How to Calculate VAT
VAT – UK Sales & Purchases
If you are engaged in the sale of goods or services and your yearly sales turnover either is over £60.000, you are required by law to register for VAT (value added tax). You may also voluntarily register if you believe that you annual sales turnover is likely to be greater than the £60.000 threshold.
The rate of VAT is generally 17.5% although there are several categories of trade which are zero rated such as foodstuff, books, children’s and clothing. However even if all of your sales are made with products which are zero rated, you will still have to register if your annual sales exceed £60.000.You add the tax to your sales billings to your clients, so you are in effect acting as a tax collector on behalf of the government.
Your suppliers bill you for VAT in their turn and this can be reclaimed. At the end of every three months you account for the tax by means of a VAT return which shows the tax you have charged less the tax that has been charged to you. The balance has then to be paid not later than one month after the end of the quarter. Filing your return can be done over the Internet.
You should know that the VAT on entertainment expenses and the purchase of company cars are exceptions in that in these cases it cannot be reclaimed.
Penalties for Being Late
There are financial penalties for late filing of a VAT return and / or payment of the tax. These are raised automatically and will mount up until all of the tax and the penalties charged are settled. Continued late payment can also result in interest being charged on what is due, including the penalties. Note that HM Revenue & Customs will not take account of the fact that your clients who have been charged the tax by you have not yet paid you; you become responsible for its payment on the due date from the moment you issue your invoice.
You should exercise great caution in accounting for VAT. The penalties can be severe and will surely become so if you are persistently late in making your return or paying up on time. You should therefore ring fence VAT revenue in your books and not use it for supporting your business. A separate bank account credited weekly or monthly can be a good idea. This will ensure that when the tax becomes due you will have the cash to pay it.
This is a brief introduction to the VAT rules and is only intended as a guide. Once you have established what and to whom you are going to be selling your products, whether goods or services, you should talk things over with your accountant.
Ignorance of the rules is not a defence.
Exports are generally exempt from VAT but there are some possible exceptions: The rules governing imports are more complex however. These are touched on below:
Exports and VAT
The export of goods and services is largely VAT exempt; this means that you do not have to charge VAT to your clients. There are however certain procedures which have to be observed in order for such business to qualify. Because the rules can sometimes be complicated it is always advisable to check with your accountant; freight forwarder or Customs direct beforehand but the following gives a general guide.
Exports to a non EC country – VAT exempt
The first thing to note is that there is a time limit if you want to invoice the goods without having to charge VAT. The requirement is that they must be shipped within three months of you receiving the order for them. If you meet this requirement then you are free to invoice them as such. You must however maintain records of all individual transactions for inspection by Customs including the following:
A copy of the customer’s order
A proof of shipment (bill of lading - trucking receipt - airway bill)
A copy of your invoice
Exports to an EC country – VAT exempt A copy of the customer’s order A proof of delivery (bill of lading - trucking receipt - airway bill) A copy of your invoice (showing the customer’s local VAT registration number)
Export delivery charges – VAT exempt VAT on imports: VAT on imports from non-EC countries: Note however that if you are importing goods which are VAT exempt in the UK, (books, children’s’ clothing etc), VAT would not then be charged. VAT on imports from the EC: You can obtain more detailed information from HMRC by clicking on the link below:
There is no time limit on orders for delivery to export customers who are located within the EC. If you wish to invoice the goods without having to charge VAT however you must include your customer’s local VAT registration number on your invoice. Once again you must maintain records of all individual transactions for inspection by Customs including the following:
Regardless of whether you are exporting goods within or beyond the EC you are able to charge your customers for delivery without having to charge VAT providing the delivery charge you intend to make is clearly stated on your customer’s original order to you. This is classified by Customs as a single supply transaction. However if the original order does not show a delivery charge and you subsequently agree to pay for the delivery, this would be classified by Customs as a separate supply transaction and you would be liable to remit the VAT on the delivery charge to customs whether or not you have charged it to your client.
The rules governing VAT on imports are quite simple: If the goods are coming directly to you from a non-EC country you have to pay VAT on importation; if they are coming to you from within the EC you don’t. There are a few issues you should bear in mind though as follows.
VAT is charged on the landed cost of the goods. The landed cost is defined as the cost of the goods themselves, plus freight charges and import duty. The official position is that the tax must be paid to Customs before the goods can be released, but in in fact a procedure known as ‘deferment; is often allowed. This is based on a bank guarantee to customs which means that payment of the duty is deferred for exactly one month. Deferment can also be a service offered by your shipping agent, who will pay the duty themselves, then bill you for it in turn. Because this practice is widespread, Figurewizard always assumes that deferment is in force and so payment of VAT on non-EC imports is deemed to take place a month after they have arrived in the UK.
There is no VAT payable on importation here, even if the goods originate from outside the EC. For example, if you are importing say pens originally manufactured in China from a German supplier; that supplier will already have paid duty and their equivalent of VAT when they imported them into Germany. This means that they now have the status of goods of EC origin; hence no VAT will have to paid by you.
Summary
VAT administration can be complex, more so than any other tax, so you must deal with it with great care. Your best bet if you are not sure about something is to consult your accountant or if you prefer, HM Customs & Revenue themselves. Where you have questions about duty or VAT on imports or exports you cannot do better than to turn to your shipping agent for advice. What matters here most of all though is that you seek any such advice before you get started. If you break the rules, even inadvertently, you will still have to account for the tax.
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