What is VAT?
VAT is a tax on spending. It is added to the cost of most goods and services supplied in the UK and Isle of Man by VAT-registered businesses and paid by the customer. VAT registered businesses can recover some of the VAT they pay on purchases and expenses.
Inputs and Outputs
Inputs are the goods and services that come into the business that are paid for by the business. Any VAT the business pays on inputs is called input tax.
Outputs are the goods or services that the business sells to customers. The VAT the business adds to these sales is called output tax.
If you want to remember if something is an input or an output, think about which way the supply of goods or services is moving through the business. Inputs come into the business, Outputs go out.
Six things VAT –registered Businesses need to do
- Charge VAT to all customers at the correct rate
- Issue invoices and receipts that follow VAT rules
- Keep all business records
- Keep a VAT account
- Send HMRC VAT returns online
- Pay their VAT as soon as it becomes due
Business records should be kept for 6 years. Examples of business records include;
- Annual accounts, including profit and loss account
- Computer records, emails, stored documents
- Bank statements and paying in slips
- Cash books and other account books
- Credit or debit notes issued or received
- Orders and delivery notes
- Purchase and sales day books
- Purchase invoices and copy sales invoices
- Records of daily takings such as till rolls
- Relevant business correspondence
- Documents from trade with EC member states
- Import and export documents
How to work out VAT
To work out how much VAT to add to an amount that does not include VAT, multiply by the percentage of the VAT rate you need to use.
For example; £150 x 20% = £30 VAT to add to £150
To work out how much VAT there is in an amount you have paid that includes VAT, use the VAT fraction for VAT rate used. The VAT fractions are: 1/6 (standard rate) and 1/21 (Reduced rate.
For example: £150 x 1/6 = £25.00 standard rate VAT included in £150, £150 x 1/21 = £7.14 reduced rate VAT included in £150
These rates are got by using the formula: VAT rate/(VAT rate + 100). Thus for standard rate, it will be 20/(20+100) which results in 1/6.
If you need help with VAT issues in your company, give us a call on 02070388046 or mobile; 07706728958
Many thanks,
Sterling Libs ACCA, ACPA
