VAT Filing and Tax Compliance for Businesses

This assignment provides a detailed analysis of VAT filing and tax compliance for businesses. It emphasizes the significance of timely VAT Return submission, accurate calculations, and adherence to HMRC regulations. The guide also highlights the benefits of proper tax filing, including avoiding errors and omissions, smooth functioning, and growth of the company. The assignment is based on various studies and research papers that demonstrate the impact of indirect taxes on income distribution and economic growth.

INDIRECT TAX

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1. Identification of sources of VAT information.....................................................................1
1.2. Interaction of organisations with relevant government agency...........................................1
1.3. VAT Registration Requirements.........................................................................................2
1.4. Identification of information included on business documentation of VAT registered
businesses....................................................................................................................................3
1.5. Requirements and Frequency of reporting VAT schemes...................................................4
1.6. Maintaining up-to-date knowledge of changes to codes of practice, regulation or
legislation....................................................................................................................................4
TASK 2............................................................................................................................................5
2.1 Extract relevant data for a specific period from the accounting system...............................5
2.2 Calculation of inputs and outputs using VAT classifications...............................................5
2.3 Calculation of VAT due to, or from the relevant tax authority.............................................6
2.4. VAT return and associated payment within the statutory time limits..................................7
TASK 3............................................................................................................................................8
3.1 Implications and Penalties for an organisation Resulting from Failure to Abide by VAT
Regulations..................................................................................................................................8
3.2. Adjustments and Declarations for Errors or Omissions Identified in Previous VAT
Periods.........................................................................................................................................9
TASK 4..........................................................................................................................................10
4.1. Informing Managers about the Impact of VAT Payment on an organisation's Cash Flows
and Financial Forecasts.............................................................................................................10
4.2. Advising People about Changes in VAT Legislation's Effect on Organisation's Record
Keeping System........................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERNCES.................................................................................................................................12

INTRODUCTION
Indirect Tax refers to the amount collected by an entity present in the supply chain, for
instance, a producer or retailer, which in turns get paid to government (Wang, Caminada and
Goudswaard, 2012). This amount is paid by customers on purchase of the company's offerings.
The most prominent example of indirect tax is the Value Added Tax.. The report covers a
detailed understanding of VAT regulations and calculation of VAT returns in a timely and
accurate way. It also includes a detailed discussion of VAT penalties and various adjustments for
previous errors and communication of VAT information within the organisation.
TASK 1
1.1. Identification of sources of VAT information
Value Added Tax is a form of indirect tax which is placed on a company's offerings
whenever a specific value is added at stages of supply chain, i.e., from production to ultimate
sales of the product. Within the UK government, there are various sources which provide
effective information on VAT.
One such source of information is Value Added Tax Act, 1994. This act within the
country is related with VAT and provides effective information on this aspect which provides
effective information on the same. In addition to this, there are various provisions that are
covered under this act which are required by companies to comply with to effectively manage
VAT within their organisation.
Another source of information is government websites, which consists of online portals
where individuals as well as organisations could collect information related to VAT. These sites
provide information about the changes that take place each year in the acts associated with VAT,
which are necessary for the organisation be updated with (Sterner, 2012).
Another source by which organisations could get effective VAT information are the
journals that are issued by government and various taxation agencies which could provide the
organisation with the data and information on how the firm could effectively manage, calculate,
collect and pay VAT to the government.
1.2. Interaction of organisations with relevant government agency
It is imperative for any organisation to effectively interact with various government
agencies to gain a better understanding on how to develop a legal framework of managing and

filing indirect taxes. One such government organisation is Her Majesty's Revenue and Customs
which is a department within the UK which undertakes collection of taxes as well as
administration of various other regulatory regimes which also includes National Minimum
Wage.
There are various ways in which companies could interact with this organisation
regarding indirect taxes. This entity has its own website which enlists information about various
taxes and systems that are required by companies to perform ethical work frame regarding the
taxation system. The company could use this website to interact with this organisation regarding
various queries associated with filing of taxes. In addition to this, the company has postal service
too which allows the firms to interact the officials of this agency via formal letters where the
company could receive formal notices from the agencies regarding information associated with
their taxation (Pradhan and Ghosh, 2012).
Within the website there are details of the operative timings of the company throughout
the week where the agency is functional and open for interaction. Such information could be
quite useful for organisation so that they could approach the agency within in an appropriate and
timely manner.
1.3. VAT Registration Requirements
For any functional organisation, it is imperative that it be acquainted with various
requirements that are necessary for VAT registration. These requirements are necessary to be
complied by the organisation for appropriate filing of VAT returns. Within UK, it is crucial for
companies to register its business with HMRC for VAT in case the VAT taxable turnover of the
company gets more than £85,000. It is required by the firm to charge right amount of VAT and
effectively submit their VAT returns. In addition to this it is needed by the company to keep their
VAT records as well as VAT account (Penu, 2016).
There are two types of methods which are required to be considered by companies for
their VAT registration. These methods are as follows: Compulsory Registration: It is essential and compulsory for firms to register for VAT if
the firm expects its VAT taxable turnover to be higher than £85,000 in a period of next
30 days or if the VAT taxable turnover be more than the this amount over the past 12
months. It is also required for the firm to register even if it sells goods that are exempted

from VAT but buy commodities more than £85,000 from registered suppliers for
business use.
 Voluntary Registration: An organisations could register for VAT if its business turnover
is less than £85,000. However, it is required for the company to pay HMRC any VAT
amount which is owed to it from the date the firm is registered (Nie and Yue, 2012).
Companies, after receiving its VAT number from HMRC, could sign up for the online
account on its website for submitting VAT returns. In case any company fails to register online,
the firm is required to register online by using various forms which are listed below:
 Form VAT1A in case the firm is an EU business and indulged in distance selling to the
UK.
 Form VAT1B in case it import goods that more than £85,000 form any other EU country.
 Form VAT1C in case the company disposes assets whose 8th and 13th Directive refunds
are claimed.
1.4. Identification of information included on business documentation of VAT registered
businesses
It is quite imperative that firms include effective information on its business
documentation for an appropriate management of VAT within the company. It is imperative for
firms that effective invoices are produced which are considered as the most prominent business
documentation for VAT registration (Karagöz, 2013). There are various information that could
be included in these invoices which are mentioned below:
 One imperative information is the date on which the invoice was issued.
 It also must include unique sequential number which is quite effective for conducting and
managing the sales.
 It must also full name and address of the supplier as well as the customers. In addition, it
must also include the registration number of supplier as well.
 The invoice must involve the nature and quantity of the supplied goods.
 It also must include unit price exclusive of VAT and breakdown of VAT rate.
 It also involves the total amount of VAT payable.
1.5. Requirements and Frequency of reporting VAT schemes
VAT scheme refers to the VAT amount that is paid by business or is claimed back from
HMRC which is the difference between the VAT charged from customers and VAT paid by the

business for its purchases. These schemes effectively aid the business to enhance their cash flow
system within the company. There are various schemes that could be used by companies which
are as follows: Annual Accounting: This scheme would allow firms to submit a single VAT return
annually. Throughout the year, companies are required to pay instalments which is based
on its estimated liability with balancing payment due along with the return. Firms could
apply for this scheme in case it expects its taxable supplies to stay below £1.35M in
following 12 months (VAT Annual Accounting Scheme, 2019). Cash Accounting: This scheme is one of the methods of VAT reporting where the VAT
is recorded as per the payments received or paid. It requires organisations to pay for its
sales and reclaim VAT on the purchases after payments made to the suppliers. The VAT
taxable turnover of the firm must be £1.35M or less. Flat Rate Scheme: Under this scheme, the tax paid by the firm would be calculated by
multiplication of VAT flat rate by VAT inclusive turnover. All the businesses regarding
of its nature get a discount of 1% in their first year. The firm is required to have VAT
turnover of £150,000 or less to apply for this scheme.
 Standard Scheme: In this VAT reporting method, the VAT is recorded as well as paid as
per the issue of invoices. The company is required to submit the returns quarterly, i.e.,
four times a year. It is required by the firm to pay the difference to HMRC in case the
amount of sales is higher than that of the cost.
1.6. Maintaining up-to-date knowledge of changes to codes of practice, regulation or legislation
Each organisation follows legislations, regulations and codes of practice to effective
operative functions. For an organisation to smoothly conduct its business, it is imperative that the
firm gather up-to-date knowledge in regards with various legislations and regulations that are
provided by government (Joumard, Pisu and Bloch, 2012). It would help organisations in
managing their tax related information in a systematic manner. The changes witnessed in the
regulations aim at reducing the limitations and loopholes of the previous laws. More accurate
practices could be adopted by the firm if it has effective knowledge about these regulations. It
limits the chances of errors and enhance the possibilities of effective business practices such as
appropriate calculation of taxes in accordance with the legal standards.

TASK 2
2.1 Extract relevant data for a specific period from the accounting system
Example 1- VAT's standard rate is currently is 20% within the country.
Mark is undergoing the process of completion of his VAT return for quarter ended 31
March, 2018. the following information is available:
 Sales invoices totalling is £100000 were issued in respect of standard rated sales.
 Standard rated expenses were amounted to £20700.
 On 17th February 2018, Mark purchased machinery worth £23100 inclusive of VAT.
Example 2- Thomas is planning to commence trading in future. He operates an aircraft
and is taking three alternative business types in consideration. These are
 Training, where sales will be standard rated for VAT
 Transport, where sales are planned at Zero rated for VAT
 An air ambulance service, where sales will be exempted for VAT.
For each alternative Thomas sales will be £75000 per month (VAT exclusive) and his
standard rated expenses would be £12500 per month(VAT inclusive).
2.2 Calculation of inputs and outputs using VAT classifications
1. Standard supplies: Example1
Output VAT
Sales (100,000*20%)
£20,000
Input VAT
Expenses (20700*20%) (£4140)
Machinery (23100*20/120) (£3850)
VAT payable £12010
Example 2

In this example Cathy will be required to register for VAT as taxable supplies are made
by her. Output VAT of £15000 (75000*20%) per month will be due and input tax of £2083
(12500*20/120) per month will be receivable.
2. Exempted supplies: Thomas will not permitted to register for VAT taxable supplies will
not be made.
3. Zero -rated supplies: Exemption from registration for VAT could be applied by Thomas
since zero-rated supplies are being made, otherwise he should still register as these are
taxable supplies (Hansen, 2014).
Output VAT will not be due but input VAT of £2083 per month will be recoverable.
4. Exports: VAT is charged on the goods that are used in European Union otherwise no
VAT would be charged. Exported goods could be charged with zero-rated which would
allow businesses to enjoy input credit.
2.3 Calculation of VAT due to, or from the relevant tax authority
Amount due to tax department is that amount which is required to be paid to other
business organisations is higher than the received amount.. To effectively calculate amount of
due from or due to the appropriate authority input and output tax calculations will be done.
 Standard supplies- General applicable rate is 20% on which VAT amount will be
calculated. Mark will be liable to pay £12010 to VAT department which is authorised by
HMRC. In another case Cathy is required to pay an amount of £13500 to the department
as net VAT payable.
 Zero-rated supplies: This means the offerings which are not exempted from tax but rate
with which tax charged remains zero. This aids in taking credit to the business input tax
paid. Thomas is exempted from registration and does not require to pay any output tax to
the government. Input tax receivable is worth £2083.
 Exempted supplies: Registration is not required for supply of commodities and services
which are registered as exempted. So, output VAT will not be payable and no input tax
would be recovered (Fukuyama, 2013).

2.4. VAT return and associated payment within the statutory time limits

TASK 3
3.1 Implications and Penalties for an organisation Resulting from Failure to Abide by VAT
Regulations
The results and penalties which HMRC Department will charge are different for different
types of mistakes made by a company. These can be related to the maintenance of records. firms
must have to keep records of last six years in order to avoid the penalty from HMRC (Ehrhart,
2013). The amount of penalty is £ 500 for breaching this requirement. The amount of penalties
increases as the frequency of the mistakes done increases. For the very first time, £ 5 per day will
be charged, and if the mistake is also occurred earlier than the charge will increase to £ 10 per
day within the period of previous two years, and it is £ 15 in case an organisation is breaching
the same law for more than one time.
It is also important to know that these penalties will not be deducted in already paid
amount of the VAT Return, instead the company has to pay the VAT amount without involving
the Penalised amount in the Return amount (Deb Pal, Pohit and Roy, 2012).
Mostly the penalties are calculated on the basis “PLR” which stands for Potential Lost
Revenue. It is additional amount that is to be paid by the business in b reach of law. It is used for
the calculation of the amount to be charged from a business for the breach of certain law of
VAT. Certain criteria are set by HMRC for different types of errors such as for the careless
errors- the charge will be 30% of PLR, Deliberate Errors- the charge will be 70% of PLR, and
for Deliberate and Concealed Errors- the charge will be 100% of PLR.
In case a firm does not follow the rules and regulations of VAT, it will have to incur these
penalties.
3.2. Adjustments and Declarations for Errors or Omissions Identified in Previous VAT Periods
As HMRC sets up the penalties and implications for the non follow of rules and
regulations related to tax payment, it also provides measures to companies in making over their
mistakes, errors and omissions in their previous records of VAT Return. The best is to self
declare the mistake in any to HMRC before the department finds out it. It will prevent the
business from being effected by their intervention (Dalton, 2013).

If any omissions or errors of equal to or less than £ 10,000 are to be adjusted than they
can be easily rectified by a company by informing to the HMRC Department. But the Deliberate
Errors made by the company must be shown separately. For this, companies have to calculate the
net amount remaining due to HMRC Department and the amount that it has already paid to
HRMC and then payment of remaining amount will settle down the omission.
The adjustment will be done while filing the next Return to HMRC, in case if any amount
is remaining due to HMRC, than it will be recorded in the Box 1 and if any amount has to be
taken back from HMRC than it must be written clearly in Box 4.
TASK 4
4.1. Informing Managers about the Impact of VAT Payment on an organisation's Cash Flows and
Financial Forecasts
The impact depends upon the type and turnover of any business. In order to get tax
advantages the managers of the should hire experts of tax legislations. There are two impacts of
value added tax on the profitability of a firm. The neutrality in the purchase and sales is sue to
the fact that companies register themselves for VAT and get net value of their sales and
purchases made by them (Aasness and Nygård, 2014). Due to this, they get and proper
estimation of their future forecasts regarding the expenses and income which will incur of their
relative sales and purchases. It will help them in knowing the VAT, they have to pay in future. In
case if an organisation is dealing in good which are exempted from the payment of VAT but the
value of those obtained goods are relatively high then VAT will be charged on the cost of
acquisition of those goods or services. The costs also affects the cash flow. As the business is
providing goods to their customers on credit basis, them the difference between the time of
selling and the time of getting the amount of those goods from the customers are different.
In these ways, managers can know the VAT Payment affects on cash flows and future
forecasts of companies.
4.2. Advising People about Changes in VAT Legislation's Effect on Organisation's Record
Keeping System
The affect of changes in the legislations of VAT can vary from companies to companies
and apply in various situations. For getting positive or eradicating the negative affects of change
in the legislations related to VAT, organisations can hire tax advisor to deal with these situations.

But is not always possible that the change in these legislations will led to negative change only
(Arauco and et. al., 2014). The changes are such as now HMRC Department is not accepting the
manual records instead it suggests companies to keep digital records. It is helpful for a firm as it
reduced the chances of damaging the data or loss of files as they can be now stored without
covering extra space of office. Not only this but it also made easier to store more data than
manual record keeping. The system enhanced the way of working of not only for one firm but
also for other companies. In addition to this, HMRC had made changes such as it will accept the
data only in spreadsheets form by the use of various software and it will be directly connected to
HMRC. It saves time of both HMRC and a company. It also helped in making all the tax related
information into one easy access form (Braunerhjelm and Eklund, 2014).
CONCLUSION
From the above given data, it is summarised that firms should be aware about all the rules
and regulations of VAT so that the company can file VAT Return at right time by doing proper
calculation so that the errors and omissions can be avoided. It will also help in proper working
and avoiding the intervention of HMRC Department in the functioning of companies. Proper
filing of tax will also help in the growth and development of the country.

REFERNCES
Books and Journals
Aasness, J. and Nygård, O. E., 2014. Revenue functions and Dupuit curves for indirect taxes
with cross-border shopping. International Tax and Public Finance. 21(2). pp.272-297.
Arauco, V.P., and et. al., 2014. Explaining low redistributive impact in Bolivia. Public Finance
Review. 42(3). pp.326-345.
Braunerhjelm, P. and Eklund, J.E., 2014. Taxes, tax administrative burdens and new firm
formation. Kyklos. 67(1). pp.1-11.
Dalton, H., 2013. Principles of public finance. Routledge.
Deb Pal, B., Pohit, S. and Roy, J., 2012. Social accounting matrix for India. Economic Systems
Research. 24(1). pp.77-99.
Ehrhart, H., 2013. Elections and the structure of taxation in developing countries. Public Choice.
156(1-2). pp.195-211.
Fukuyama, F., 2013. What is governance?. Governance. 26(3). pp.347-368.
Hansen, B., 2014. The economic theory of fiscal policy. Routledge.
Joumard, I., Pisu, M. and Bloch, D., 2012. Less income inequality and more growth–are they
compatible? Part 3. Income redistribution via taxes and transfers across OECD
countries.
Karagöz, K., 2013. Determinants of tax revenue: does sectorial composition matter?. Journal of
Finance, Accounting & Management. 4(2).
Nie, H. and Yue, X., 2012. A study of the impact of indirect taxes on income distribution in rural
and urban China. Journal of Chinese Tax and Policy. 2(2). p.30.
Penu, D., 2016. Indirect taxes in Romania: an econometric analysis.
Pradhan, B. K. and Ghosh, J., 2012. The Impact of Carbon Taxes on Growth Emissions and
Welfare in India: A CGE Analysis. Institute of Economic Growth, University of Delhi.
Sterner, T. ed., 2012. Fuel taxes and the poor: the distributional effects of gasoline taxation and
their implications for climate policy. Routledge.
Wang, C., Caminada, K. and Goudswaard, K., 2012. The redistributive effect of social transfer
programmes and taxes: A decomposition across countries. International Social Security
Review. 65(3). pp.27-48.
Online
VAT Annual Accounting Scheme. 2019. [Online]. Available through: <https://www.gov.uk/vat-
annual-accounting-scheme>