How Does VAT Work

Charging and Claiming VAT

You charge VAT on the sale of goods and services classified as being subject to VAT - This is known as the output tax. 

You reclaim VAT charged to you by suppliers - This is known as the input tax. The net balance is remitted to HMRC every three months. If input tax is greater than output tax, HMRC pays the net amount to you instead.

You have to account for all VAT transactions regardless of whether or not the cash for them has been collected / paid.

VAT and Fixed Assets

Output tax is not restricted to that added to the sale of goods and services. 

The sale of fixed assets also requires you to add VAT to such transactions. That is because you will have reclaimed that VAT on them as input tax in the quarter you had acquired them.

VAT and Company Cars

One notable exception when it comes to input and output tax is company cars. The VAT on these is not deductible as input tax.

As a result, because the VAT has not been reclaimed, it is not required to be added to transactions when company cars are sold. Note this separate condition only relates to cars, it does not apply to commercial vehicles.

How to Pay VAT

Value added tax is payable quarterly. You are allowed one month's grace to both submit the return and pay it.

For example, if a VAT quarter starts at the beginning of January, the VAT return and payment must be made by no later than the end of April. All returns are required to be completed online.

Tax Points

The date of supply represents the tax point.

This is important because that identifies the VAT quarter that the transaction belongs to. In practice. this is usually the date the invoice was issued.

VAT and Bad Debts

If an account receivable has failed to pay, the amount due including VAT will be transferred to the bad debts account to be written off against profits..

However once that has been done and once the debt becomes unpaid for six months beyond the date upon which it was originally payable, you are entitled to reclaim the VAT that was charged in it as input tax.

Figurewizard and VAT

When producing profit and loss and cashflow forecasts using Figurewiard, you simply enter all values exclding VAT, with the exception of the purchase and sale of company cars which are entered including VAT.

Our system automatically runs the forecast VAT account including quarterly payments to or receipts from HMRC with no intervention called for from you.

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