Li always pays any VAT which is due at the same time that the related VAT return is submitted.
- The late submission of the VAT return for the quarter ended 30 September 2021 will have resulted in HMRC issuing a surcharge liability notice specifying a surcharge period running to 30 September 2022.
- The late payment of VAT for the quarter ended 31 December 2021 will result in a surcharge of £572 (28,600 x 2%).
- In addition, the surcharge period will have been extended to 31 December 2022.
- Li then submitted four VAT returns on time.
- The late submission of the VAT return for the quarter ended 31 March 2023 will therefore only result in a surcharge liability notice (specifying a surcharge period running to 31 March 2024).
Neither a surcharge liability notice, nor a default surcharge, will be incurred if a business has a reasonable excuse for the late submission or the late payment. For example, an unexpected stay in hospital should count as a reasonable excuse for either late payment or late submission. However, having insufficient funds will not normally be accepted by HMRC as a reasonable excuse for late payment.
Errors in a VAT return
A VAT registered business which makes an error in a VAT return resulting in the underpayment of VAT, can be subject to both a penalty for an incorrect return and penalty interest.
EXAMPLE 21
During March 2023, Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three cars when completing its VAT return for the quarter ended 31 December 2022.
- If the error is less than the higher of £10,000 or 1% of Zoo Ltd’s turnover for the quarter ended 31 March 2023, the error can be voluntarily disclosed by simply entering it on the VAT return for the quarter ended 31 March 2023.
- If the error exceeds the limit, it can be voluntarily disclosed but disclosure must be made separately to HMRC.
- There will only be penalty interest where separate disclosure is required, but a penalty for an incorrect return might be imposed in either case.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a taxpayer’s behaviour.
EXAMPLE 22
Continuing with example 21
- HMRC will not charge a penalty if Zoo Ltd has taken reasonable care, provided the company informs them of the error.
- However, claiming input VAT on the purchase of cars is more likely to be treated as careless, since Zoo Ltd would be expected to know that such input VAT is not recoverable.
- The maximum amount of penalty will therefore be 30% of the amount of input VAT incorrectly claimed, but this penalty could be reduced to nil if unprompted disclosure is made to HMRC.
Imports and exports
When a UK VAT registered business imports goods into the UK, VAT has to be accounted for according to the date the goods are imported. This import VAT is at the UK VAT rate.
A system of postponed accounting applies so that the import VAT is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT return (a reverse charge procedure).
Therefore, for most businesses, there is no VAT cost because the output VAT and corresponding input VAT are equal. However, there is a VAT cost if a business makes exempt supplies, since an exempt business cannot reclaim any input VAT, or if the imported goods are of a type for which input VAT is not recoverable (such as cars for private use).
Postponed accounting does not have to be used, and there are some circumstances when it cannot be used. However, as far as TX-UK is concerned, it should be assumed that postponed accounting applies to all imports of goods.
EXAMPLE 23
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing £1,000 (exclusive of VAT) from either a UK supplier or an overseas supplier.
- If Yung Ltd purchases the goods from a UK supplier, it will pay the supplier £1,200 (1,000 plus VAT of 200 (1,000 x 20%)), and then reclaim input VAT of £200.
- If the goods are instead purchased from an overseas supplier, Yung Ltd will pay £1,000 to the supplier. On its VAT return, Yung Ltd will then show output VAT of £200 and input VAT of £200.
- The end result is the same in each case; a net of VAT cost of £1,000. However, with the import there is no need to actually pay the VAT subsequent to its recovery as input VAT.
When a UK VAT registered business exports goods, the supply is zero-rated.
International services
Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated. Therefore, where a UK VAT registered business receives international services the place of supply will be the UK.
EXAMPLE 24
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT registered businesses situated overseas. As business-to-business services, these are treated as being supplied in the UK.
- VAT will be accounted for on the earlier of the date when the service is completed or the date it is paid for.
- The VAT charged at the UK VAT rate should be declared on Wing Ltd’s VAT return as output VAT, but will then be reclaimed as input VAT on the same VAT return (a similar reverse charge procedure to that for imports).
The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK.
The cash accounting, annual accounting and flat rate schemes
The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful the schemes are not confused, as they are completely different from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.
EXAMPLE 25
Ming is registered for VAT. She has annual standard rated sales of £800,000. This figure is inclusive of VAT. Ming pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her customers have recently defaulted on the payment of their debts.
- Ming can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.
- In addition, she must be up to date with her VAT returns and VAT payments.
- Output VAT will be accounted for three months later than at present since the scheme will result in the tax point becoming the date when payment is received from customers.
- The recovery of input VAT on expenses will not be affected as these are paid in cash.
- The scheme will provide automatic relief for an impairment loss should a customer default on the payment of a debt.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to submit one VAT return each year.
EXAMPLE 26
Newt Ltd is registered for VAT. The company has annual standard rated sales of £950,000. This figure is inclusive of VAT. Because of bookkeeping problems, Newt Ltd has been late in submitting its recent VAT returns.
- Newt Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.
- In addition, the company must be up to date with its VAT payments.
- Under the scheme, only one VAT return is submitted each year. This is due within two months of the end of the annual VAT period.
- The resulting reduced administration should mean that default surcharges are avoided in respect of the late submission of VAT returns.
- Nine monthly payments are made on account of VAT commencing in month four of the annual VAT return period. Any balancing payment is made with the VAT return.
- Each payment on account will be 10% of the VAT payable for the previous year. This will improve both budgeting and possibly cash flow where a business is expanding.
The flat rate scheme can simplify the way in which small businesses calculate their VAT liability.
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total income. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the gross total income figure (including exempt supplies) with no input VAT being recovered. The percentage varies according to the type of trade which the business is involved in, and will be given to you in the examination.
EXAMPLE 27
Omah registered for VAT on 1 January 2023. He has annual standard rated sales of £100,000, and these are all made to the general public. Omah has annual standard rated expenses of £16,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for Omah’s trade is 13%.
- Omah can join the flat rate scheme if his expected taxable turnover (excluding VAT) for the next 12 months does not exceed £150,000.
- He can continue to use the scheme until his total turnover (including VAT, but excluding sales of capital assets) for the previous year exceeds £230,000.
- The main advantage of the scheme is the simplified VAT administration. Omah’s customers are not VAT registered, so there will be no need to issue VAT invoices.
- Using the normal basis of calculating the VAT liability, Omah will have to pay annual VAT of £16,800 ((100,000 – 16,000) x 20%).
- If he uses the flat rate scheme, Omah will pay VAT of £15,600 ((100,000 + 20,000 (output VAT of 100,000 x 20%)) x 13%), which is an annual saving of £1,200 (16,800 – 15,600)
A flat rate of 16.5% applies to those businesses which have no, or only a limited amount of, purchases of goods. You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question could be set where this rate applies.
There is very little advantage to using the flat rate scheme if the 16.5% rate applies because it is equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a business has much input VAT, the flat rate scheme will not be beneficial if the 16.5% rate applies.
EXAMPLE 28
Continuing with example 27, assume that the relevant flat rate scheme percentage for Omah’s trade is instead 16.5%.
- If Omah uses the flat rate scheme, he will now pay VAT of £19,800 ((100,000 + 20,000) x 16.5%).
- This is £3,000 (19,800 – 16,800) more than the normal basis of calculating the VAT liability.
Conclusion
There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. Several different topics will usually be covered within a longer-style VAT question, so it is important to cover the whole subject area.
Written by a member of the TX-UK examining team