Indirect taxataion : Assignment

Indirect tax

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of VAT information.................................................................................................1
1.2 The way in which an organisation should interact with the relevant government agency....2
1.3 VAT registration requirements..............................................................................................2
1.4 Information that must be included on business documents of VAT registered businesses...3
1.5 Requirements and frequency of reporting for VAT schemes................................................3
1.6 Maintaining an up-to-date knowledge of changes to code of practice, regulation or
legislation.....................................................................................................................................4
TASK 2............................................................................................................................................4
2.1 Extraction of relevant data for a specific period of accounting period..................................4
2.2 Calculation of relevant inputs and outputs.............................................................................5
2.3 Calculation of the VAT due to or from the relevant tax authority.........................................7
2.4 VAT Return with 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 any errors or omission identified in previous VAT period
......................................................................................................................................................9
TASK 4............................................................................................................................................9
4.1 Inform managers of the impact that the VAT payment may have on an organisation’s cash
flow and financial forecasts.........................................................................................................9
4.2 Advise for changes in VAT legislation which would have an effect on an organisation’s
recording systems.......................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Indirect tax is one of the major source of revenue for government in UK. Indirect Tax
refers to Indirect tax refers to tax on on consumable products not directly levied on income or
property such as excise duties, custom duties, value added tax etc. Ultimate consumer of goods
or services bears burden of indirect tax. Indirect tax leads to an significant increase in the price of
goods and products for the consumers (Adema, Fron and Ladaique, 2014). In all indirect taxes
VAT is most important due to various implications and procedures. In UK, value added tax is
largest source of government revenue among all indirect taxes. In UK, VAT is paid by retailers,
whole-sellers or other intermediaries to government but consumers are ultimate bearer of tax.
This report exhibits a complete understanding of VAT while covering various aspects like
sources of information under VAT, registration requirements, information required for business
documentation and other VAT related compliances. In this report all regulations concerned with
VAT, accurate and timely VAT return , VAT implications and penalties and communication of
VAT information is discussed.
TASK 1
1.1 Sources of VAT information
VAT is mainly associated with goods and consumable products. VAT is levied on a
product as the value is added at different stages of the supply chain, from production to retail
sale. For intermediaries like whole-sellers, retailers and other relevant intermediaries, sources of
information for VAT calculation are purchase register, sales registers, credit notes, debit notes,
inventory registers and other manual register related with selling and purchasing activities. In
case of sales return a credit note is used which helps organisation to adjust VAT input and output
and also a Debit note is used for purchase return (Bargain and et.al., 2015). As a good practice in
order to classify and mange value added tax for various products, an inventory register is
maintained by business organisations. Some entity for simplification of process of VAT
calculation maintains a memorandum VAT register in which input credits and input credits
availed are recorded by entities which also helps to avoid any error or difficulties. Therefore in
order to calculate VAT amount payable, consideration of purchase register, sales registers, credit
notes, debit notes, inventory registers and other manual register related with selling and
purchasing activities are necessary. All of these are major sources on VAT information.

1.2 The way in which an organisation should interact with the relevant government agency
For proper compliance of rules and regulations, an regulatory authority some times
known as government agency, is established by government for particular field and such relevant
government agency ensures proper compliance of rules and regulations (Duclos and Makdissi,
2014). Under UK's tax regulatory system HMRC act as government agency which regulates the
compliance of indirect taxes. HMRC act as intermediary between government and business
organisations. Beside HMRC there are many councils and units which acts as intermediaries.
These agencies provides various online and offline services to taxpayers and also provides some
experts to solve difficulties related with indirect taxes.
1.3 VAT registration requirements
In UK registration of VAT registration is compulsory for organisations having total
turnover exceeding £85,000 however an organisation can register voluntarily if turnover is less
than above threshold limit. In case of distance-selling this limit is £70000. The turnover
mentioned in threshold is VAT taxable turnover that incudes total amount of products or goods
sold which is not exempt under VAT (Tagkalakis, 2014). Here Distance selling refers to selling
of goods by registered business of one European Union country sells goods to other country in
European Union. Following are the major documents required for VAT registration, as follows -
 Relevant documents related with incorporation such as Certificate of incorporation, Firm
registration certificate.
 National Insurance (NI) number
 Specific Tax identifier code i.e. Unique Taxpayer's reference (UTR) number
 Details related to Business banks
 Information of associated businesses within last two years
After registration of business under VAT, a certificate indicating unique VAT
registration is provided to business organisation. For Companies, doing business within UK but
not having any registered office in UK; registration under VAT is necessary. Insurance and
education business are not required to registered under VAT because such business sell goods or
services that are exempt from VAT.

1.4 Information that must be included on business documents of VAT registered businesses
Under VAT every registered business organisation issues invoice to purchaser or
customer that clearly indicates business is registered under VAT. Invoices, clearance of goods
certificate, road permits for transportation of goods are relevant business documents for VAT
registered businesses. In UK it is compulsory for every registered firms to indicate unique VAT
registration number on invoices issued by company. Such unique VAT identification number
used by other organisation in supply chain to avail input credit on VAT and also assists
government to collects and make refund of tax collected by business entities. Along with such
number, full address of business, contact number and official website (if any); are required to
print on invoice. These information helps to identify registered and unregistered firms or
business. Corporate identification number also required to be mentioned in business documents
along with VAT number and rates applicable (Pomeranz, 2015).
1.5 Requirements and frequency of reporting for VAT schemes
There are various accounting system usually called as schemes which assist organisation
to simplify the process of VAT while avoiding any penalty or disputes. Such scheme makes the
VAT procedure flexible for business organisations according to their structures. Following are
the major VAT schemes, as follows:
 Annual accounting- This scheme is introduced to assist business organisation to manage
their budget and cash flow and to reduce paperwork. This accounting scheme is helpful
for small and medium sized businesses organisations and firms because these scheme
allows them to file only one VAT return annually instead of four returns. Lump sum
amount is paid by firms during the year for estimated liability of VAT and excess or due
is adjusted with such single return.
 Cash accounting- Under this scheme vat is paid by business organisation only after
receipt of cash from customers which helps organisation to avoid any unnecessary
adjustment and negative cash flow due to excessive vat payment arise in case of credit
sales. This scheme allow business organisation to pay tax as they receive cash from sales.
In case of small and medium firms due to credit sales cash flow problems are rises but
due to this scheme it is easier for them to pay tax in timely manner (McNabb and LeMay-
Boucher, 2014).

 Flat-rate scheme- In this system an option is available to business organisations under
which a flat rate for VAT is provided to organisations according to their products and
activity. Such option is available to small businesses with taxable turnover of £150000
(excluding VAT) or less. Choosing option under this scheme helps organisations to
eliminate burden of detailed records of purchase and sales. Government makes changes
time to time in these flat rates.
 Standard scheme- This is little bit complex as compared to other scheme but for large
business organisation it is more suitable. Under standard scheme 4 return in a year is to
be filed by organisation and tax is paid on quarterly basis. This is simple structure of
VAT which is applicable for all enterprises.
1.6 Maintaining an up-to-date knowledge of changes to code of practice, regulation or legislation
Compliance of Code of practice, regulation or legislation are necessary for organisation
in order to operate its functions effectively. In this context a great understanding of code of
practice, regulation or legislation of VAT is necessary in order to avoid any error, penalties,
disputes and demands (Mathur and Morris, 2014). Following code of practice helps organisations
to maintain records in systematic manner. Changes in regulation and legislation is made by
government time to time to reduce complexities. Business organisation should aware about
recent and potential changes in VAT system to keep on changes in forecast and budget as per
these changes.
TASK 2
2.1 Extraction of relevant data for a specific period of accounting period
Under UK's VAT regulatory system, returns are submitted monthly or quarterly basis.
Mostly quarterly return submission is preferred. After getting registration under VAT
organisations are bound to submit return in accordance with rules and regulation prescribed by
authorities. Let us take an registered organisation for which quarters ends on March, June,
September and December. Following are the details for the extraction of relevant data for filing
the return of the VAT for the quarter ending 31st December, 2018:
Accounting Information
For VAT payable:
Sales Book £ 245550

Less: Credit Note £ 2560
Total £ 248110
Cash Book £ 9820
EU Acquisitions £ 22110
Correction of error £ 1550
Grand Total £ 281590
For Input VAT:
Purchase Book £114320
Less: Credit Notes £ 1720
Total £ 116040
Cash Book £ 7890
Petty Cash Book £175
EU Acquisitions £ 22350
Bad Debt Relief £ 6710
Grand Total £ 153165
2.2 Calculation of relevant inputs and outputs
VAT payable:
Sales Sales Value (£) VAT Payable (£)
Standard Supplies 170500 17535.2
Exempt Supplies 22340 -
Zero Rated Supplies 38700 -
Exports 17250 -
Sales Book £ 17210.20
Less: Credit Note £ 325.00
Total £ 17535.2
Cash Book £ 975.40
EU Acquisitions £ 2020.00
Correction of error £ 168.75
Grand Total £ 20699.35

Input VAT:
Purchase Purchase Value (£) VAT Input (£)
Standard Supplies 74150 11435
Exempt Supplies 14210 -
Zero Rated Supplies 13550 -
Exports 9780 -
Purchase Book £11250
Less: Credit Notes £ 185.00
Total £ 11435.00
Cash Book £ 810
Petty Cash Book £16.86
EU Acquisitions £ 2020.00
Bad Debt Relief £ 525.00
Grand Total £ 14806.86
Input Tax:
 Purchase Day Book shows £11250 of total input and the amount of £185 is the input
VAT total of purchase return day book out of which £11435 whole is standard supply
input.
 Cash Book shows £ 810 and Petty Cash Book has £ 16.86 which are taken from the total
of the VAT analysis column of the cash book.
 EU Acquisition refers to purchases made from another EU state.
 Bad debt relief refers to amount of owing which a supplier writes off in the books
because the bad is unlikely even to be paid off- the buyer may have 'gone bust' for
example.
Output Tax:
 Sales Day Book shows £ 17210.20 of total output and amount of £325 is the output VAT
total of sales return day book out of which £ 17535.20 whole is standard supply output.

 Cash Book shows £ 975.40 which are taken from the total of the VAT analysis column of
the cash book.
 Correction of error is the case in which business owes a net £ 168.75 which could be
caused due to amount of input VAT included has been too high or amount of output VAT
included has been too low.
2.3 Calculation of the VAT due to or from the relevant tax authority
The authority for VAT and custom in UK is HM Revenue and Custom. The VAT due to
or from is analysed by HMRC only. The calculations of VAT due to or from HMRC in the given
case are as follows:
Particulars Amount (£)
VAT output:
Sales 17535.2
Cash Book 975.2
EU Acquisitions 2020
Correction of error 168.75
Total VAT output 20699.35
VAT Input:
Purchase 11435
Cash Book 810
Petty Cash Book 16.86
EU Acquisition 2020
Bad Debts Relief 525
Total VAT Input 14806.86
Net VAT Payable to HMRC 5892.49
2.4 VAT Return with associated payment within the statutory time limits
VAT Return

Particulars Amount (£)
VAT due in on sales 19852.35
VAT due on acquisitions from other EC Member State 2020
Total VAT due 21872.35
VAT input including acquisitions from the EC 14754.35
Net VAT to be paid to HMRC 5892.49
Total value of sales and all other output 247546
Total value of purchases and all other input 124510
Total value of all supplies of goods and related costs, excluding any
VAT, to other EC Member States
248910
Total value of all acquisitions of goods and related costs, excluding any
VAT, from other EC Member States
136780
Return for the quarter ended 31st December 2018 have to submit to be submitted HMRC
till 7th February, 2019 and the payment of £ 5892.49 is also required to pay till 7th February, 2019
otherwise penalties will have to be paid by the organization.
TASK 3
3.1 Implications and penalties for an organisation resulting from failure to abide by VAT
regulations
Value Added Tax in UK is governed by Act which specifies various type of penalties,
schemes and other VAT related notifications and circulars. In UK for governing indirect taxes an
authority is established i.e. HM Revenues and Customs which has power to impose penalties on
organisation in default (Fabbri, 2015). This body is also responsible for systematic collection and
payment of taxes and provides guidance through circulars and guideline.
For first time defaulter in case of non payment of VAT a warning in form of Surcharge
Liability Notice is issued to such organisation. After first warning, for repeated errors or defaults
some penalties and fines are prescribed. Following are penalties and implications in case of
failure may be imposed under VAT regulations:

 In case of Late filing: No specific penalties are prescribed for late filing of VAT return
but penalty is prescribed for non payment or late payment of VAT payable.
 In case of Late payment: In this case Surcharge Liability Notice is issued as discussed
above and in case conditions of Surcharge Liability Notice are not fulfilled than a
surcharge of 2% of the VAT due will apply and this gone be increased to 5%, 10% or
15% in case mistake is repeated or an extended Surcharge Liability Notice will be issued
(Madden, 2015).
 Late registration: No specific penalties are prescribed in case of late VAT registration.
However if an organisation met the threshold and there is an obligation has been arsed
then penalties are levied for delay, In case Less than 9 months of delay: 5% of VAT due,
9 to 18 months delay: 10% of VAT due and more than 18 months delay: 15% of VAT
due.
3.2 Adjustments and declarations for any errors or omission identified in previous VAT period
Following are the criteria for adjustments for any errors or omission identified in
previous VAT period :
 Error or omission should below the reporting threshold.
 Error or omission should not be deliberated(mistake made on a purpose).
 Error or omission should be for an accounting period that ends less then 4 years ago
(Jiang and Shao, 2014).
Following are the major facts that helps to make adjustments and declarations in case of
any errors or omission identified in previous VAT period:
 From VAT 652 is used for Error correction in any previous year return, Official site of
government provides this forms through its official website after filling business details
on website along with VAT registration number.
 Transitional arrangements are introduced by HMRC which for rectification of error in
relation to mismatch regarding input credit.
 HMRC also provide relief from difficulties of error correction by launching specific
schemes for correction.

TASK 4
4.1 Inform managers of the impact that the VAT payment may have on an organisation’s cash
flow and financial forecasts
There is huge impact on company's cash flow due to payment of VAT. However,VAT
rates change as time passes by to retain its effect and efficiency. These changes have impact on
all financial accounts across an organisation which eventually affect the VAT control account.
The factors which affect the cash flow and financial forecasts due to VAT payment are explained
as follows:
 Imposition of penalty by the tax departments for the error done by the organisation and
management are unknown about these errors can affect cash flow or financial forecast of
the organisation.
 Sudden increase in VAT rate by the government on the products which the organisation
is engaged can affect financial forecast of managers.
 If the company is dealing in credit sales and purchase the goods in cash, then this will
adversely affect the cash flow position of the company because of late payment or receipt
from the parties (Thuronyi and Cui, 2015).
 Sudden demand notice received by the tax authorities of UK can also increases the
payment towards consultants and legal charges which affects cash flow of the entity
adversely.
 Payment of VAT may impact the working capital requirement and due to which
organisation requires more cash, it will reduce the cash flow in the business.
4.2 Advise for changes in VAT legislation which would have an effect on an organisation’s
recording systems
By implementing the changes by the government time to time by issuing circulars or
notification etc. which affects various interested person in an organisation like mangers,
accountant, supplier, related parties etc. Changes in the VAT legislation will effect the
organisational recording system such as making tax digital or removing offline forms for VAT
registration. Organisation faced many challenges for implementing these legislation changes in
the organisation. These are as follows:

 Changes in record keeping system: In complying the digitalisation, company needs to
adopt a spreadsheet or software for preparing their accounts which is directly linked with
the HMRC through the Application Programming Interface (API).
 Changes in VAT return submission: - Organisation submit the VAT return to HMRC
through API and data for return filing is recorded by the software in the digital form (Raj,
2017). After the launch of Making Tax Digital (MTD), the manual data recording in
HMRC has stopped.
 Timing: - Making Tax Digital in respect of VAT, followed by the majority of
organisation from 1st April 2019 because software trial is recently open for tax payers.
CONCLUSION
From the above report it is concluded that burden of indirect tax is ultimately imposed on
consumers. To avoid some burden of tax business organisations should take registration of VAT.
Registered business organisation should comply with rules and regulations prescribed by
relevant authority to prevent any difficulties and penalties. Managers and other responsible
person should be aware of latest changes made by government through circular and notifications.
In order to follow good practices business organisation should file VAT return accurately and
timely. Keep updated with latest regulation is necessary to avoid penalties and fines. These
penalties and implication can affect an organisation's cash flow and forecast.

REFERENCES
Books and Journals
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Duclos, J. Y., Makdissi, P. and Araar, A., 2014. Pro-poor indirect tax reforms, with an
application to Mexico. International tax and public finance. 21(1). pp.87-118.
Fabbri, M., 2015. Shaping tax norms through lotteries. International Review of Law and
Economics. 44. pp.8-15.
Jiang, Z. and Shao, S., 2014. Distributional effects of a carbon tax on Chinese households: A
case of Shanghai. Energy Policy. 73. pp.269-277.
Kumar, N., 2014. Goods and Services Tax in India: A way forward. Global Journal of
Multidisciplinary Studies. 3(6).
Madden, D., 2015. The Poverty Effects Of A ‘Fat‐Tax’In Ireland. Health economics. 24(1).
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Mathur, A. and Morris, A. C., 2014. Distributional effects of a carbon tax in broader US fiscal
reform. Energy Policy. 66. pp.326-334.
McNabb, K. and LeMay-Boucher, P., 2014. Tax structures, economic growth and development.
Pomeranz, D., 2015. No taxation without information: Deterrence and self-enforcement in the
value added tax. American Economic Review. 105(8). pp.2539-69.
Raj, R., 2017. Goods and Services Tax in India.
Schenk, A., Thuronyi, V. and Cui, W., 2015. Value added tax. Cambridge University Press.
Tagkalakis, A. O., 2014. The direct and indirect effects of audits on the tax revenue in Greece.
Economics Bulletin. 34(2). pp.984-1001.
Online
VAT registration. 2018. [Online]. Available through: <https://www.gov.uk/vat-registration>
Errors in VAT records. 2015. [Online]. Available
through:<https://www.gov.uk/government/publications/vat-notice-70045-how-to-correct-vat-
errors-and-make-adjustments-or-claims/vat-notice-70045-how-to-correct-vat-errors-and-make-
adjustments-or-claims>