1. VAT Basics
Ian M Harris BA(Hons) FIIT CTA MAAT
Leicester City Council
VAT & Taxation Advice Office
2. VAT & Taxation Advice Office
Who are we?
– Ian Harris BA(Hons) FIIT CTA MAAT
– Taxation Officer
– Part of Financial Services Division
Where are we?
– Room B2.09(B), New Walk Centre (at the moment!)
– Extension: (37)4060 (0116-454-4060)
– Fax: 0116-255-2443
– Mobile/Text: 07980-339581
– E-mail: vattax@leicester.gov.uk
3. The Introduction of VAT
Started on 1 April 1973
Not intended to impact on local authorities’
statutory activities
Refund system in place for such ‘non-
business’ activities
But when acting in a business capacity
‘normal’ VAT rules apply to local
authorities
EU law lays down a requirement to avoid
distortion of competition
4. VAT - The European Tax
EC Principal VAT Directive lays
down the basis
Applies to all EU Member States
Details the scope of VAT, meaning of
taxable person, time and place of
supply, exemptions from VAT, etc
5. VAT in the UK
UK implements the Directive by
way of the VAT Act 1994
Secondary legislation: VAT
Regulations 1995 and numerous
other SIs
UK has certain derogations, eg
the retention of zero-rating
6. The Role of Customs
Administration of VAT in the UK
Network of local VAT offices
Ensure VAT is correctly accounted for
By assessing for underdeclared VAT, plus
interest and penalties!
If disagree have right of appeal
All communication with Customs must go
through the VAT & Taxation Advice Office
7. VAT - How Does It Work?
Taxable person - someone who is (or
who ought to be) registered for VAT
Taxable supply - a supply of goods
or services which is liable to VAT
A taxable person charges VAT on
his/her taxable supplies and reclaims
VAT incurred in connection with
making those supplies
8. How it Works: An Example
VAT VAT net
incurred charged VAT
forester nil £2.00 £2.00
timber mill £2.00 £20.00 £18.00
manufacturer £20.00 £80.00 £60.00
retailer £80.00 £166.50 £86.50
£166.50
Which equals the amount paid by the
customer
9. The success of VAT
Intrinsically simple
A self-assessed tax
A self-policed tax
Extremely efficient cost of
collection
10. The success of VAT
VAT raises over £90billion pa
VAT accounts for over 15% of
Government revenue
– at a cost of less than 1p per Pound
Income Tax raises somewhat more
– but at a cost of over 5p per Pound
Corporation Tax raises only about half
as much
11. Rates of VAT
Standard-rate
20%
Lower-rate
5%
and
Zero-rate
0%
Note that zero-rate is different to
exemption from VAT
12. Output Tax and Input Tax
VAT charged by a taxable
person is his/her output tax
VAT incurred by a taxable
person is his/her input tax
Output tax less input tax =
amount payable to Customs
13. The VAT Return
Total output tax for the period (A)
Total input tax for the period (B)
A - B = amount due TO Customs
Or, if A - B is negative (input tax is
higher than output tax), then A - B
= amount due FROM Customs
14. Input Tax - General Rules
To reclaim input tax you must:
hold a VAT invoice
– though there are certain cases, eg
payphones and purchases from coin-
operated vending machines, where you
simply must demonstrate that VAT has
been incurred on the expenditure
receive the supply
use the goods or services supplied for
official purposes
15. VAT Invoices - Full Invoices
Used by most businesses such as
wholesalers and manufacturers
Require certain specified
information
For businesses - must be issued
within 14 days of the supply
For local authorities - must be
issued within 2 months of the supply
16. VAT Invoices - Full Invoices
To be valid a full VAT invoice must contain:
- a sequential identifying number
- the date of the supply (the tax point)
- the name, address and VAT-registration number of the
supplier
- the name and address of the customer
- a description of the goods or services supplied
- the quantity of the goods, extent of the services, unit
price, rate of VAT applicable and net amount payable
- the total amount payable excluding VAT
- any discount offered
- the total amount of VAT payable in UK Pounds
17. VAT Invoices - Less Detailed
Issued by retailers and other VAT-
registered persons selling to the
public
Often referred to as a ‘VAT receipt’
Minimal information required
Must be able to demonstrate that a
VATable supply has been received
from a VAT-registered supplier
18. The VAT Fraction
To calculate the VAT amount
from a VAT-inclusive amount
20% VAT so:
20/120ths = VAT amount
simplifies to 1/6th
19. Imports from Within the EU
Effectively importer charges self
VAT by accounting for UK VAT
as acquisition tax (equivalent to
output tax)
Declare on VAT Return and
recover as input tax
Copy all such invoices to the
VAT and Taxation Advice Office
20. Imports from Outside the EU
UK VAT payable at point of importation
Shipping agent usually pays UK VAT on
importation then claims reimbursement
but
– shipping agent’s invoice is not a VAT Invoice
Can only reclaim VAT on imports on
basis of C79 Certificate from Customs
21. ‘Imported Services’
Cross-border B2B services normally VATable where
customer located
Customer effectively charges self VAT by accounting
for UK VAT as output tax, declaring on VAT Return
and recovering as input tax
There are some exceptions though:
– notably services supplied where performed or consumed, eg land
related services, hotel accommodation and restaurant and catering
services
Copy all invoices for services procured from non-UK
suppliers to VAT and Taxation Advice Office
Cross-border B2C services normally VATable where
supplier is located
There are similar exceptions though
22. Irrecoverable Input Tax
You cannot recover VAT incurred on:
certain second-hand goods (including goods
bought at auction)
supplies made under the Tour Operators
Margin Scheme (TOMS)
purchases of motor cars (or 50% of VAT on
leased cars)
purchases in respect of business
entertainment
23. Irrecoverable Input Tax
Also you cannot recover VAT
incurred on:
purchases from suppliers who are
not registered for VAT
supplies purchased on behalf of
someone else
24. Credit Notes
Credit notes must be issued to correct any
overcharge of VAT
The customer must then repay the VAT
shown on the credit note to Customs
A credit note should be treated as a
‘negative invoice’
Credit notes cannot be used to write off bad
debts
25. Outputs and Output Tax
An output is a supply of goods or services
Goods - supply made when title passes
Services - to do something (or refrain from
doing something) for payment
Remember payment does not have to be in
money - there could be a barter or part-barter
The supply will bear VAT at standard, lower or
zero-rate or be exempt from VAT or be outside
the scope of VAT (eg a non-business activity)
26. Tax Points - The Time of Supply
The tax point is the time at which you must account
for VAT and is determined by when the supply is
made
A supply is made when:
in the case of goods, they are delivered to or removed
by the customer
in the case of services, the service is complete or, for
ongoing services, a payment is received
But where an invoice is issued the date of the invoice
usually becomes the tax point
Unless payment is received first which triggers a tax
point
27. Non-Business Activities
Supplies made for no consideration or, in
the case of land, where the consideration is
no more than a ‘peppercorn’
Supplies made by a public body under a
statutory regime
Certain ‘traditional’ local authority
activities which do not ‘compete’ with the
private sector
28. Non-Business Activities
For a local authority activity to be non-
business it must be -
- free at the point of delivery
or
- subject to a special legal regime
and
- not likely to cause any significant distortion of
competition
29. Business Supplies
Supplies which are not non-business must
be business supplies and may be:
– standard-rated
– lower-rated
– zero-rated
– exempt from VAT
Business supplies do not have to be made
for a profit
30. Exemption from VAT
Determined by Schedule 9 of the VAT Act
land (including lettings, leases, etc)
insurance
postal services (by the Post Office)
betting, gaming and lotteries
finance
education (other than statutory education)
health and welfare (other than statutory social
care)
31. Exemption from VAT
burial and cremation
subscriptions to trade unions, professional and
other public interest bodies
sports, sports competitions and physical
education
works of art, etc
charity fund raising events
cultural services
goods on which input VAT was irrecoverable
investment gold
services by a cost sharing group to its members
32. Zero-Rating
Determined by Schedule 8 of the VAT Act
food
sewerage and water
books and printed matter
talking books for the blind and handicapped
and wireless sets for the blind
construction of certain new buildings
certain protected buildings
international services
33. Zero-Rating
transport (notably public transport fares)
residential caravans and houseboats
gold
bank notes
drugs, medicines and aids for the handicapped
imports and exports
charities
young children’s clothing and footwear and certain
protective clothing and footwear
34. Lower-Rating
Determined by Schedule 7A of the VAT Act
domestic fuel or power
installation of energy saving materials
grant-funded installation of heating equipment or
security equipment
women’s sanitary protection products
children’s car seats
residential conversions
35. Lower-Rating
renovations and alterations of dwellings
contraceptive products
advice or information to promote welfare of
elderly, disabled or children
installation of mobility aids for the elderly
smoking cessation products
caravans over 7m long not suitable as a
permanent residence
cable-suspended passenger transport systems
36. Your Responsibilities
Follow the VAT rules
Remember VAT affects both income
and expenditure
Consider the VAT implications of
decisions made
Refer to the VAT Manual
If unsure, seek advice don’t guess
37. The VAT & Taxation Advice Office
If in doubt contact:
– THE VAT & TAXATION ADVICE OFFICE
– Room B2.09(B), New Walk Centre
– Extension: (37)4060
– Direct dialling: 0116-454-4060
– Fax: 0116-255-2443
– Mobile/Text: 07980-339581
– E-Mail: vattax@leicester.gov.uk