant number of areas where other rates of VAT apply. Let me assure you – it is in your interest to get it right. It is not always easy to untangle things later!

Example: a camping and caravan site charged VAT at 17.5% on its residential lettings. HMRC advised that this should be exempt. The site decided to amend the past three years Returns on this basis. He prepared a claim exceeding £40,000. HMRC said, “You can’t have the money back, because you won’t pass it back to your customers.”

Marks & Spencers had a similar problem with their teacakes!

The basic position is that all supplies of goods and services are standard rated, that is 17.5%.

The other alternatives fall into three Schedules:

Sch 7A – Reduced Rate
Sch 8 – Zero Rate
Sch 9 – Exempt

The lines between the three schedules are sometimes quite fine. For example, transactions in relation to property can fall into any of the three, or be standard rated. If you are not sure, you can ring the HMRC National Advice Service. They will give you an answer, and a call reference number. But they will not provide advice on minimising the VAT cost of a transaction. It is always better to seek advice before making your transaction. Once the goods or services are supplied, it can be difficult to put right an error.

If your sales are B2B, and you make a VAT error, it is generally easier to put things right. If you undercharged VAT, send a VAT-only invoice to the customers, with a covering letter, telling him that the VAT can be recovered subject to the normal rules. If you overcharged VAT, send a VAT-only credit note, and a cheque.

Beware: to make and have to adjust an error can appear unprofessional. Use the opportunity to comment on the complexity of VAT, and your readiness to put right any problems!

The distinction between exempt and taxable sales is also important. Something is taxable if it is standard, reduced, or zero rated. Something is exempt if it is exempt.

There are two important distinctions:

  1. first, a person cannot be registered for VAT if he only makes exempt sales, unless he is registered as part of a VAT Group;

  2. second, where a person makes exempt and taxable sales, he can only recover a proportion of his input tax on his costs. Essentially, he can only recover input tax in relation to the taxable sales he makes.

Example: a property developer sells two houses, one he built himself, which is taxable; the other he purchased and renovated, which is exempt. He can recover input tax on the first, one materials, professional fees, etc. He cannot recover that input tax in relation to the second.

Lots of businesses make some exempt sales. Common examples are commissions on insurance, financial products, lottery tickets. In each case, a calculation is required to be carried out for each VAT Period. Where the income is small, no adjustment will be required.

October 2006

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