Assignment on Indirecxt Tax (pdf)

INDIRECT TAX

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Understanding of VAT regulations..............................................................................................1
1.1 Identification of sources of information on VAT.................................................................1
1.2 Explanation on interaction of organisation with relevant government agency.....................1
1.3 VAT registration requirements.............................................................................................2
1.4 The information that must be included in business documentation of VAT registered
business.......................................................................................................................................2
1.5 Explanation of following VAT schemes...............................................................................3
1.6 Maintaining an updated knowledge of changes in codes, regulations and rules in
legislation....................................................................................................................................4
2. Complete VAT return in prescribed time limit............................................................................4
2.1 Extracting relevant data for a specific period from accounting period.................................4
2.2 Calculating relevant inputs and output using VAT classifications.......................................4
2.3 Calculating VAT due to, from the relevant tax authorities...................................................5
2.4 Completing and submitting VAT return and other payment within prescribed time limit. .6
3. Understanding VAT penalties and adjustments for errors...........................................................7
3.1 Implications and penalties for an organisation from non compliance of VAT regulations. .7
3.2 Adjustments and declarations for errors and omissions in previous VAT periods..............7
4. Communicating VAT information...............................................................................................8
4.1 Informing managers about the effect VAT payment cash flow and financial forecasts......8
4.2 Effect of change in VAT legislation on organisation's recording system.............................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Indirect tax is the type of tax which is collected by intermediary such as retail stores from
consumers who bears the ultimate economic burden of tax. In this report, explanation will be
developed on indirect tax that is VAT (value-added tax). Its sources of information and
requirements for registration will be discussed. Further, in this assessment, different schemes of
VAT will be discussed which required in reporting. Penalties and adjustments to rectify VAT
error will be discussed in context of organisation. Lastly, in this report information will be
provided on impact of VAT payment on organisation's cash flow and financial forecasting.
1. Understanding of VAT regulations
1.1 Identification of sources of information on VAT
It is the type of consumption based tax which added to goods and services and to
product's sales and price (Zu, 2018). Throughout the production process of company it gets
charged. VAT is an invoice-based tax which charge by each seller in their product chain to
buyer's invoice. It is also known as destination based tax because tax rate is charged according to
the location of consumer. It is first implemented by two countries that is France and Germany
which is in the form of general consumption tax.
Initially VAT only charged by large type of businesses but with the passage of time it
gets extended in every business sector. Therefore, as of 2018, approximately 193 countries have
applied this tax including OECD member of united states. For calculating VAT, there are two
such methods which includes credit-invoice and invoice-based method. Credit-invoice method is
used to record sales transaction of business and invoice-based method is most widely used and
among in all the countries of the world. VAT amount is decided by states in percentage form and
will charge on top services of business (FERREIRA and Veiga, 2016).
1.2 Explanation on interaction of organisation with relevant government agency
Every type of business who engage in providing taxable goods and services and whose
turnover exceeds £85000 must have to registered themselves for VAT. Business whose turnover
is less than the threshold limit may also apply under voluntary registration of VAT. Currently its
default rate is 20% which may reduced from 5% to 0%. It is also known as one of the key
consideration for every size of business.
Organisation who have registered for VAT must have to reclaim for any amount which
they have paid for business related goods and services. Businesses must have to pay amount of
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VAT which they have charged on their goods and services (Adam and Roantree, 2015). The
deadline which set by government agency that is HM revenue and commission for filling VAT
return is first calendar month or 7 days after the end of accounting period. Companies which are
engaged in following conditions also have to registered under VAT.
 Company have provided an impression of large business.
 Have build trust of company
After successful registration, entities are liable towards government agency in order to charge tax
on their goods and services and pay it them.
1.3 VAT registration requirements
Companies must have to registered for VAT when their turnover exceed £85000 with the
period of next 30 days. If total turnover of company in last 12 months exceed thresholds limit
then also business have to compulsory register under VAT. Entities and suppliers also have to
registered under VAT if they sell goods and services which are exempt but buys for more than
£85000 to use in business. Threshold limit was based on taxable turnover of VAT. If goods have
been received from EU which is of more than £83000, then also entity have to registered under
VAT.
Businesses in which goods are exempt did not have to registered themselves under VAT.
Distance selling goods will also take place for business which have registered for selling goods
to country other than EU (Harju, Matikka and Rauhanen, 2015). Companies which do not have
any physical presence but they are doing business in market than they have to provide complete
details and market price of such businesses. Foreign businesses which is not established in UK
must also have to submit their VAT registration application to HMRC under form VAT1. In
order to registration, taxpayer needs to provide details including unique tax references numbers.
For every type of businesses, different VAT rates have been provided by the government agency.
1.4 The information that must be included in business documentation of VAT registered business
A VAT registered business entity must fulfil all the requirements regarding the
documentation. A business organisation must keep records and detailed information of VAT of
about 6 years or 10 years in special cases when company using VAT MOSS service. The
information can be record digitally or manually totally on the preferences of the business entity.
Invoices are the main important part of obtaining records related to VAT. It is the legal
evidence and source of proof for the tax authority that company have adequately and sufficiently
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complied the VAT rules. It is also a proof that company is paying correct tax payment to HMRC.
If any invoice is considered as bad debt then, company has to maintain a separate VAT bad debt
account that have the necessary information regarding amount of VAT charged, sales etc.
A complete summary of the standard VAT account has to be maintained by a VAT
registered firm. This account consist of total VAT sales, purchases, the amount of tax that
company is owing to HMRC, the amount of input credit that can be claimed for refund. If the
entity is registered under flat rate scheme, then it needs to apply required provisions (VAT record
keeping, 2019).
1.5 Explanation of following VAT schemes
Annual Accounting:
This is the scheme which helps small businesses by allowing flexibility for submitting
only one VAT return annually. But during particular year, taxpayer have to pay instalments
which is developed by calculating estimated liability in year. With this scheme, paper work of
cash flow and budgeting will get reduced to a taxpayer. Instalment have to paid by registered
person so that at the end of year burden of invoices will not get develop upon them.
Cash Accounting:
It is a method which developed by government agency in order to report with VAT which
is on the basis of payment made or received (Lamantia and Pezzino, 2016). In this method,
principles of cash accounting is followed with the assumption that income will record when it
gets received and expenses are recorded when they get paid.
Flat Rate Scheme:
It is a method which provide a way of paying VAT to businesses whereby they only pays
fixed percentage of their annual turnover (Liu and Lockwood, 2016). This scheme designed to
help taxpayer regarding VAT return process for small types of businesses. With this scheme,
organisation's will able to keep difference between VAT which charged upon goods and services
and amount paid to HMRC.
Standard scheme:
This is also a method of reporting VAT where it is recorded and paid with the help of
invoices which are issued (Standard VAT accounting scheme- What is the standard VAT
Accounting Scheme, 2019). With this method, businesses pays VAT return four times in a year
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and due return will get repaid on quarterly basis. Taxpayer will pay to HMRC when amount of
sales is higher than amount of cost.
1.6 Maintaining an updated knowledge of changes in codes, regulations and rules in legislation
Up to date knowledge about the different and new regulations, codes and rules helps the
company in adhering to the VAT legislation properly. Central tax authority of UK HMRC
formulates such regulations and protocol for bringing the uniformity amongst business entities in
collecting tax from various customers. Appropriate knowledge of VAT rules and regulations in
customers helps them in avoiding any fraudulent act that may be practised by some vendors, as
some of them charges higher VAT from their customers for personal gain (Van Thiel and
Lamensch, 2018).
2. Complete VAT return in prescribed time limit
2.1 Extracting relevant data for a specific period from accounting period
A person has made domestic sales for the year ending on 31st December 2018 of 600000
(£).It made purchases of different materials for the operations in the company such as calendars
and diaries for office use (£) 500, food and drinks for the office consumption 250 (£)., electrical
goods. It also purchased sanitary items 200 (£), education fees of children 3000(£). It purchased
uniform of its for worth 300 (£). It imported raw materials from America worth 120000 (£). It
exported its goods of worth 50000 (£).
The person needs to calculate his output and input tax for identifying the amount of tax
payable or for claiming the input tax credit in case the input exceeds the output tax.
2.2 Calculating relevant inputs and output using VAT classifications
VAT
Classifications
Description and calculations
Standard supplies  Standard rate on sale of most of the goods and services is 20%.
Therefore, the sales of the person will be charged at this rate. So, the
calculation will be like this : 600000*20% = 120000 Output Tax
payable
 It purchased calenders & diaries, food and drinks for office
consumption on which he has paid VAT of 20%.
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(250+500 = 750*20% = 150 Input tax)
Exempt supplies  These are those goods and services that are not subject to VAT.
Hence, no tax no input credit.
 Education fees paid by person for children is exempted under the
VAT act of UK.
Zero rated
supplies
 Zero rated supplies means that goods and services are taxable in the
eyes of VAT act but the rate of these supplies prescribed is nil that is
0% (VAT rates on different goods and services. 2019).
 The person purchased uniforms for its staff of his office which are
mentioned under the category of zero rated supplies. He paid 0%
VAT on these purchases and hence will not be able to claim any
input credit.
Imports  The goods and services that are brought or purchased from outside
the country is termed as imports. The VT is chargeable on such
purchase or sale at the rate mentioned in VAT act that is 10%.
 He imported raw materials on which he paid tax :
120000*10%= 12000 (Input tax)
Exports  The goods and services that are being sold to places outside the
country is recognised as exports. The exports are chargeable at the
rate of 20% in VAT act of UK.
 In the question, person made exports of worth 50000 which is
taxable at the rate of 20%.
50000*20%= 10000 (Output tax)
Reduced rated
supplies
 These are those goods which are chargeable at reduced or lesser rate
as compared to standard rate of 20%.
 There was a purchase of sanitary materials by the person which are
taxable at the rate of 5%. Hence, the input tax will be calculated as:
200*5%= 10 (Input tax)
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2.3 Calculating VAT due to, from the relevant tax authorities
The VAT is calculated by subtracting input tax from output tax.
Particulars Amount
(£)
Domestic sales: 120000
Exports : 10000
Total output tax 1,30,000
Food&drinks, calender& diaries : 150
Education fees: Exempt
Uniforms: 0
Imports : 10000
Sanitary materials: 10
Total input tax 10,160
VAT payable 1,19,840
2.4 Completing and submitting VAT return and other payment within prescribed time limit
A complete VAT return must have the following documents when filing it with the
central authority of UK that is HMRC. BIR Form No. 2307, approved tax debit memo, approved
tax credit certificate and authorization letter if the VAT return is filed by some appointed or
authorised person on behalf of its client.
The procedure of filing return is as follows;
 The process starts with filling BIR Form No. 2550M, Q, for monthly and quarterly
declaring the VAT tax.
 The payment must point initiated towards the authorised agent bank of HMRC along with
the required monthly declaration form.
 If the return does not involve any payment, then company or other registered person must
file the declaration form along with the necessary attachments with bodies such as City
Treasure of Municipality, Large Taxpayer Assistance Division, collection agent etc.
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3. Understanding VAT penalties and adjustments for errors
3.1 Implications and penalties for an organisation from non compliance of VAT regulations
VAT is a value added tax which is levied on sale of products and services in United
Kingdom. Standard rate is 20%. It is an indirect tax as the amount is collected by organisations
which is to be deposited in Government's account. All organisations need to comply to rules and
regulations for avoiding huge penalties and government intervention in operations. The
following are some penalties :
 Company with more than 85000 (£) needs to register itself for charging and paying VAT
to UK government. Late registration attracts penalty of 5% of tax unpaid in case
registration is 9 months late, 10% for 9 moths to 18 months and 15% for more than 18
months.
 If default is made in filing return of VAT on due date, company receives Surcharge
Liability notice for missing of return. Organisations can file return within stipulated
period for avoiding financial penalty.
 Late payment of VAT amount to HMRC will attract 2% surcharge on VAT amount due.
The surcharge keeps on increasing to 5%, 10%, 15% on VAT due for the time such
default continues in successive assessment years.
3.2 Adjustments and declarations for errors and omissions in previous VAT periods
Organisations have some reliefs granted by taxation authority in UK in case they make
any error or omission in already filed VAT returns. Below are some adjustments :
 A company can report threshold for net errors of more than 10000 (£). The errors can be
only between 10000 to 50000 (£) for which adjustment can be made in next assessment
year. Adding net value in box 1 for amount of tax due to HMRC and adding box 4 for
amount due to company. Firm has to satisfy other necessary conditions such as keeping
all records of errors and inaccurate amount, keeping the summary of how errors occurred
and when these were discovered. Organisation needs to include incorrect amount in their
standard VAT account (Schippers, 2017).
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 Errors which are made before 4 years or which does not come under reporting threshold
limit needs to be notified by companies to HMRC. This notification can be sent to
HMRC 's VAT correction team or firm can file form VAT652.
4. Communicating VAT information
4.1 Informing managers about the effect VAT payment cash flow and financial forecasts
Financial Manager and other concerned managers needs to be well aware of the VAT
legislations and the consequences of it on organisation in the time of non compliance of laws.
Cash flow of the company determines that which activities are generating cash and which
activities are over utilising the cash resources. It helps in identifying liquidity of firm. VAT
payment and its related provisions have great impact on cash flow . It affects businesses in the
sense that manufacturing process and costs have direct relation to VAT as this indirect tax is
levied on manufactured goods and services. Managers needs available of funds for paying this
tax at the time of purchasing supplies, however, credit could be availed by them.
Forecasting of sales, profits and loss must be made by eliminating the vat that a company
is going to charge from its clients. Managers does this for effectively claiming the costs from
authorities without any complexities.
However, cash flow must be inclusive of VAT in company's receipts and payments. This
is because of the fact they this will be actual cash inflow and outflow that will be taking place
and affecting firm's liquidity. Payment of Value added tax to HMRC will be shown as one of the
payment in forecasted cash flow.
4.2 Effect of change in VAT legislation on organisation's recording system
VAT as discussed above, do not get included in the income and expenditure account of a
company. So any change in rates of VAT, or any other legislations would not affect firm's
system of recording income and expenditure. This is because a firm only acts as a registered
person collecting tax from customers on behalf of UK government (Nechaev and Antipina,
2016).
For example, a recent change in VAT legislation of digitalising the VAT for keeping
records digitally, applying compatible making digital tax for VAT software, for filing returns for
period starting from APRIL 1, 2019. The notification included information pack for legal
advisors, software developers, members of legal bodies, companies, customers etc.
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The effect of such changes would be that companies would not be able to store data
manually. Firms' will have to digital store its records in functional compatible software as
described in government's notification. The software contains spreadsheets and other supporting
programs which can be directly be connected to HMRC through connecting interface known as
Application Programming Interface (API) (Miller and Pope, 2016)
VAT is shown as a separate liability head in the cooks of accounts of company. This is
eventually seen in the balance sheet that shows firm's position on a particular date.
Change in VAT legislations such as change in standard rate, special rate etc. will have
effect on recording system of a firm. Company needs to issue invoices of all its sales for
claiming VAT refund. Cash book and daily book have separate column of VAT that does not get
processed through sales and purchase ledger.
CONCLUSION
From the above project report, it can be summarised that sale of all manufactured goods
and services are prone to an indirect tax which is VAT. There must be proper compliance of
VAT regulations for avoiding any penalties relating to registration, default in payment, wrong
filling of returns etc. It is a legal requirement of all the firms whose annual turnover exceeds
85000 pounds to get registered by VAT authority for collecting VAT from its sales on the behalf
of UK government. The report also concluded that late registration attracts the penalty of 5% of
tax due after receiving the legal notice by the HMRC. The penalty keeps on rising till the default
continues.
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REFERENCES
Books and Journals
Adam, S. and Roantree, B., 2015. UK tax policy 2010–15: An assessment. Fiscal Studies. 36(3).
pp.349-373.
FERREIRA, R.M.Z. and Veiga, F., 2016. The Revolution of the Tax System based on Flat
Tax. Athens Journal of Law. pp.253-268.
Harju, J., Matikka, T. and Rauhanen, T., 2015, March. The effect of VAT threshold on the
behavior of small businesses: Evidence and implications. In Conference Journal: CESifo
Area Conferences on Public Sector Economics.
Lamantia, F. and Pezzino, M., 2016. Tax evasion, intrinsic motivation, and the evolutionary
effect of a flat rate.
Liu, L. and Lockwood, B., 2016. VAT notches, voluntary registration and bunching: Theory and
UK evidence.
Miller, H. and Pope, T., 2016. The changing composition of UK tax revenues. Institute for
Fiscal Studies, Briefing Note. 26.
Nechaev, A. and Antipina, O., 2016. Analysis of the Impact of Taxation of Business Entities on
the Innovative Development of the Country. European Research Studies. 19(1). p.71.
Schippers, M., 2017. Brexit: Consequences for trade, VAT and customs. EC Tax Review.26(4).
pp.220-225.
Van Thiel, S. and Lamensch, M., 2018. Possible Consequences of Brexit in the Area of Indirect
Taxation: Why Prime Minister May Talks about a Hard Brexit, but Really Needs a Soft
Brexit!. World Tax Journal: WTJ. 10(1). pp.3-41.
Zu, Y., 2018. VAT/GST Thresholds and Small Businesses: Where to Draw the Line?.
Online
Standard VAT accounting scheme- What is the standard VAT Accounting Scheme. 2019.
[Online]. Available through <https://debitoor.com/dictionary/standard-vat-accounting-
scheme>
VAT record keeping. 2019. [Online] . Available through <https://www.gov.uk/vat-record-
keeping/vat-account>
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VAT rates on different goods and services. 2019. [Online] . Available through
<https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services>
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