Should I be registered for VAT in the UK?                                                                                back to the top


General

1. In principle, any person who makes (or expects to make) taxable supplies is required to register with Customs and Excise. This is done by submitting an application form (VAT 1) to the appropriate VAT office. This procedure is quite separate from any notification required for income or corporation tax purposes.

2. From 1 April 2002, a person making taxable supplies is required to apply for registration for VAT purposes at the end of any month if the value of his taxable supplies in the past 12 months exceeded £54,000, or at any time there are reasonable grounds for believing that the value of his taxable supplies in the next 30 days (taken in isolation) will exceed £54,000. This registration limit is usually increased annually at the time of the Budget.

3. The onus to register is on the person carrying on the business. He is required to notify Customs and Excise of his liability to register within 30 days after the end of the month in which the annual threshold is exceeded or within 30 days after the date on which the grounds for registration first existed on the basis of anticipated turnover in the next 30 days. The date of registration that must go on the VAT 1 is the first day of the second month after the month in which the annual threshold is exceeded or, in the case of a registration required on the basis of anticipated future supplies, the date on which the grounds for registration first existed. There are penalties for late registration.

4 A business, whose taxable supplies are below the thresholds referred to in paragraph 2 above, can apply for voluntary registration.

Group Registration

5. A single VAT registration may be adopted to cover limited companies under common control. The advantage of such a registration is that supplies of goods and services between the companies within the group are not subject to VAT. Any other supply of goods or services by or to a group member is treated as a supply by, or to, the "representative member". This may be administratively convenient where the group accounting function is centralised. All companies within a VAT group have joint and several liability for any VAT due.

6. An application to be treated as members of a group on behalf of two or more eligible companies is made to Customs and Excise who will so treat them from the beginning of a prescribed accounting period. One of the companies within the VAT group is treated as the "representative member". An application for group registration must be made at least 90 days before the date which registration is to take effect, although Customs and Excise have the discretion to waive this time limit. The nominated representative member submits the application for registration (VAT 1). The representative member must also submit a form VAT 50 and each of the member companies a form VAT 51.

7. To be included in a VAT group a business must be:

· a corporate body resident in the UK; or a corporate body with an established place of business in the UK;

· be under some form of common control, e.g. a subsidiary, holding company etc. (the controlling company, person, need not necessarily be included within the VAT group).

8. For a company to be considered resident for VAT group treatment purposes, some part of its superior and directing authority must be present in the UK. This usually means that at least one director with full voting rights is resident in the UK and regularly attends board meetings.


What is the rate of VAT?                                                                                                         back to the top


There are currently three rates of VAT which constitute taxable supplies. The standard rate, at 17.5%, applies to the supply of most goods and services. The reduced rate, at 5%, applies in only a limited number of circumstances such as the installation of energy saving materials, children’s car seats and some residential conversations renovations and alterations (this list is not exhaustive). The zero rate applies to supplies such as those of books, public transport, and children’s clothing (again this list is not exhaustive).

Certain supplies are exempt of VAT such as certain land transactions, insurance, financial services, certain educational services and some cultural services. There are a number of other supplies that are exempt of VAT. As with zero rated supplies there is no VAT charged on exempt supplies but, unlike zero rated supplies, the related input tax is not recoverable on exempt supplies, subject to a de minimis level.

Some supplies are subject to VAT under various margin schemes.

The area of VAT liability can be quite complex and often specific advice is need to establish the correct liability of supplies.


What are the penalties for errors or underdeclarations?                                                            back to the top


1. Customs have wide powers for the administration of VAT, including the ability to make an assessment where no return has been made or they have reason to doubt its accuracy. Furthermore, in addition to charging interest on late payments, Customs may impose penalties. Criminal proceedings could also be instituted in respect of certain offences, for example, the fraudulent evasion of tax.

2. A person has the right of appeal to an independent VAT tribunal against an assessment, penalty or ruling made by Customs. Usually an appeal must be made within thirty days of the assessment, penalty or letter from Customs setting out the disputed decision.

Default Surcharge

3. A default surcharge of up to 15% may be imposed if a taxable person has not submitted the VAT payment to Customs and Excise within the specified period and he has been in default in the previous 12 months. No surcharge arises if the person can satisfy Customs, or on appeal a Tribunal, that there is a reasonable excuse for the default.

Misdeclarations

4. A misdeclaration penalty of 15% will be charged for misdeclarations where the amount underdeclared by the taxable person is equal or more than the lesser of £1m or 30% of the gross amount of VAT i.e. the aggregate of output tax and input tax for a VAT accounting period.

5. The penalty would not normally be imposed in the following circumstances:

a) during a period of grace from the end of the VAT return period in which the misdeclaration is made to the due date for the following VAT return;
b) when a misdeclaration has been corrected by a compensating error (in the following tax period) in respect of the same transaction or transactions with no overall loss of VAT;
c) where the net tax misdeclared does not exceed £2,000;
d) the error is voluntarily disclosed to Customs and Excise (see paragraph 16 below);
e) a taxable person satisfies Customs and Excise, or on appeal a tribunal, that there is a reasonable excuse for the conduct.

Persistent Misdeclarations

6. A person is liable to a penalty where:

a) there is a "material" inaccuracy in respect of any prescribed accounting period;
b) Customs and Excise serve a penalty liability notice on the person concerned within 5 consecutive accounting periods of the material inaccuracy;
c) the penalty liability notice specifies a penalty period of 8 consecutive prescribed accounting periods beginning with the period in which the date of the notice falls; and
d) he makes at least two further material inaccuracies in prescribed accounting periods within the penalty period.

7. A "material" inaccuracy is one where the amount of tax misdeclared exceeds £500,000 or 10% of the gross amount of the tax for that period.

8 No liability arises in respect of the first further material inaccuracy under 6(d) above but for any subsequent material inaccuracies the person concerned is liable to a penalty of 15% of the tax which would have been lost if the error had not been discovered.

Late Registration Penalty

9. If you fail to notify a liability to register for VAT at the appropriate time, Customs may impose a penalty of up to 15% of the tax due.

10. It is therefore vital to ensure that each new/acquired company which makes taxable supplies is registered for VAT at the correct time. You must not assume that a new/acquired company is automatically covered by the existing VAT group registration. This is not the case and unless the company is registered in its own right or as part of a group registration, a late registration penalty may be imposed.

Mitigation of Penalties

11. In relation to misdeclarations, persistent misdeclarations and late registrations, Customs may reduce the penalty to such amount (including nil) as they think proper but, in doing so, must not take into account:

a) insufficiency of funds available to any person to pay tax due or the penalty;
b) the fact that there has been no significant loss of tax; or
c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith.
12. A Tribunal has similar powers of mitigation as Customs but in addition, where a penalty has been mitigated by Customs, a VAT Tribunal may, on an appeal relating to the penalty, cancel the reduction in whole or in part. In addition, an appeal may be made to a Tribunal against interest or a default surcharge.

Voluntary Disclosures

13. In order to avoid any misdeclaration penalties, any errors discovered should be voluntarily disclosed before Customs and Excise begin to make enquiries. This should normally be done before an appointment is next made by Customs to visit and inspect the records.

14. Where the net value of errors discovered does not exceed £2,000, the VAT account for the period can be adjusted and the value of that adjustment included in the current VAT return. Where errors are adjusted in this way, no interest will be charged and the correction becomes part of the tax for the period in which it is made.

15. Where the net value of errors discovered exceeds £2,000, or where it does not but the taxpayer so chooses, the local VAT office must be informed. A disclosure can be made on a special form VAT 652 or by letter. Details must be given of the period in which the errors occurred; whether the errors were input or output tax errors, whether the individual error amounts were due to or repayable by Customs, and the total amount payable or repayable. Interest will be charged on any underdeclarations disclosed on this way, but no interest will be charged where the net amount of the error is £2,000 or less. To stop interest accumulating, full payment should be sent with the disclosure.



VAT Evasion                                                                                                                                  back to the top

A person who is knowingly concerned in, or in taking steps with a view to, the fraudulent “evasion of VAT” by him or any other person commits a Criminal Offence. In certain circumstances this can lead to imprisonment.

Most case are however dealt with under the following civil provisions:_

Where
(a) for the purpose of “evading VAT”, a person does any act or omits to take any action: and
(b) his conduct involves dishonesty

there is a penalty equal to the amount of tax evaded or sought to be evaded. Such penalties can be mitigated by up to 75% and in exceptional cases further reductions can be achieved. To obtain mitigation factors such as an early and truthful explanation, attending interviews and co-operating in establishing the true amount of arrears are taken into consideration.

Interest

Interest, at varying rates, is charged where Customs raise an assessment, or where there has been a voluntary disclosure in respect of a net error for past accounting periods. The period for which it can be levied is limited to a maximum of three years.



When do I have to submit VAT returns?                                                                                            back to the top


1. A taxable person must complete a return on form VAT 100 for every VAT accounting period. The completed form, with payment, should be sent to the VAT Central Unit at Southend on Sea to be received by Customs not later than the last day of the month following the end of the period to which it relates. No invoices, schedules or workings are required to be filed with the return.

2. For a registered person, the first VAT accounting period commences on the effective date of registration. The final period ceases on the date on which the trader's registration is cancelled.

3. Normally the duration of the VAT accounting period is three months. The date to which VAT returns are prepared depends on the "stagger group" to which the trader is allocated. The three "stagger groups" are:

Group 1 - Returns prepared for the three month period to 31 March, 30 June, 30 September, 31 December.
Group 2 - Returns prepared for the three month period to 30 April, 31 July, 31 October, 31 January.
Group 3 - Returns prepared for the three month period to 31 May, 31 August, 30 November, end of February.

4. Tax periods are staggered in order to spread the flow of VAT returns to Customs. Traders wishing to adopt a particular stagger group, for example to make their business year end and VAT periods coincide, may do so by applying to Customs when notifying their liability to register. For those traders whose accounting system is not based on calendar months, the standard date set out above for the stagger groups may be amended by up to 14 days in order to fit in with the accounting system. It is possible for a trader to have monthly tax periods or, if turnover does not exceed £300,000, to have an annual period.

5. A person must continue to submit returns for as long as he is registered, even though he may have ceased trading and all entries on the return are nil entries.

6. The form VAT 100 sets out:

· the VAT due in the period on sales and other outputs;
· the VAT due on acquisitions from EU states;
· the VAT reclaimed in the period on purchases and other inputs including acquisitions;
· the net tax due to or from Customs;
· statistical information in the form of the value of outputs and inputs for the period (exclusive of VAT);
· statistical information in the form of the value of supplies of goods to and acquisitions from other EU Member States;
· details of which retail scheme has been used, if any; and
· a declaration to be signed by and on behalf of the registered person to the effect that the information given in the return is true and complete.



What is a VAT Account?                                                                                                               back to the top


1. Every taxable person should keep and maintain an account called a "Value Added Tax Account". It should be divided into separate parts relating to the prescribed accounting periods of the taxable person and each part should consist of a tax payable portion and a tax allowable portion.

2. The tax payable portion comprises a total of the output tax due for the prescribed accounting period, including a total of the output tax due on the acquisitions from other EU Member States for that prescribed accounting period and any correction to the tax payable portion of a previous return which may be corrected on the current return (e.g. a credit note/debit note).

3. The tax allowable portion comprises the total of the input tax allowable to the taxable person for that prescribed accounting period. This includes the input tax allowable in respect of acquisitions from other EC Member States in the accounting period, any permitted correction of tax allowable portion of previous returns, and any other adjustments required.

4. Every taxable person must keep and preserve such records as are required for a period of six years. If this causes storage problems or undue expense, the local VAT office should be consulted. The agreement of Customs must be obtained before any business records are destroyed within the six year retention period. Records may also be maintained on microfilm, microfiche or computer records with Customs' prior approval. The records to be kept include suppliers' invoices, credit notes and debit notes issued or received, invoices issued and details of self supplies, goods used for private purposes, business gifts etc.

4. Where for any return period the output tax exceeds the input tax, a payment must be made to Customs when submitting a return. Where for any return period the allowable input tax is greater than the output tax, the amount of the excess is normally repayable to the taxable person by Customs. Where the amount is less than £1, it is treated as nil and not carried forward to the next return.





What is Output Tax?                                                                                                                        back to the top


1. Output tax in relation to a taxable person is the tax on taxable supplies which he makes (i.e. his sales), and the acquisition of goods by him from another Member State. Certain services received from outside the UK are also treated as forming part of the output. The supplier will then be liable to VAT either at the standard rate (currently 17.5%), reduced rate of 5% or the zero rate (0%).

2. Complications can arise where the supply comprises two or more constituent elements. A distinction has to be drawn between a "composite supply", where the various elements are indivisible and a "multiple supply" which is in effect a single transaction involving the supply of a number of separable goods or services. In the latter case, the supply of each constituent element must be considered as an independent supply for VAT purposes and, accordingly, the consideration for the multiple supply must be duly apportioned. It is therefore necessary to determine the essential quality of the final supply to ascertain the true VAT treatment.

3. Output tax is also due on certain "deemed supplies", for example, business gifts, the private use of goods or services, assets held at de-registration and certain self-supplies.

4. The tax becomes due at the time of supply but in practice is accounted for and paid by reference to tax returns completed for prescribed accounting periods. Certain small businesses are, however, allowed to account for VAT on the basis of cash received and/or by means of only one VAT return a year.


What is Input Tax ?                                                                                                                        back to the top


1. Input tax is the VAT incurred by a taxable person on:

· goods or services supplied to him;
· acquisitions of goods from other Member States; and
· importation of goods;

provided the goods or services, acquisition or importation are for the purpose of any business carried on, or to be carried on, by him. The effect of the above is that VAT cannot be reclaimed on goods and services which are not used for business purposes. Where exempt supplies are made, it may not be possible to recover all input tax incurred.

2. Input tax should normally be claimed on the VAT return for the period during which the supplier's tax point occurs or, for imported goods, in the period during which the date of importation takes place. The tax point will be shown on a supplier's invoice. If unable to make a claim for input tax in the proper period (e.g. because the necessary evidence is not received in time) input tax may normally be claimed in a later period. Input tax cannot be reclaimed unless a valid invoice or other document is held.

3. If input tax can be reclaimed in full, the amount to be claimed is that shown on the tax invoice received from the supplier. In the case of a less detailed tax invoice which does not show VAT separately, input tax is calculated by applying the VAT fraction (currently 7/47) to the total amount charged.


At what time is VAT due (Tax Point)?                                                                                           back to the top

1. The time at which a supply of goods or services is treated as taking place is called the "tax point". VAT must normally be accounted for in the prescribed accounting period in which the tax point occurs and at the rate of tax in force at that time.

2. The "basic tax point" as far as goods are concerned is the time at which the goods are removed, or the time at which they are made available if they are not to be removed. In respect of services the "basic tax point" arises when the services are performed, normally on completion.

3. The "actual tax point" overrides the "basic tax point". If the supplier issues a tax invoice or receives payment before the basic tax point, the earlier of these two occasions will crystallise the actual tax point.

4. If the supplier issues a tax invoice within 14 days after the basic tax point then, unless he has notified Customs in writing that he does not wish the rule to apply, the tax point is the date the invoice is issued. The exception to this occurs if payment is received before the basic tax point in which case payment date becomes the actual tax point. The 14 day rule can be extended by agreement with Customs where it is not possible in practice to issue an invoice within 14 days. Extension of up to 90 days is not uncommon.

5. Most deposits are advance payments and create tax points when received. Some types of deposits, however, are not consideration for a supply and their receipt does not create a tax point, e.g. deposits taken as security to ensure safe return of goods hired out which are refunded if the goods are returned in good order. A time of supply is not created in a supply of property by the receipt of a deposit by a third party acting as stakeholder (as opposed to an agent of the vendor) until the money is released to the vendor.

6. Where any contract for the supply of goods or services provides for the retention of any part of the consideration by one party pending full and satisfactory performance of the contract, or any part of it, by the other party, a supply is treated as separately and successively supplied at each of the following times:

a) for that part of the consideration which is not retained the normal tax point rules apply;
b) for any part of the consideration which is retained, it will be the earlier of the times when a payment in respect of any part of the consideration is received or the supplier issues a tax invoice relating to any such part or 18 months after the completion of the work due to be performed under the contract.

7. If goods are sent or taken on approval or sale or return (or similar terms) so that they are removed before it is known whether the supply will take place, the tax point is the time when it becomes certain that the supply has taken place (because the customer pays for them or otherwise indicates that he wishes to keep them) or, if sooner, twelve months after the removal. However, if before this time the supplier issues a tax invoice in respect of the supply, the tax point for the amount invoiced is the date the invoice is issued.

8. Where goods are supplied under a conditional sale agreement whereby the supplier retains the ownership of in the goods until all or part are appropriated under the agreement by the buyer and in circumstances where the whole or part of the consideration is determined at that time, the tax point is the earliest of the date of such appropriation by the buyer; the date when a tax invoice is issued by the supplier; or the date when a payment is received by the supplier, unless the 14 day rule applies to the appropriation.

9. Where services are supplied for any period for a consideration, the whole or part of which is determined or payable periodically or from time to time, the services are treated as separately and successively supplied each time payment is received or a tax invoice relating to the supply is issued by the supplier, whichever is the earlier.

10. Where such separate and successive supplies of services are made under an agreement which provides for successive payments and, at or about the beginning of any period not exceeding one year, the supplier issues a tax invoice which, in addition to the normal requirements for a tax invoice shows:

· the date on which payments under the agreement become due in the period;
· the amount payable (excluding VAT) on each such date; and
· the rate of tax in force at the time of issue of the tax invoice and the amount of tax chargeable in accordance with that rate on each payment;

the services are to be treated as separately and successively supplied whenever a payment in respect of them becomes due or is received, whichever is the earlier.



Can I recover VAT on bad debts?                                                                                              back to the top


1. Where a trader has accounted for output tax on a supply but has not been paid either in whole or in part by his customer he may be entitled to a refund of VAT in certain circumstances.

2. The following conditions must be satisfied before a taxable person is entitled to a refund of VAT under the bad debt provisions:

i) supplies were made for a consideration in money and tax has been accounted for and paid to Customs (although has recently been challenged at the European Court of Justice);
ii) the whole or part of the consideration has been written off in his accounts as a bad debt;
iii) six months from the payment date have elapsed;
iv) the value of the supply is equal to or less than its open market value;
v) in the case of a supply of goods made on or before 19 March 1997 the property in the goods has passed to the person to whom they were supplied;
vi) a claim has not previously been made under any provisions for bad debt relief.

3. In order to claim bad debt relief, a copy of the relevant tax invoice or, where one was not necessary, a document showing the time and nature of the supply, purchaser and consideration should be held. Accounting records should show that the tax has been accounted for and paid and that the consideration has been written off as a bad debt. Such records should be maintained for four years from the date of the claim. The claim should be included with other inputs on form VAT 100 in the period when the relief is claimed.

4. Where part payment has been received for an amount outstanding in respect of more than one supply then, unless it is made in respect of a specific supply, the payment should be set off against the earliest supplies first. Supplies made on the same day should be aggregated. The amount of relief to be claimed is the VAT proportion of the outstanding balance that relates to standard-rated supplies.

5. Customs will require repayment of the bad debt relief claimed insofar as payment is subsequently received for a supply, or if the requirements set out above are not adhered to.

6. Whether the bad debt relief is claimed or not is a commercial matter. It is not necessary to claim relief if it is felt that payment will subsequently be made and the administrative costs of reclaiming and subsequently repaying will exceed the cash flow benefits.


What are the rules for company cars and petrol?                                                                       back to the top


1. VAT charged on the supply to, or acquisition or importation by, a taxable person of a "motor car" is not available for credit unless the car is used exclusively for business purposes. This prevents a VAT claim if a business or employee uses the car for any non business (private) activity. Generally only motor dealers, car hire leasing companies, driving instructors or similar car users qualify to claim VAT. It may, however, be possible to claim in respect of such vehicles as "pool cars" which are never taken home by employees.

2. Where a taxable person supplies a motor car on which input tax has been excluded from credit, VAT is chargeable only on any excess of the selling price over the original purchase price. The excess is regarded as being tax inclusive, i.e. VAT is calculated by applying the VAT fraction. A tax invoice must not be issued and VAT must not be shown separately but documentary evidence of the purchase and sale must be retained.

3. Where input tax was deductible on the purchase of the car, output tax must be accounted for on the full selling price at the time of sale and a tax invoice should be issued.



Motor Expenses

4. If a motor vehicle is leased (other than under hire purchase or lease-purchase agreements) or hired for business purposes, VAT incurred on the rental can be reclaimed in full if the car is used wholly for business purposes. If used for any private or other non business motoring (for example a company car which an employee can take back) only 50% of VAT suffered on lease charges can be reclaimed.

5. If a vehicle is used for business purposes, VAT on repairs and maintenance can be treated as input tax provided the work done is paid for by the business. This applies even if the vehicle is used for private motoring and even if no VAT is reclaimed on any road fuel in order to avoid use of the scale charges (see paragraph 8 below). VAT on repairs etc., covered by a mileage allowance or relating to a vehicle used by a sole trader or partner for private motoring only, cannot be treated as input tax.

6. VAT charged on accessories fitted to a car when it is purchased cannot be reclaimed even if separately itemised on the sales invoice. VAT can be reclaimed on accessories subsequently purchased and fitted to a vehicle for business reasons, provided the accessory remains part of the vehicle. VAT can also be reclaimed on an accessory fitted to and remaining part of a vehicle owned by an employee, director or partner if the accessory has a business use.

7. VAT on all road fuel purchased by the business, or reimbursed to employees, can be reclaimed subject to the normal rules of have a valid tax invoice. This applies even if it is used for private motoring, but see below.

6. Where, in any prescribed accounting period, a taxable person supplies fuel for no charge, or a charge below the cash price, to an individual by reason of his employment or office, for private use in his own car or a car allocated to him, a supply of fixed value is deemed to have been made. This fixed value supply is known as a scale charge. VAT must be accounted for using the fuel scale charges, which represent the tax inclusive value of the fuel supplied for each car. The scale charges only apply to motor cars and are based upon the engine capacity of the car and on whether it has a diesel or petrol engine. For VAT periods beginning after 5 April 2001 the VAT due per vehicle each quarter is as follows:
Diesel engine
2,000 or less £33.51
More than 2,000 £42.59

Other engines
1,400 or less £36.04
1,401 to 2,000 £45.72
More than 2,000 £67.46

9. If fuel is supplied for private motoring free or for less than the amount paid for it, the only way to avoid accounting for VAT using the scale charge is by not reclaiming input tax on any fuel purchased, whether used for business or private motoring, in cars or commercial vehicles. If this method is adopted, the local VAT office must be advised before the start of the period in which it is to take effect. The local VAT office will then treat the decision as remaining in force until told otherwise.

10. If fuel is supplied for private motoring for a charge which equals or exceeds the cost price, output tax is calculated by multiplying the amount charged for the petrol by the VAT fraction. In this case there is no requirement to use the scale charge to account for VAT.

11. Where no private motoring is paid for by the business, the fuel scale charge does not apply. However a taxable person must be able to show this from his business records. This is not possible for many businesses as detailed records need to be maintained recording business and non-business mileage and the cost of all fuel bought.

12. Where road fuel is used in a vehicle other than a motor car (e.g. vans) the normal VAT rules apply. VAT on fuel supplied to a taxable person for use by employees can be treated as input tax and VAT must then be accounted for on private use. If preferred, input tax can be apportioned.

13. From 1 August 1995, if a charge is made to an employee, director or partner for the use of a motor car in respect of which no VAT has been claimed, no VAT is chargeable.

14. No VAT is due if a car, which has been purchased or leased for the purposes of the business, is used for private motoring free of charge, provided that no VAT was claimed on the original purchase. Tax must, however, be accounted for on any private use of a vehicle other than a car. The tax value of the supply is the cost of making the vehicle available; for example depreciation, insurance, repairs etc. If VAT has been claimed on the purchase, acquisition or importation of a car and it is subsequently put to a non business use, a deemed supply of the car, on which VAT is due, arises. Anti-avoidance legislation prevents supplies of cars below open market value to employees, connected persons and employees of connected persons being treated as business use.





What are the requirements of a VAT invoice?                                                                           back to the top


1. When a registered person makes a standard-rated supply to another taxable person, or makes a supply of goods or services other than an exempt supply to a person in another EU Member State, or receives a payment on account from a person in another Member State, he should issue a tax invoice to that person within 30 days of the time the supply is treated as taking place.

2. A tax invoice is required to show:

a) an identifying number;
b) the time of the supply and date of issue of the document;
c) the name, address, and registration number of the supplier;
d) the name and address of the person to whom the goods or services are supplied;
e) the type of supply by reference to certain specified categories, e.g. sale, hire purchase, lease etc.;
f) a description sufficient to identify the goods or services supplied;

g) for each description the quantity of the goods or extent of the services, the rate of tax and amount payable, excluding tax, expressed in sterling;
h) the gross amount payable, excluding tax, expressed in sterling;
i) the rate of any cash discount offered;
j) each rate of tax chargeable and the amount of tax chargeable, expressed in sterling, at each rate; and
k) the total amount of tax chargeable expressed in sterling.

3. When a tax invoice is issued to a person in another Member State, the prefix "GB" before the registration number and the registration number, including prefix, of the customer (if registered) must also be included.

4. A registered taxable person who is a retailer is not required to provide a tax invoice unless he is requested to do so by a customer who is a taxable person. In the event of such a request and provided that the value of the supply does not exceed £100, and the supply is not to a person in another Member State, the tax invoice need only contain the following particulars:

a) the name, address and registration number of the retailer;
b) the time of supply;
c) a description sufficient to identify the goods or services supplied;
d) the total amount payable including tax; and
e) the rate of tax in force at the time of the supply.

Zero-rated and exempt supplies must not be included in less detailed tax invoices. Copies of these invoices need not be kept by the supplier.

5. Where the VAT-inclusive amount of a supply of petrol and diesel oil is more than £100, the particulars required on a full tax invoice are modified so that the vehicle registration and not the customer's name and address is shown on the tax invoice. The type of supply and number of gallons/litres need not be shown. Where the VAT-inclusive amount is £100 or less, a less detailed tax invoice may be issued per (4) above.

6. Invoices are not required to support claims for input tax in respect of telephone calls, purchases through coin operated machines and car park charges if the cost does not exceed £25.

7. Invoices can be made out to employees for subsistence expenses and petrol.


What VAT is not recoverable by a VAT registered person or business?                                         back to the top


1. A taxable person is entitled, at the end of each tax period, to credit for input tax incurred on supplies of goods and services made to him and tax paid on the importation or acquisition of goods, provided the goods or services are used or to be used for the purposes of his business in making taxable supplies.

2. Any claim for input tax must be supported by a valid tax invoice or equivalent document unless Customs direct otherwise. A pro forma invoice will not suffice.

3. However, notwithstanding the general rules above, input tax relating to certain items is specifically non-deductible. The main ones to note are:

a) certain motor cars and accessories;
b) business entertainment;
c) purchases under one of the second-hand schemes;
d) domestic accommodation provided to directors or proprietors

4. A person making only exempt supplies cannot register for VAT purposes and cannot recover any of the VAT on his expenditure. A person who makes both taxable and exempt supplies can recover only part of the input tax and is known as a partly exempt person. The partial exemption regulations govern the recovery of input tax by such a person.

5. Under the partial exemption regulations that came into effect on 1 April 1992, deductible input tax has to be calculated as follows. The taxpayer has to:

a) identify all the importations and purchases of goods and services;
b) input tax on goods and services exclusively used or to be used in making taxable supplies is deductible in full;
c) input tax on goods or services exclusively used or to be used in making exempt supplies or in undertaking any non-taxable activity is not deductible at all; and
d) the remaining input tax (normally called the residual input tax or the "pot") is deductible in the same proportion as the value of taxable supplies bears to the value of total supplies made.

6. Input tax falling under paragraph (b) or (c) above should be matters of fact, although it should be borne in mind that transactions can sometimes be restructured to ensure that the input tax incurred is not exempt input tax. The requirement under paragraph (d) above is the standard partial exemption method. Other methods, known as special methods, can be used with Customs' approval.

7. Customs have powers to direct a person to apportion his residual input tax in a particular way. This power can, however, only be exercised in respect of the future and is rarely used in practice. For practical purposes, each person can, subject to Customs' written approval, decide for himself how his residual input tax is to be divided into deductible and non-deductible elements if the standard method would be distortive.

8. The only criteria to be satisfied are:

a) it will enable no more tax to be reclaimed in any tax year than is incurred in making taxable supplies; and
b) its accuracy can be readily checked by VAT control officers.

9. The apportionment of residual input tax can be carried out in a variety of ways, e.g. using ratios of floor areas, staff numbers, input tax etc. It is important to avoid using complicated methods for apportioning residual input tax. Such methods lead to errors which can attract penalties and interest charges. Once a decision is taken about the method of apportionment to be used, a business must get Customs' written approval to use it.

10. With effect from the beginning of tax years starting on or after 1 December 1994, if the amount of exempt input tax (i.e. that input tax used directly or indirectly in the making of exempt supplies):

a) does not exceed £625 per month on average (£7,500 per annum); and
b) is no more than 50% of total input tax;

then that tax may be recovered in full. This is known as the de minimis rule.


What is the background for a VAT inspection?                                                                         back to the top


1. Customs attempt to visit every taxable person within three years of registration. After that, the interval between visits depends on the size and the complexity of the business. VAT registered entities that send in late, incorrect or seemingly inconsistent returns are visited more frequently.

2. Visits are normally by appointment during normal business hours with reasonable notice. Customs do, however, have the power to enter and inspect premises used in connection with the carrying on of a business at any reasonable time. A person acting under the authority of Customs has the power to demand the production of any document concerned with the supply of goods or services in the course of the business, from any person connected with the business. This includes any profit and loss account or balance sheet relating to the business. He may take copies of extracts or copies of any documents and may, at a reasonable time and for a reasonable period, remove any document, giving a receipt if requested.

3. The main reason for an assurance visit is to ensure that the full amount of tax due has properly been accounted for at the correct time, but the officer might also discuss various aspects of the business, examine business records and activities, discuss any VAT problems and point out any errors found.

4. An assurance visit is not a clearance for tax purposes and cannot usually be relied upon if errors then existing are subsequently detected. When errors do come to light as a result of a visit, a notice of assessment or a notice of overdeclaration will be sent to the trader. A trader can act through a professional advisor in any subsequent negotiations with Customs and if the parties are unable to agree, there is a right of appeal to a VAT Tribunal.

5. Increasingly, Customs are using more risk profiling when deciding which companies to visit. This targeting extends further to only checking one or two specific perceived risk areas when the visit is made. It is likely, therefore, that future visits will be of shorter duration than traditional control visits and the scope of the visit will be much reduced.

6. All officers carry official identity cards which must be shown if challenged. They should carry out their duties in a reasonable manner and should explain their actions if these appear unreasonable. Any complaint should be made to the Collector in charge of the local VAT office, or if appropriate, to an independent VAT Tribunal.

7. A taxable person will be subject to an in-depth investigation only where there is reason to suspect that deliberate tax evasion has taken place.

8. It is important that, where Customs allege that errors have arisen during a VAT inspection, you should only agree the facts with them but not admit any liability. If you are at all uncertain about your response you should seek immediate professional advice. The officer should also be asked to put his findings in writing prior to any assessment being raised and it is important that immediately after the visit you make a brief written record of the events.