Chapter 19 Value added tax

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.1

Chapter 19Value added tax

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.2

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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.3

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.4

The VAT system

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.5

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.6

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.7

A VAT account

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.8

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.9

VAT on a sales invoice

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.10

VAT in the sales day book

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.11

VAT in the sales ledger

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.12

VAT in the general ledger

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.13

VAT on a purchase invoice

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.14

VAT in the purchase day book

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.15

VAT in the purchases ledger

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.16

VAT in the general ledger

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.17

VAT and cash discounts

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.18

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:

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.19

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.20

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.21

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.

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.22

VAT return forms (Continued)

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.23

Learning outcomes

You should have now learnt:

1. 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

2. 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.24

Learning outcomes (Continued)

3. How to prepare a VAT account as recommended by HM Revenue and Customs

4. That the VAT account should show the balance owing to, or by, HM Revenue and Customs

5. 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.25

Learning outcomes (Continued)

6. 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

Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012

Slide 19.26

Learning outcomes (Continued)

7. That although businesses show VAT separately on sales invoices, the VAT is not regarded as part of the sales figure in the trading account

8. That VAT is calculated on the sales value less any cash discount offered

9. How to complete a VAT return