Comprehensive Indirect Tax Report: VAT, Calculations, and Compliance

This report comprehensively examines indirect taxes, particularly Value Added Tax (VAT) in the UK. It begins with an introduction to indirect taxes and VAT, explaining their nature and importance. The report then delves into various aspects of VAT, starting with sources of information and how organizations should interact with government agencies like HMRC. It covers VAT registration requirements, the information needed on business documentation, and the frequency of reporting for different VAT schemes, including annual accounting, cash accounting, and flat-rate schemes. The report emphasizes the importance of staying updated on changes to VAT regulations and provides practical examples of VAT calculations, including output tax, input tax, and VAT payable. It also discusses the implications and penalties for non-compliance with VAT regulations and the handling of errors or omissions. Furthermore, the report addresses the impact of VAT payments on an organization's cash flow and financial forecasts, and the need to advise relevant personnel of changes in VAT legislation. The report concludes with a summary of the key points and references.

INDIRECT
TAX
Table of Contents

INTRODUCTION...........................................................................................................................3
TASK 1 ...........................................................................................................................................4
1.1 Sources of Information on VAT...........................................................................................4
1.2 Explain how an organization should interact with the relevant government agency............4
1.3 Explain VAT registration requirements................................................................................5
1.4 Identify the information that must be included on business documentation of VAT
registered businesses...................................................................................................................6
1.5 Requirements and the frequency of reporting for various VAT schemes.............................6
1.6 Maintain an up-to-date knowledge of changes to codes of practice, regulation or
legislation....................................................................................................................................7
TASK 2............................................................................................................................................7
2.1 Extract relevant data for a specified data for a specific period from the accounting system.
.....................................................................................................................................................7
2.2 Calculations of VAT.............................................................................................................8
2.3 Calculate the VAT due to, or from, the relevant tax authority.............................................9
2.4 Submit a VAT return and any associated payment within the statutory time limit............10
TASK 3 .........................................................................................................................................10
3.1 Explain the implications and penalties for an organisation resulting from failure to abide
by VAT regulations...................................................................................................................10
3.2 Adjustments and declarations for any errors or omissions identified in previous VAT
periods.......................................................................................................................................11
TASK 4 .........................................................................................................................................11
4.1 Impact of VAT payment on organization's cash flow and financial forecasts....................11
4.2 Advise relevant people of changes in VAT legislation which would have an effect on an
organization's recording systems...............................................................................................12
CONCLUSION..............................................................................................................................12
................................................................................................................................................12
REFERENCES..............................................................................................................................12
INTRODUCTION
Indirect taxes are imposed on producers or suppliers by UK government. Under this
system, the burden of tax can be shifted to another person (consumer). Unlike, direct tax, it is

charged on incomes of households and firms. It is also called “expenditure taxes”. Value Added
Tax or VAT is an indirect tax, charged on sale of goods and services in the UK. It is a kind of
“consumption tax” due it's being levied on the products that people buy. It is collected by
business on behalf of the government, hence called “indirect tax”. In
UK, it is the third largest source of government revenue after income tax and National insurance.
The report covers, VAT regulations by describing its sources, registration requirements, various
schemes, calculation, penalties for failure or breaching the regulations, adjustments and
declarations for errors assessed in previous VAT return (Acosta‐Ormaechea and et. al., 2012).
TASK 1
1.1 Sources of Information on VAT
The business that are dealing in goods and services should know everything about the
taxes that are levied. The necessary information range from registration to rates to calculations
and basis of charging. It becomes imperative to gather and apply complete detail about the VAT,
for carrying out the activities smoothly. The best source to obtain information in Value Added
Tax Act, 1994 and rules. it contains meaning, definitions, provisions, items covered, criteria for
firms that will be covered by this Act, amendments, penalties for contravention and many more.
Further, online guide has been provided by the UK government in order to enable the entities to
have the every possible knowledge about VAT before starting the business or expansion by
entering into a new segment of service or goods.
1.2 Explain how an organization should interact with the relevant government agency.
VAT is levied and administered by the UK government. It is the ultimate authority for
implementing and changing the provisions of the ACT. All the data from registration to paying
this tax is saved in the database of HM Revenue and Customs (HMRC) department. It has
established its departments to assist the taxpayer regarding the payment. Further, tax
representatives have been appointed by HMRC who will control VAT regulations applicable on
the firms operating in their assigned areas. This department has introduced digital record keeping
system for VAT-registered businesses (Overview of digitalization of tax under HMRC (, 2018).
The firms can file their return physically by visiting the office of the representative or can also
file online by accessing the government official site. Further, any query will be resolved by such
officials for better interaction.

1.3 Explain VAT registration requirements.
A business must be registered to avail the benefits of VAT. Every firm, providing
services or dealing in goods must get registered with HMRC, if its VAT taxable turnover is more
than £85,000 (Keen, 2013). On the completion of the process, a registration certificate will be
provided by quoting the VAT number, details about the first return to filed and payment to be
made together with effective date. There are two types of registrations.
1. Compulsory registration- One must register if:
 if VAT taxable turnover is expected to be more than £85,000 in the next 30-day period.
In this case, one must get registered by the end of that 30-day period and the effective
date will the date firm realised, not when the turnover exceeded the threshold limit.
 If business had a VAT taxable turnover of more than £85,000 over the last 12 months.
The registration has to be done within 30 days of the end of the month when the limited
went over the specified turnover. Effective date in this case will the first day of the
succeeding month when the limit was exceeded (Alm,2012).
Further, a person can register voluntarily even if the turnover is less than above
mentioned limit, provided the goods that are being sold in not “exempted”. A firm can get
registered online, an account will be created. Also, registration can be done through post using:
 Form VAT1 if :
1. for registration exception
2. Agricultural Flat Rate Scheme
3. Registering business units or divisions of a body corporate under separate VAT numbers.
There are separate forms available to be sent through post other than the businesses
mentioned above. These are:
1. VAT1A for EU business distance selling to UK
2. VAT2B importing goods having value of more than £85,000 from another EU state.
3. VAT1C on disposing of assets on which 8th or 13th Directive refunds have been claimed.
No registration is required in case, a firm deals only in those goods or services that are
exempt from VAT, provided, the goods worth more than £85,000 must be bought from EU-VAT
registered suppliers only. Also, one may have to get registered for VAT if he take over a VAT
registered business.

1.4 Identify the information that must be included on business documentation of VAT registered
businesses.
According to VAT Act, 1994, a business registered under this Act must keep the records
of sales and purchases, separate summary of VAT called a VAT account and invoices. The
invoice must have VAT registration number and the amount on which tax will be calculated.
Apart from the this, it must contain the name of the party involved in the transaction. Further,
legal structure and address of the firm should also be mentioned along with the Corporate
Identification Number (CIN). These records must be kept for at least 6 years. Further, these can
be maintained on paper, electronically or as a part of software program. These must be accurate,
complete and illegible (Amir and et. al., 2013). In case, a VAT invoice is lost or damaged or no
longer readable, then a duplicate copy can be requested from the supplier on which the word
“duplicate” will be mentioned. The VAT account is maintained for returns. Invoices must be
issued within 30 days of the date of making supply. It is the primary evidence on the basis of
which VAT amount can be claimed.
1.5 Requirements and the frequency of reporting for various VAT schemes.
VAT Act provides various accounting schemes for business in UK. These are for making
the complex system easier to understand and implement. Also, it improves the cash flows of a
business by saving time and money. Basically, these for small retail firms to make accounting for
tax simple. Types of VAT schemes are as follows:
 Annual accounting- Under this scheme, businesses are required to file the return
and make payment on annual basis. There is no need to file quarterly returns. This
method enables the firms to prepared budget with more attention. It minimize the
paperwork and it easy to manage the cash flow. Since, it is to be annually, there
may arise circumstances of over-paying or under-paying of tax, therefore, entities
may required to make a payment or apply for refund (Mathur and Morris, 2014).
 Cash accounting- While using this scheme, VAT is to be calculated from the
date when the firm is being paid in contrast to the date of issuing the invoice. It is
useful in those case, where there is delay in payments. It is suitable for the
business buying huge quantity goods on credit. One condition under this scheme,
is that VAT can be claimed only when the company has been paid completely. It

can be used by only if the turnover of the business is not expected to go beyond
the specified limit i.e. £1.35million (Schenk and et. al., 2015).
 Flat-rate scheme- This accounting scheme can be opted by the businesses having
turnover less than £150,000. Under this, the VAT amount calculated and to be
paid is a percentage of the total turnover. There are different flat rates for different
sectors. However, there is no need to keep VAT record on every purchase or sale.
It is suitable for small firms.
 Standard scheme- The VAT return is to be filed in the quarter in which the
invoice is received or issued irrespective of the whether the payment has been
made or received, respectively in individual and different quarter. In nutshell,
firms are required to file quarterly returns and the amounts are claimed in the
respective quarter. However, it is granted only when tax paid is more than the
payable amount.
1.6 Maintain an up-to-date knowledge of changes to codes of practice, regulation or legislation.
Government form Act, rules, code of conduct, legislation for the betterment of firms. A
business must abide by these for carrying its activities without any hindrance. Also, the laws and
rules are amended to have better control and improve the VAT system in the country. Entities
must be aware of such amendments (Collins, 2013). Keeping up to date information of code of
conduct and various applicable legislation provides great efficiency in business dealings.
Further, the intervention of government is reduced, if a business follow the exiting laws and code
of practice along with changes made. Adhering to the updated data will not only help the
businesses regarding taxation part but also it will impact other departments. For example, the
entity will maintain all the accounting records in proper way to claim and avoid any penalties.
TASK 2
2.1 Extract relevant data for a specified data for a specific period from the accounting system.
Example 1- Moon Realty, a VAT registered company, is leasing its 20-door residential
commercial apartment in the following manner:
The 1st 10 units are being used by commercial establishments and being rented for
£13,200 per month while at the back is another 10-door apartment being used as residential and
being rented for £8,000 per month per door. The company for the last month incurred expenses

based on actual receipts in the amount £60,000 of which £49,000 comes from VAT registered
suppliers. Based on the above data compute the following: (5%)
a. Output tax for last month
b. Input tax for last month
c. VAT payable for the last month
Example 2- John will start trading in the coming months. He has SUV car and is
considering three alternative types of business. These are; (a) training, in which all sales will be
standard rated for VAT, (b) transport, the sales will be charged at zero rate for VAT and (c) as an
ambulance, in which all sales will be exempt.
For each alternative, the sales will be £70,000 per month (exclusive of VAT), and
standard rated expenses will be £10,000 per month (inclusive of VAT).
2.2 Calculations of VAT
Solution 1-
a. Output tax for the month
10* £13,200
Output tax = --------------------* 12% = £14,142.86
112% or 1.12
b. Input tax
£49,000
Input tax = -----------------------* 12% = £5,250.00
112% or 1.12%
c. Vat payable = £14,142.86 - £5,250 = £8,892.86
Solution 2- Standard rated supplies
 It is mandatory for John to get registered for as he is making taxable supplies.
 Output tax of will be
= £ 80,000*20% = £14,000
 Input tax :
= £10,000*20/120 = £1667
Zero rated supplies:
 John is eligible to claim exemption from VAT registration because he is making zero-
rated supplies, otherwise, he should still register as these fall under taxable category.

 Output tax will not be due, but input tax is recoverable.
Exempt supplies:
 Since, John is not dealing in taxable items, VAT registration is not required.
 Output VAT will not be due and input VAT will not be recoverable.
Exports:
If goods are exported outside EU, then no VAT will be charged. VAT is for goods dealt
in European Union. It can be imposed with zero rate to enable firms to claim refunds.
2.3 Calculate the VAT due to, or from, the relevant tax authority.
Amount due is the difference between the tax amount paid is more than the payment
previously made. By taking the above examples, amount due to or from the relevant government
will done in this way:
Standard supplies- The HMRC provides a standard rate which is used in general and the
rate is 20%. In example 1, the VAT payable to government is £8,892 and in 2nd example, it is
£1,667.
Zero-rated supplies: It includes goods that are charged at zero rate. Only John will have
to pay £1,667 to the HMRC department.
Exempt supplies: No tax is required to be paid as goods are exempt. Also, no benefit of
refund will be provided.

2.4 Submit a VAT return and any associated payment within the statutory time limit.
TASK 3
3.1 Explain the implications and penalties for an organisation resulting from failure to abide by
VAT regulations.
The Value Added Tax Act, 1994, provides the laws that are required to be abide by the
VAT registered firms. A contravention in the provisions by businesses will lead the entities to
pay the penalties. Some of the basic penalties that are common for all businesses irrespective of
turnover or size are as follows:
1. in case of delay in the filing of VAT return or tax payment, the payer is warned for the
first time. In case of default being continued, a surcharge liability notice will be served to
the taxpayer for a period of 12 months, granting trial. If he fails to meets the

requirements of the served notice, a surcharge @2% will be charged, which will be
increased to 5%, 10% or 15% if the mistake subsist.
2. Timely registration is important to avoid the penalty. The penalty in such case will be
@5% if registration is delayed by 9 months. 10% will be charged, in case of delay for 9
to 18 months and beyond 18 months, 15% will be charged as penalty. This will be
calculated on the VAT due (Kalotay, 2012).
The circumstances where, a firm attracts penalty can range from not getting registered
even when threshold limit has been exceeded or when it breaches rules or laws. It is compulsory
for every business to comply the legislation for saving the costs being incurred in the legal
consequences. Also, it increases the creditworthiness of the company.
3.2 Adjustments and declarations for any errors or omissions identified in previous VAT periods.
Errors or omissions can be avoided by recoding the details carefully. VAT Act and rules
provide the adjustments in which these can be corrected if made in the previous VAT returns.
However, it can be made right only if they are:
1. below the prescribed reporting threshold limit
2. the errors or mistakes were unintentional or done unknowingly
3. for an accounting period that ends less than 4 years ago.
When the amount of the error is £10,000 or less, then the adjustments that can be made
comes under reporting threshold. Details of error is submitted in a report in the form VAT652
and it is send to the error correction team. After this, a notice is issued by HMRC to the applicant
specifying the tax or interest amount liability of the firms. Further, it provides two methods by
which errors can be corrected. They are:
 Method 1: If the errors of a net value do not exceed £10,000 or net value is between
£10,000 to £50,000 but do not exceed 1% of the net output in the VAT return period.
 Method 2: This method is applicable if the errors of a net value are between £10,000 to
£50,000 and that can not exceed more £50,00,000.
TASK 4
4.1 Impact of VAT payment on organization's cash flow and financial forecasts.
In the indirect tax, although the burden of tax is shifted to another person, then also its
affects the financial and cash flow of an organization negatively. Businesses provides goods on

credit to customers and it takes time to realise the amount. It is calculated on the sales made even
if the payment has not been received. Meanwhile, VAT has to be paid on quarterly basis. The
This affect the cash flow because the outflow of cash is more than inflow in form of tax. Further,
the solvency becomes difficult when the company has to pay VAT before even receiving the
payment. It also impact the finance and budgets when taxes paid exceeds the amount realised
because of which the chances of its suimplications and penalties for an organisation resulting
from failure to abide brvival gets influenced in the long-term (Karakosta and et. al., 2014).
4.2 Advise relevant people of changes in VAT legislation which would have an effect on an
organization's recording systems.
The investors of an organization is interested in knowing the financial standing of the
company. Hence, details of calculations including the VAT are shown in those statements. Also,
it is used by the government for taxation purpose. Any changes in the VAT Act and rules will
affect the whole procedure of the organization that it uses in maintaining for recording
transaction. The firm will have to adapt the change and conduct its business accordingly, by
complying with the businesses. Such changes are taken care by accountants and taxation
department in an entity. They will notify the company about any difference between the old and
new method so that it does not face difficulties in future and costs can be saved. Along with this,
businesses should be aware of the amendments made by the government in the laws so that such
changes are accepted without causing delay.
CONCLUSION
From the above report, it has been concluded that indirect tax is applicable on the
businesses dealings in goods and services. Further, the tax burden can be shifted to another
person. VAT registration is compulsory for the firms, who has exceeded the threshold limits. The
regulations are followed to get the benefit of return and also, businesses should files the returns
within the prescribed statutory limit to avoid any penalty. Further, they should know about the
impact VAT leaves on financial and cash flow in order to save itself from any distressing
situations and to maintain a balance in its activities for sustainable growth.

REFERENCES
Books and journals:
Acosta‐Ormaechea and et. al., 2012. Tax Composition and Growth: A Broad Cross‐Country
Perspective. German Economic Review.
Alm, J., 2012. Measuring, explaining, and controlling tax evasion: lessons from theory,
experiments, and field studies. International Tax and Public Finance. 19(1). pp.54-77.
Amir and et. al., 2013. The impact of the Indonesian income tax reform: A CGE analysis.
Economic Modelling. 31. pp.492-501.
Collins, M., 2013. Estimating the direct and indirect tax contributions of households in ireland.
Kalotay, K., 2012. Indirect FDI. The Journal of World Investment & Trade. 13(4). pp.542-555.
Karakosta and et. al., 2014. Indirect tax harmonization and global public goods. International
Tax and Public Finance. 21(1). pp.29-49.
Keen, M. M., 2013. Targeting, cascading, and indirect tax design (No. 13-57). International
Monetary Fund.
Mathur, A. and Morris, A.C., 2014. Distributional effects of a carbon tax in broader US fiscal
reform. Energy Policy. 66. pp.326-334.
Schenk and et. al., 2015. Value added tax. Cambridge University Press.
Online:
Overview of digitalization of tax under HMRC. 2018. [Online]. Available through:
<https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-
tax-digital>.