The Principles of VAT

The basic principle of VAT is that tax should be charged at each stage of the production and distribution process but that the total tax due should be borne by final consumer of the product. This is achieved as follows:
Traders who are registered for VAT, are required to charge VAT on there sales and must account for this output tax to Govt. but

a) Such traders are allowed to recover from Govt. the input tax they pay to their own suppliers, so that


b) In effect, registered traders suffer no VAT and the total VAT is born by the consumer at the end of the distribution .

TAXABLE PERSONS.

Formally VAT is chargeable when a taxable supply of goods or services is made in the State by a taxable person in the course of business. The term “person” can refer to an individual, partnership or company, as well as to any other body which supplies goods or services in the course of business. There is no need for a profit motive to exist, just that goods or services are supplied for a consideration , so, the term “person” can refer to a charity, a club etc, A taxable person is a person making taxable supplies who is or should be, registered for VAT. Person must register if their turnover of taxable items exceeds a prescribed registration threshold and might register voluntarily even if turnover is below this threshold.
A taxable person should charge VAT to customers when making taxable supplies, must account for this output tax to Govt. and may reclaim the tax suffered on input. A person who is not a taxable person can neither charge VAT to customers not reclaim input tax. The main national museum and art galleries are an exception to this general rule, in that they are allowed to reclaim input even though they provide free admission to the public and so not operate a business.

TAXABLE SUPPLIES.

A taxable supply is any supply of goods or services in U.K other than a supply which is specifically exempted from VAT. Vat is charged on a taxable supply at the standard rate (17.5% ) unless the supply attracts tax at reduced rate ( 5%) or at the zero rate (0%). The type of supply which are exempt from VAT and the types of supply which are taxable at the reduced rate or zero rate.


SUPPLY OF GOODS


A supply of goods is deemed to occur when the ownership of goods passes from one person to another. In general, a supply of goods will fall within the scope of VAT only if it is made for a consideration ( i.e in return for money or payment in kind ) but the following are also deemed to be supplies of goods for VAT purposes.
a. Gift of business assets other than :
i. Gift made to any one person in any rolling 12 month period costing in total no more than $ 50.
ii. Gifts consisting of samples ( but if two or more identical sample are given to the same person, only one of these samples is deemed not to be supply ).

(b) goods permanently taken out of a business for private use by the owner or an employee of the business, in respect of which input tax has been paid.
The sale of goods on hire purchase terms is deemed to be a supply of goods but VAT is charged on the cash price of the goods, not the HP price.




SUPPLY OF SERVICES.

Ay supply which is made for a consideration but which is not a supply of goods is deemed to be a supply of services . However, gift of services is not a taxable supply. The hiring of goods to the customer is a supply of services not a supply of goods, since ownership of the goods does not pass to the customer. A supply of services is also deemed to occur if the owner or an employee of a business;
(a.) Temporarily makes private use of goods owned by the business, in respect of which input tax has been paid, or
(b.) Makes private use of services which have been supplied to the business, in respect of which input tax has been paid.
By concession, the private use of a business motor car is not a taxable supply.

SELF – SUPPLY
A “self –Supply” occurs when a taxable person makes a supply to himself of hers self. For example, a self – supply of a motor car occurs if a motor car manufacturer produces a car and then uses it instead of supplying it to a customer. The Treasury is empowered to order that for VAT purpose, self supplied goods or services are regarded as both.
(a) A taxable supply made by the business, and
(b) A taxable supply made to the business.
The effect of such an order is that output tax must be accounted for in relation to the supply but that an equal amount of input tax is deemed to have been suffered. This input tax may be irrecoverable in whole or part.

EXEMPT SUPPLIES
A supply of goods or services is an exempt supply if it falls within one of fifteen exemption groups. In summary, these exception groups are as follows ;
GROUP - 1. The sale or lease of land and buildings, other than:
(i) To ( iv ).
group –2, insurance
group- 3, postal services provede by the post office
group- 4, batting, gaming and lotteries.,
group- 5, financial services ( bank charges, stock broking , under writing ).
Group- 6, education provided by schools, universities and further education colleges.
Group- 7, health and welfare services
Group- 8, burial and cremation services
Group –9, subscription to trade unions and professional bodies
Group- 10, sports competition entry fees paid to non profit making bodies
Group 11- Disposal of works of art to approved bodies ( i.e national galleries )
Group- 12, Certain fund raising events organized by charities,
Group- 13, Cultural Services
Group- 14, Supplies of goods where input tax cannot be recovered
Group- 15, investment gold

The tax implications of a supply of goods or services being exempt are as follows;
( a ) VAT cannot be charged on an exempt supply.
( b ) A person who makes only exempt supply cannot register for VAT, charges no output tax, is not a taxable person and cannot reclaim input tax.
( c ) In effect, a person making only exempt supplies is in an identical position with regard to V
AT as the final consumer at the end of a distribution chain.

OPTION TO TAX.
The inability to reclaim input tax when making exempt supplies might lead the vendor of a used commercial building to elect for the “ option to tax”. If such an election is made, the vendor charged output tax on the sale of the building, becomes a taxable person and may claim input tax. Of course, the buyer of the building will have to pay VAT but if the buyer is also a taxable person then he or she will be able to reclaim the tax paid and therefore may not object to the arrangement.


REDUCED RATE SUPPLIES.
A supply of goods or services is charged to VAT at the reduced rate of 5% if it falls within the one of eleven reduced rate groups.

ZERO RATE SUPPLIES

A supply of goods or services is charged to VAT at the zero rate ( 0 % ) if it falls within one of sixteen zero-rate groups. These Groups are as follows:
Groups 1 to 16 mainly, Food, Water, Books, Instruments for handicapped, The sale ( or lease for more than 21 years ) of new buildings for residential or charitable use and second – hand buildings which have been converted for residential use
Sale of protected buildings, Certain categories of international services.
Gold supplied by central bank to another central bank, Bank notes. Drugs and Medicines prescribed to handicapped, Exports, Sales in tax –free shops to persons leaving to destinations outside the U.K, sale by a charity of donated goods.
Children’s clothing and footwear.

The tax implication of a supply of goods or services being zero-rated are as follows:
(a.) The supply is a taxable supply but the VAT due is calculated at 0%
(b.) A person who make only zero- rated supplies is nonetheless making taxable supplies and must register as a taxable person if taxable turnover exceeds the prescribed threshold. Having registered ( and may be done voluntarily if taxable turnover is less than the threshold, as explained below ) the person will than be able to reclaim input tax.
The Value of a Supply.
The value of a taxable supply is the amount on which the VAT charge is based and this is normally equal to the price ( before VAT ) charged for the supply. For example, if a standard – rated supply is made at a price of $ 1,000. Plus VAT at 17.5% the value of the supply is $ 1000.and the consideration given for the supply is $ 1175.
For standard- rated supplies. The VAT component of the consideration can be found by multiplying the consideration by the VAT fraction which is currently 17.5/117.5= 7/47ths
Note the following points regarding the value of supply.
(a.) If a supply consists of a gift of business assets, the value of the supply is deemed to be the price (excluding VAT ) which the person receiving the gift would have to pay to purchase goods identical in every respect to the goods concerned. This rule also applies if the assets are taken permanently out of business for private use by the owner or an employee of the business.
(b.) If the owner or an employee temporarily makes private use of business assets, the value of the resulting supply of services is based on the amount by which the assets have depreciated whilst being used for private purpose.
(c.) If private use if made of services which have been supplied to the business the value of the resulting supply of services is equal to an appropriate proportion of the value of the supply which was made to the business.
(d.) If the consideration for a supply is paid in kind or if supply is made to a connected person for less than market value, the value of the supply is taken to be the market value of the goods or services supplied.
CASH DISCOUNTS:
If a customer is offered a cash discount in return for the prompt payment, the value of the supply is the price ( before VAT ), charged by the supplier, less the maximum cash discount which the customer might receive. This is the case whether or not the customer actually takes advantage of the discount.
Note that the VAT fraction cannot be used to calculate the VAT component of the consideration of a cash discount is offered but not taken.


MIXED SUPPLIES.
A “mixed supply” occurs if a mixture of goods and / or services is invoiced together at a single inclusive price. If all of the items in the mixture are chargeable to VAT at the same rate, the value of the supply and the related output tax can be calculated in the usual way. Otherwise, it is necessary to apportion the price charged between the various element of the mixture in order to calculate the out put tax due. There is no standard way of achieving this apportionment but the method used must be fair and justifiable .
COMPOSITE SUPPLIES ;
A composite supply occurs if a mixture of goods and / or services is supplied together in such a way that it is not possible to split the supply into its component parts. In this case the nature of the supply as a whole must be considered in order to determine the rate of tax due ( if any ). For example, in the case of Mander Laundries Ltd ( 1973 ) it was held that the services of a launderette consists of a single, standard rated supply of services, not a mixed supply of water, heats, hire of washing machine etc.
IMPORTS AND EXPORTS.
The vat treatment of imports and exports depends upon two main factors:
(a.) Whether the transaction involve goods or services, and\
(b.) Whether the transactions are between U.K and a country which is not a member of the European union or between the UK and another EU member.
International Services
H . S . N.

HARMONISED SYSTEM OF NOMENCLATURE.

DEVELOPED BY : WORLD CUSTOMS ORGANIZATION .

CLASSIFIED GOODS INTO 5019.GROUPS .

ITEMS : MORE THAN 12000.
CHAPTERS : 98.
MAIN HEADINGS : 241.
SUB HEADINGS : 6100.
8 DIGITS : FIRST 2 FOR GROUP OF COMMODITIES ( CHAPTERS ).
NEXT 2 FOR MAIN ITEMS ( HEADINGS ).
5 AND 6 FOR SUB – ITEMS ( SUB – HEAD )
LAST 2 FOR FURTHER BIFURCATION ( TERRIF ITEMS )
HSN ADOPTED BY CUSTOMS ON 1-2-2003.
WE ALREADY HAVE 6 DIGITS GST FOR 27- A.

INTERNATIONAL SERVICES
If certain services are supplied in the UK by an overseas supplier then the person receiving the services is treated as if he or she were the supplier and is required to account for output tax in relation to them. This is known as the “ reverse charge” procedure. The VAT suffered by taxable person on imported services as a result of this procedure may be treated as input tax. The reverse charge procedure applies to the following type of services ( excluding any services which are exempt from VAT.
(a.) Certain advertising, professional, financial and other services which are used by the recipient for business purposes ( regardless of whether or not the recipient is a registered person ).
(b.) Services of any kind which are supplied to a registered person and which are used for business purpose.
Subject to the normal registration rules, an overseas supplier may register in the UK and charge UK VAT. In this case, the reverse charge procedure does not apply.
Export of services are largely outside the scope of UK VAT.
REGISTRATION
The total value of the taxable supplies made by a person in a year is known as that person’s taxable turnover. A person whose taxable turnover exceeds the registration threshold must get registration number.
A VAT registration number is issued, which must be quoted on the person’s tax invoices.
A person who is liable to register but who fail to do so is still a taxable person and is personally responsible for the output tax due in relation to supplies made since the date on which registration should have occurred
TRANSFEROF A BUSINESS TO AN UNREGISTERED PERSON.
VOLUNTARY REGISTRATION
EXEMPTION FROM REGISTRATION.
PRE- REGISTRATION INPUT TAX.
GROUP REGISTRATION ( of associated companies ).
De- registration.

SUMMARY
VAT is chargeable when a taxable person makes a taxable supply of goods or service in the course of business.
A taxable supply is any supply of goods or services other than an exempt supply and may be charged to value added tax at either the standard rate, the reduced rate or the zero rate.\
A taxable person is a person who is making taxable supplies and who is ( or should be ) VAT registered. A taxable person may be an individual, a partnership, a company, a charity, a club or an association.
A person making taxable supplies which exceed the registration threshold must register with Govt. A person making taxable supplies which do not exceed the threshold may register voluntarily.
A taxable person must account to HMRC Revenue and customs for the output tax charged to customers but may recover some or all of the input tax paid to suppliers.
A person making only exempt supplies cannot charge VAT to customers and is unable to recover input tax.