Indirect Tax VAT Report: UK VAT System, Calculations, and Compliance

This report provides a comprehensive overview of Value Added Tax (VAT) in the UK, beginning with an introduction to indirect taxes and the role of VAT. It identifies sources of information on VAT, including relevant legislation and government resources. The report details the legal requirements for VAT registration, business documentation, and various VAT schemes such as annual accounting, cash accounting, and flat rate accounting. It also covers changes to codes of practice, regulations, and legislation. The report includes a practical application by extracting data from an accounting system, calculating VAT liabilities, and completing a VAT return. Additionally, it explores the implications of non-compliance with VAT regulations and the impact of VAT payments on an organization's cash flow and financial forecasts. The report concludes with an analysis of potential changes in VAT legislation and their effects on business operations.

INDIRECT TAX

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 identification of sources of information on VAT..................................................................1
1.2 Explanation on organisation should interact with relevant government legacy....................1
1.3 Define the VAT legislation requirements..............................................................................2
1.4 Identification of information that must be included on business documentation of VAT
registered business.......................................................................................................................2
1.5 Define the requirements for these VAT schemes..................................................................3
1.6 Knowledge about changes to code of practices, regulation and legislation..........................4
TASK 2............................................................................................................................................4
2.1 Extracting the relevant data for a specific period through accounting system......................4
2.2 Calculating the relevant inputs and outputs as per VAT classifications...............................5
2.3 Measuring VAT as per relevant tax authority.......................................................................6
2.4 Completion of VAT return submission by associated payments within limits.....................7
TASK 3............................................................................................................................................8
3.1 Explaining the implications and penalties in Tesco as per failure to abide VAT regulations
.....................................................................................................................................................8
3.2 Make relevant declarations and adjustments for omissions and any errors as per previous
VAT periods................................................................................................................................9
TASK 4..........................................................................................................................................10
4.1 Inform managers the impact of VAT payment have on organization cash flows and
financial forecast........................................................................................................................10
4.2 Define changes in VAT legislation that could have effect on organization recording
system........................................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
An Indirect tax can be defined as taxation on any individuals and entity that is ultimately paid for
by the another person (Adachi, 2018 ). It is collected by an intermediary from the person who
bears the ultimate economic burden of tax. The some indirect taxes can be referred as the
consumption taxes and it can be termed out as value added tax. The present report will look over
the things as sources of information about the VAT and its legal requirements and information
that must be include on business documentation. Furthermore, calculation about the VAT return
will be given.
TASK 1
1.1 identification of sources of information on VAT.
VAT is termed out as “Value added tax”. On 1st January 1973 the UK has joined
European community and as a consequence purchase tax was replaced by Value Added Tax on 1
April 1073. The main aim of Tax is to raise profitability to finance government spending like any
other government (THE FINANCIAL ASPECT OF VAT AND HOW IT WILL AFFECT THE
BUSINESS’S CASH FLOW, 2018)). It is kind of consumption tax and in this revenue can be
generated with help of consumer spending. The seller of commodities and services will charge
this to the price. European union law requires that standard VAT rate will be at least 15% and the
reduction of rate will be till 5%. In addition to it, number of EU countries has have retained the
other rates for the specific product. Thus, it can be termed out as indirect Tax as it is collected
by firm on behalf of legal authorities.
1.2 Explanation on organisation should interact with relevant government legacy.
To run the organization, it is very essential to abide by laws and legislation set by Her
majesty Revenue and customs. Thus, firms can assist with issues like inheritance Tax on buying
and selling of property. The UK government is committed to creating the most competitive text
regimes. Thus, organisation are needed to be complied with all taxation polices set by the
department of HMRC in UK. In addition to this, the VAT registered business must report to the
HM revenue and customers about the amount of VAT charged. It is essential for organisation to
get registered itself at the time when value added tax turnover goes over £85,000 in the next 30
day period. On the other hand, the firm can also get voluntary registration if the turnover is
below £85,000 .
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1.3 Define the VAT legislation requirements.
The HMRC has recently announced the proposed changes and this all are needed to be
introduced in the finance bill 2018. Thus, VAT legislation requirement has been discussed in
below presented manner as-
 The organization must registered for value Added Tax with HM Revenue and Customs
(HMRC). If the taxable turnover is more than £85,000.
 Any kind of supply made in the UK is not exempt from VAT. Thus, taxable supplier will
be inclusive at time when they are zero rated for VAT.
 The VAT is charged on services that are imported from place outside the EU.
 The commodities and services that comes to the United Kingdom from the other
European union member state, on also VAT will be charged.
 The standard rate of VAT is 20% on the most of good and services.
 The 5% VAT has been reduced from the fuel and power consume at home and by
charities, women sanity products, children car seats, residential conversions and
residential renovation and alteration.
 The 0% VAT will be charged on the certain good and services and this as books,
newspaper, most public transport service, prescription dispensed to patient by a registered
pharmacist.
 The Rate of VAT will not be charged on the exempt supplied. They are those who do not
meet the definition of taxable supplies. These as are- insurance, betting, gambling,
lotteries, providing credit and certain education and training.
1.4 Identification of information that must be included on business documentation of VAT
registered business.
INFORMATION TO BE DISCLOSED ON COMPANY DOCUMENT
This is legal requirement to disclose some extent of information on company documents. These
as are letterheads, compliment slips, invoices, purchase orders, website and email message are
all considered to be company documents (Song and 2018). These as are-
letterheads- Name of the company.
Name of company- It must be end with Ltd or world limited. (In case if the name of trade
under is differ from firm name then it is necessary to show certificate of incorporation).
The entity registered office address.
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The permanent and register number of company.
Place of registration- in country the registration has made must be shown. It would be in
‘England & Wales’ or ‘Scotland’.
Other information as-
 Correspondence address
 Telephone, FAX number and e-main address
 The number of VAT.
 General nature of the firm unless obvious from the firm name.
 Compliment slips- with the letterheads the compliment slip must be show and it is
inclusive of company name, registered office address, the company registration number
and place etc.
Invoices- This will be inclusive of things as-
 Company name
 Business address of the company
 VAT registration number
 Date of supply
 Type of supply
 Description about the good and services
 Total payable exclusion of VAT
 Rate of VAT
 Amount of VAT
 Rate of cash discount offered.
1.5 Define the requirements for these VAT schemes.
The VAT retail scheme will be helpful in terms to calculate the amount of VAT in simpler
manner. Thus, there are three standard VAT retail scheme are defined as-
 Annual accounting- This is scheme that aids to small business by allowing them to
submit only one VAT return annually rather than the normal four ( Ilzetzki, 2018.).
During the year instalments based on estimated liability for the year with balancing
payment due with the return.
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 Cash accounting scheme- This scheme is method of VAT in which information is
recorded on the basis of payments made or received rather then the issues of tax invoice
etc.
 Flat rate accounting scheme- Under this, the VAT Flat rate scheme, the amount of tax
is calculated by multiplying the flat rate of VAT and that will be inclusive of turnover.
Thus, rate are set by the HMRC and vary depending on industry sector from 4 to 14.5%.
 Standard scheme- The standard rate accounting scheme is the method in which the rate
is recorded and paid on the basis of when invoices are issued (Phillips and et.al., 2018).
Under the standard accounting rate scheme, the bushiness works as to submit a VAT
return four times in the year.
1.6 Knowledge about changes to code of practices, regulation and legislation.
Code of practices will be issued as part of the contractual disclosure facility and it is
solely used by HMRC Fraud investigation (Schippers and Verhaeren, 2018). In this, code of
practices set out the protocols and procedures that HMRc expect to work under. Thus, the code
of practices for profit audit and other complained intervention is set of guidelines for when
revenue is computing.
TASK 2
2.1 Extracting the relevant data for a specific period through accounting system
In order to analyse the taxes by considering the VAT system of UK which has have
ascertained through Taxation authority in UK. However, there have been creation of a business
scenario on which the relevant VAT rates will be charged and computation of VAT payable have
been measured.
There have been use of financial disclosure sales revenue generated by Tesco in the year
2018. Similarly, it has been assumed that Mrs. XYZ have several gains and expenses in the
accounting year 2018 which are to be measured on the on the basis of current tax threshold
presented by HMRC with respect to measure the taxable liabilities (Baumeister and et.al, 2017).
Thus, the list of revenue and expense has been recorded such as:
Particulars
Details
(in £)
Sales revenue 20000
fuel expenses 1000
food and beverages 1200
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Education (university fess) 500
Substantial reconstruction 750
Garage and parking
expenses 800
Clothing expenses 900
Occupation of land 1000
Transportation charges 1200
Import of goods 500
Export of material 600
2.2 Calculating the relevant inputs and outputs as per VAT classifications
In computation of the VAT tax as per the rate of taxes has been charged on the several gain
and expenses which will be measured through implicating such actions. However, there are
differences in the VAT rate which are being measured as per threshold allocated by HMRC.
Standard supplies: As per analysing the guidelines facilitated by HMRC with respect to
analyse the taxable liability on goods and services which have been rated as 20%. However, this
threshold has been generated by the government since 4th January 2011 (VAT rates, 2018).
Exempt supplies: There have been various expenses and goods and services which being
treated under the exempted rate for Vat adjustments. Government have awarded exemption on
several goods which are denoted under necessity of society. It mainly includes, education fees,
financial and property transactions are tax free (Humphrey, 2015).
Zero-rated supplies: These are the expense which are mainly incurred on the goods and
services that has been taxed but on zero rate. However, it includes various expenses made on
food and beverages, children’s clothes and footwears etc.
Imports: goods which are being imported through t overseas nation other than EU are
taxed by HMNRC on the rate of 10% However, under EU transaction they will be treated as free
in circulations as there will not be any import duty payable on such goods and services (Begg,
2016).
Exports: there have been various thresholds and amendments made over tax implication
on exported goods. Thus, there are various goods and services on which the taxes have been
charged at 0% while majority o them have been charged by the government as of 20%.
Moreover, to compute the taxes which are being levied over expenses and revenue of Mrs. XYZ
has been treated as:
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Particulars
Details
(in £)
VAT
rates
Amount
(in £)
Sales revenue 20000 20% 4000
fuel expenses 1000 5% 50
food and beverages 1200 0% 0
Education (university fess) 500 Exempted 0
Substantial reconstruction 750 0% 0
Garage and parking
expenses 800 Exempted 0
Clothing expenses 900 0% 0
Occupation of land 1000 Exempted 0
Transportation charges 1200 0% 0
Import of goods 500 10% 50
Export of material 600 20% 120
2.3 Measuring VAT as per relevant tax authority
In relation with analysing the VAT returns of due to HMRC there have been measurement
of the tax which are to be payable by Tesco in the respecting year 2018. Moreover, it has been
measured by implicating standard and flat rate techniques for analysing VAT payable such as:
Particulars
Standard VAT scheme
(in £)
Flat rate VAT
scheme
(in £)
Sales of Tesco 57500 57500
vat at 20% 11500 11500
sales incl. vat 69000 69000
VAT on cost 1080
Flat rate% (assumed 10%) 6900
VAT due to HMRC 70080 6900
Gain on Flat rate scheme 63180
Interpretation: As per the analysed VAT payable through standard VAT scheme and
Flat Rate VAT scheme on which there has been analysis made by government to analyse and
comprised the data set accordingly. Therefore, the gains Tesco will have as if they implicate the
VAT through Flat rate VAT scheme which have reflected the differences between standard and
flat rate techniques such as 70080- 6900 that is 63180.
Computing VAT payable
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1. Computing Net VAT Payable on VAT exclusive sales/ receipts
Total Output Tax due or total vatable sales *12%
less: total allowable input tax or total vatable purchases *12%
Vat payables
Assumptions
Details
(in £) rate
Amoun
t
(in £)
Total sales (vat exclusive) 20000 12% 2400
Less: Total purchase (VAT exclusive) 15000 12% 1800
VAT payable 600
2.4 Completion of VAT return submission by associated payments within limits
To analysing the VAT payable by Mrs. XYZ in the respective years there have been
analysis made on the proposed threshold which have reflected the outcomes as:
Particulars
Details
(in £) VAT rates
Amount
(in £)
Sales revenue 20000 20% 4000
fuel expenses 1000 5% 50
food and beverages 1200 0% 0
Education (university fess) 500 Exempted 0
Substantial reconstruction 750 0% 0
Garage and parking expenses 800 Exempted 0
Clothing expenses 900 0% 0
Occupation of land 1000 Exempted 0
Transportation charges 1200 0% 0
Import of goods 500 10% 50
Export of material 600 20% 120
Vat Payable 4120
However, with respect to make the adequate documentation of the data set has been considered
by tax practitioners such as:
1. Duly Issued certificate of creditable VAT withheld at source
2. Summary Alphalist of withholding agents of income payments subjected to withhold tax
at source.
3. Approval of tax debit memo
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4. Approval of tax credit certificate
5. Receiving the authorisation letter.
TASK 3
3.1 Explaining the implications and penalties in Tesco as per failure to abide VAT regulations
In accordance with the VAT guidelines and notice issued under VAT notice 700 that states
various penalties and sanctions against the organisations which are facing such issues. However,
this rate is being chargeable on every trade of goods and services as well as expenses payable by
individual as well as corporation in a year (Trandafir, 2016). Thus, analysing such impacts will
be adequate and effective with reference to have effective tax collection among the government.
Moreover, there are several penalties which are being enforced by government among the society
such as:
 There will be record of default by HMRC as if this authority does not receive the VAT
return within time limit.
 There will be records of a default if HMRC found that the complete payment of VAT is
due and does not reach to their account within deadline.
However, there have been payment of surcharge on the annual turnover of the organisation as
if they found defaulted and do not meet the deadline of the VAT return such as:
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Penalties:
Moreover, there are punishments which are decided by the government of UK such as:
 If the return consists of inaccurate and deliberate information which will be 100%
charged over-claimed or under-stated in tax.
 If the person of corporation failed to inform HMRC within 30 days regarding the too low
tax on which there will be charge of 30% of an assessment.
 If the exemption of VAT has not be submitted online than HMRC will charge £400 for
the VAT return (Baumeister and et.al, 2017).
3.2 Make relevant declarations and adjustments for omissions and any errors as per previous
VAT periods
There have been various grants and omission awarded to corporations by the taxable
authorities in UK while making payment of VAT returns. However, this has been listed under
notice of 700/45 as on July 2015.
There can be various remedies and benefits awarded to a company if they have the threshold
of net errors more than 10000. Therefore, these errors have ben driven under threshold of 10000-
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5000 and will be in the next assessment year. Along with this, if the report has been made before
4 years which affects in limiting the needs to be notified by companies to HMRC.
TASK 4
4.1 Inform managers the impact of VAT payment have on organization cash flows and financial
forecast.
Financial managers and other concerned authorities must have idea about the impact of
cash flows and financial forecast ( Harris and et.al., 2018). Thus, cash flow forecast is the part of
enterprise financial forecast. Furthermore, financial consequences lead to shuffle in the whole
procedures of cash flows. In addition to this, the impact on VAT on cost of production will lead
many producers to seek lower cost of raw material to compensate for the value added percentage.
Yes, it is true to said that VAT affects the cash flow forecast but is not included in the
profit forecast. Thus, reason of collecting the VAT on behalf of HR revenue & customs is not a
kind of trading activity and this also excluded from the profit forecast. In this, the financial
decision made by the importers and marginal cost on VAT can be compensated with the help of
seeking the most export markets. However, VAT do not affect the cash flow of business.
4.2 Define changes in VAT legislation that could have effect on organization recording system.
The Value added tax do not reflect in the income and expenditure of the cash glow. In
order to have impact it is main under the daily day book and cash book and it directly impact the
cash flow of company (Adachi, 2018). The VAT record can be kept on paper, electronically or
an part of software program. This kind of record must be accurate, complete and readable. Thus,
HMRC can visit organisation in order to inspect the record keeping and charge the penalty of
records. Furthermore, the VAT records must be made for the at least 6 years and for the 10 years
if there is the use of VAT on Moss service ( VAT record keeping, 2018). Generally, Value Added
tax is charged on purchase and sale. In order to record the import VAT, there is need to create an
expense separately by manually calculating the VAT applicable for the good and services.
CONCLUSION
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REFERENCES
Books and Journals
Adachi, Y., 2018. The Burden of Indirect Taxation and Consumption Tax by Income Group.
In The Economics of Tax and Social Security in Japan. Springer, Singapore.
Baumeister, M and et.al, 2017. Islamic Financing Schemes after Brexit: Sharia as Choice of Law
under Regulation Rome I and its Tax Implications.
Begg, I., 2016. The EU budget and UK contribution. National Institute Economic
Review. 236(1), pp.39-47.
Harris, T and et.al., 2018. Redistribution via VAT and cash transfers: an assessment in four low
and middle income countries (No. W18/11). Institute for Fiscal Studies.
Humphrey, A., 2015. VAT and Property: Guidance on the Application of VAT to UK Property
Transactions and the Property Sector. Spiramus Press Ltd.
Ilzetzki, E., 2018. Tax reform and the political economy of the tax base. Journal of Public
Economics.
Phillips, D and et.al., 2018. Redistribution via VAT and Cash Transfers: An Assessment in Four
Low and Middle Income Countries. Tulane University, Department of Economics.
Schippers, M. L. and Verhaeren, C. E., 2018. Taxation in a Digitizing World: Solutions for
Corporate Income Tax and Value Added Tax. EC Tax Review. 27(1). pp.61-66.
Song, Y. and et.al., 2018, February. Impact Analysis of Replacing Business Tax with Value-
added Tax on Water Conservancy Project Cost. In 4th Annual International Conference on
Material Engineering and Application (ICMEA 2017). Atlantis Press.
Trandafir, A., 2016. METHODS OF MEASUREMENT AND BENCHMARKING OF VAT
GAP IN THE EUROPEAN UNION. Economics, Management & Financial
Markets/ 11(1).
Online
THE FINANCIAL ASPECT OF VAT AND HOW IT WILL AFFECT THE BUSINESS’S CASH
FLOW. 2018. [Online] Available through:<http://www.uaevathelp.com/the-financial-
aspect-of-vat-and-how-it-will-affect-the-businesss-cash-flow/>.
VAT rates. 2018. [Online]. Available through :< https://www.gov.uk/vat-rates>.
VAT record keeping. 2018. [Online] Available through:<https://www.gov.uk/vat-record-
keeping/vat-invoices>.
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