Comprehensive VAT and Indirect Tax Report - Finance Module

This report provides a comprehensive overview of Value Added Tax (VAT) in the UK, covering various aspects from the sources of VAT information, interaction with government agencies like HMRC, and the requirements for VAT registration. It delves into the information that must be included in business documentation for VAT-registered businesses, explores different VAT schemes used for reporting purposes, and emphasizes the importance of staying updated with relevant changes in legislation and codes of practice. The report also details the process of extracting data from accounting systems, calculating input and output VAT, and determining the VAT due to or from the tax authority. Furthermore, it addresses the implications and penalties for organizations failing to comply with VAT regulations and outlines the procedures for adjustments and declarations related to errors or omissions. Finally, the report discusses the importance of informing managers about the impact of VAT payments on cash flow and financial forecasts, as well as advising on changes in VAT legislation affecting recording systems.

INDIRECT TAX

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1 ..........................................................................................................................................3
1.1 Source of information on VAT..............................................................................................3
1.2 How organisation interact with government agency.............................................................3
1.3 Requirements of VAT registration.........................................................................................4
1.4 Information that must be included on business documentation of VAT registered business 5
1.5 VAT schemes required for reporting purposes......................................................................5
1.6 Be aware about relevant changes of legislation and codes of practices................................6
TASK 2............................................................................................................................................7
2.1 Extraction of Data from the accounting system.....................................................................7
2.2 Calculation of input and output for various VAT classifications sated payment under
statutory time limits.....................................................................................................................8
2.3 Calculating VAT due to/from the relevant tax authority.......................................................8
2.4 VAT return and any associated payment within the statutory time limit..............................9
TASK 3..........................................................................................................................................10
3.1 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........................................................................................................................................10
TASK 4..........................................................................................................................................12
4.1 Informing managers of the impact that the VAT payment may have on an organisation’s
cash flow and financial forecasts...............................................................................................12
4.2 Advise for changes in VAT legislation which would have an effect on an organisation’s
recording systems.......................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES .............................................................................................................................14

INTRODUCTION
In accounting term, indirect tax is commonly known as tax levy on firm or an individual
that have to paid by the third party to the government. In general it is defined as the tax collected
by the an organisation through supply chain procedure and that is further given to legal
authorities of the nation (Bahl, 2018). There are different types of tax such as sales tax or VAT,
excise duty, good and service tax etc. Indirect tax are not directly paid by the consumer to the
governance agency but the tax burden remain on the customer as they use different services or
buy different goods.
In this report, important information regarding to VAT rules, sources, registration
requirement etc. are shown. Report also discussed significant data relevant to VAT penalties and
specific adjustment and modification. Beside this report also described VAT return of current
and previous accounting year so that crucial decision can be taken.
TASK 1
1.1 Source of information on VAT
VAT is a kind of indirect tax that is basically imposed on the consumption of a particular
product and services and add values throughout the entire production process from point of
manufacture to sales. In UK this tax was introduced in 1973 and become the 3 largest source of
income to the government that help to invest that amount for the betterment of country.
Therefore it is very important to identify the different sources of information on VAT before
charging it on companies operation business in UK. Some of the common source of information
of value added tax is registration process of Taxpayer such as tax return paper, general reports
and statements, VAT annexes, information from tax payments, acknowledgement, form tax
department, risk analysis administration etc. Other sources of information related to VAT is that
companies can directly check the portal of HMRC and collect the suitable information to pay tax
and apply specific rules and regulation.
1.2 How organisation interact with government agency.
It is observed that while registering for VAT individual firm and large organisation must
follow the following procedure that have been formulated by UK government (Cnossen, 2013).
There are different step in the registration process such has form filling and other relevant
information. Thus it is assumed that companies find some problem while making themselves

register for VAT. Therefore government agency of UK have developed different methods for
organisation that help them to directly or indirectly interact with these agency and get the detail
information. UK governance have established HMRC that is responsible to provide basic
knowledge about the Tax laws and standard and collect VAT for the respective companies.
HMRC have different non ministerial and ministerial department that deliver information to the
management of firm related to VAT. The main duty of department is to acquire the detail
information about the ongoing tax rate, sudden changes in VAT act etc. that further help
companies to repay the annual tax. Government have also published legal online site that will
give best information to the registrar firm operating business in UK.
All the above mention method are useful for existing as well as new organisation that are
operating business in UK to get the exact knowledge about the value added tax rate and other
certain modification that are introduced by government in latest time.
1.3 Requirements of VAT registration
In accounting term, it is observed that companies holding business for more that 85000
pound are liable to register them under VAT. It is very important for an organisation to make
sure that they are dealing with their business in proper manner as they have made VAT
registration or not. This will help to increase their market share and increase goodwill as they are
following standard rules and regulation associated with value added tax. There are different ways
of registering a firm for VAT such as companies may fill the online form as most of the firm are
partnership and want paper less work that help in smooth functioning. Firm may also do offline
registration by hieing an agent that will do the paper work for them and opened VAT account
and provide necessary information such as VAT return, laws and regulation etc. After the
company will have the following VAT number from the HMRC department that help them to
pay the tax for the financial year. They offline process is as follows, like new or existing
companies will have to fill up the form such as VAT1A those are selling their goods from the
other part of nation, VAT1B for the importer and other VAT1C for those companies that are
willing to dispose their following assets (Cnossen, 2013). It is observed that offline registration is
consider to be lengthy process in which VAT number is given to register company after one
month. These number are then deliver individual firm or large organisation with the legal
certificate that they are under the VAT act 1994.

1.4 Information that must be included on business documentation of VAT registered business
Nowadays, it is very important for large organisation or small companies to include the
crucial and relevant information on the following documents of the VAT registered business. It
is stated that companies have to compulsory to maintain basic business record in the digital
format that will further support to make effective decision for the improvement of companies
market value. Hence, business organisations accomplish this responsibility in a very well manner
since reported proofs of transactions is easy to follow with the certification and enrolment
according to the VAT system. A VAT certified business needs to consider following message
and report for due compliance. There are some important information that is required on the
business documents of registration that are mentioned below:
 Date of trading according to business dealing
 Yearly figures that are related to VAT
 Detail list that shows the name of share holder, director and their holding.
 Corporate, VAT number that help to determine the good that are sold by company.
 Detail information about the business operation.
 A particular document that describe that full address of business such as location, map
etc.
 Detail invoice that give the brief knowledge about the supply of relevant product product
within company (Delgado, Lago‐Peñas and Mayor, 2015).
1.5 VAT schemes required for reporting purposes
In accounting term, there are number of VAT schemes that are helpful in reporting
frequency of value added tax as these kind of taxes are recorded and paid on the date of invoice.
It is assumed that business institution applying VAT regulation accountancy strategy are more
accurate and perform well in the competitive market. Some of the assorted reporting schemes are
discussed below:
Annual accounting- This is consider to one of the effective method of VAT act that is
basically valuable to small companies that make easy process for them to submit Vat report. As
this method allows the companies to put forward their single VAT return report on yearly basis.
The main requirement of this scheme is that it support in making annual budgets and cash-flows
statements which aid to reduce the paperwork for accountant. During the year they pay
instalments for expected liability for VAT with the balancing payments due with the return.

Cash accounting- According to this strategy many small businesses and its finances are
able to prevent them to give over VAT to HMRC. This is because company without individual
receipts of sale from their consumers are not liable to pay tax. It is observed that small and new
business entity gives different credit polices to consumer to gain their commerce and realization
of income gates hold for future period. Imposing taxes earlier than realisation of income develop
difficulty of cash in the business entity. Thus the above mentioned scheme are used to resolve
these kind of issues.
Flat-rate scheme- An optional flat rate scheme is available to businesses for
simplification VAT accounting burden on small businesses with taxable turnover of £150000
(excluding VAT) or less. Adopting this scheme remove burden of detailed records of purchase
and sales. Flat rate percentage varies according to the main business activity of different
organisations (Keen, 2013).
1.6 Be aware about relevant changes of legislation and codes of practices.
It is observed that there are various changes and modification in policies and tax rate by
government of UK that need to consider by each firm operating their business in nation. These
help in managing and controlling business in effective manner. There are favourable information
needed to hold up to date such as:
 Software programs
 Daily Books of Accounts such as purchase, sales books and credit notes.
 Statistical records
 Important document that shows part return and rebates concession certificates etc.

TASK 2
2.1 Extraction of Data from the accounting system.

2.2 Calculation of input and output for various VAT classifications sated payment under
statutory time limits.
2.3 Calculating VAT due to/from the relevant tax authority
The legal authority of VAT and custom in UK is HMRC. Thus it is observed that the
VAT due is being examined by HM revenue and custom. The underneath tables shows the
computation of VAT due to or from HMRC in the given case that are discussed below:

Particulars Amount (£)
VAT output:
Sales 17835.5
Cash Book 960.5
EU Acquisitions 2110
Correction of error 175.69
Total VAT output 21081.69
VAT Input:
Purchase 10325
Cash Book 750
Petty Cash Book 15.95
EU Acquisition 2110
Bad Debts Relief 675
Total VAT Input 13875.95
Net VAT Payable to HMRC 7205.74
2.4 VAT return and any associated payment within the statutory time limit.
Particulars Amount (£)
VAT due in on sales 18971.69
VAT due on acquisitions from other EC Member State 2110
Total VAT due 21081.69
VAT input including acquisitions from the EC 13875.95
Net VAT to be paid to HMRC 7205.74
Total value of sales and all other output 256658
Total value of purchases and all other input 113820

Total value of all supplies of goods and related costs, excluding any
VAT, to other EC Member States
265517
Total value of all acquisitions of goods and related costs, excluding any
VAT, from other EC Member States
128890
From the above calculation it has been observed that return for the year ending on 31st
Dec, that will be give to HMRC up-to 7th Feb. It is observed that company have to make payment
of about £7205.74 in this accounting year in case if company is not able to pay the amount then
they have to bear penalties. In order to avoid these charges company follows the VAT Act.
TASK 3
3.1 Implications and Penalties for an organisation resulting from failure to abide by VAT
regulations
If a taxable person, specifically registered VAT businesses, are unable to file their VAT
returns under the applicable schemes and statutory time limits, in that case, the organisation shall
be liable to pay a penalty known as ' Default Surcharge (Kenyon, Langley and Paquin, 2012)'. A
default surcharge is a type of penalty that is imposed on an organisation if they fail to pay their
VAT returns for a period of 12 months from date of filing the return. Within the 12 months
period, only a warning shall be given from HMRC to the concerned business with a penalty of
£100 from the day of default of filing return. This £100 penalty is charged on individual partners
in case of a partnership with only the representative partner having the right to appeal the
decision in court. HMRC has the right to charge penalty between 15% to 100% of the unpaid
amount owed by the business.
3.2 Adjustments and declarations for any errors or omissions identified in previous VAT periods
1. Declaration of errors or omissions identified in previous VAT periods:
It is necessary for registered businesses to declare disclosure of any kind of errors,
omissions or inaccuracies arising in the current or previous VAT periods. The tax authority,
HMRC, requires reporting of such errors by filling form VAT652 that has to be submitted to
VAT Correction Team. These errors can be categorised as follows:
 an error identified above reporting threshold.
 a deliberate error or a mistake made on purpose
 an error made in a VAT period of less than four previous years.

The error reporting threshold limits an organisation's error frequency to the amount of
£10,000. Any error exceeding this threshold needs to be reported to HMRC ( Lam and Ravussin,
2017). To calculate the threshold, a net value of errors is computed by taking a total of all
additive taxes that are due to HMRC and deducting tax due from this amount. This has been
shown below:
Net Value of Errors = Total Additional tax due to HMRC - Tax Due
Errors or mistakes that have been made on purpose or are deliberate in nature must be
reported separately to HMRC in writing with supporting evidence. The evidence submitted must
include details of date of discovery of error, reasons amounting to cause of such errors and how
it occurred. On the basis of these documents, HMRC shall decide the amount of interest that
needs to be charged or penalty that needs to be paid or no action must be taken against the
organisation in question (Schenk, Thuronyi and Cui,2015).
An error identified in VAT period of less than 4 previous years by HMRC would attract a
certain amount of interest that would be charged against tax due for current period or a charge of
misdeclaration penalty to claim such amounts.
2. Adjustments of errors or omissions identified in previous VAT periods:
In order to address the problem of errors identified in current or previous VAT periods,
the HM Revenue and Customs Department has set up a Penalties for Errors Regime in 2009
under section 4 of the Act. For any type of error adjustments net value of errors must be
computed that would ascertain whether the error falls below or above the reporting threshold.
The adjusted amount can be included in the current VAT providing in following cases:
 If the net value does not exceed £10,000 or
 If the net value lies between £10,000 and £50,000 but does not exceed 1% of net outputs
mentioned in VAT return declaration for the period in which the error is discovered,
However, if net value of errors does not meet the above criteria or is categorised as a deliberate
error, a separate form- VAT652 must be filled and submitted to HMRC with details describing:
 Reasons amounting to cause of such errors
 accounting period of discovery of error
 Type of error - input or output
 Net Value of Errors- both under-declared and over-declared amounts
 Computation summary for calculating Net Value

 If the errors have resulted in additional payments to tax authorities
 Total amount to be adjusted
In case the net value of errors have nil or minimal effect on the net VAT due on returns either of
the above methods can be used to rectify the errors. The organisation must notify HMRC about
any kind of deliberate error made on the organisation's part.
TASK 4
4.1 Informing managers of the impact that the VAT payment may have on an organisation’s cash
flow and financial forecasts
Taxes, both direct and indirect, are charges on an individual's or a business' revenues that
have been earned by them in a given accounting period. Similarly, Value Added Tax is a
consumption tax that has to be paid by the entities on purchase or sale of goods and services in
the form of Input VAT and Output VAT (Schneider, 2012). Hence, different organisations are
liable to pay different amounts of VAT for a particular VAT Period.
Thus, we can say that the VAT payable to the tax authorities depends upon the nature,
size and turnover of the business as well as schemes and rates applicable for such registered
organisations. These rates may be subject to change based on any changes in related laws or the
Act governing them in order to attain better disclosure of tax efficacies in the economy. Cash-
flows and financial forecasts of an organisation are also affected by these changes and it is
important for the managers to make changes in these so as to not over-pay or under-pay what is
owed by them to the authorities.
4.2 Advise for changes in VAT legislation which would have an effect on an organisation’s
recording systems
VAT legislation changes mainly refer to change in schemes, record keeping systems,
return submission and time limits. Any changes made will affect VAT Accounts and VAT
invoices maintained by organisations and suppliers (Schneider, 2015). For complying with
digitalisation such as introduction of Making Tax Digital (MTD) program, the managers would
need to check that no error has been made while digitalisation of their accounts on the portal.
Thus, it is important for the users to be aware of changes and also know the process that is

followed by the new legislations to understand and implement these changes in the organisation
within.
For instance, in order to prepare accounts on a spreadsheet or software that is directly
linked with HMRC, managers are advised to take help of API or Application Programming
Interface. Attaining knowledge of such interface would help in easy and fast formulation of
spreadsheet in the VAT Accounts to forecast and budget, plan and control the expenditure to pay
less returns on revenues (Weber, 2013).
CONCLUSION
From the above, report it has been concluded that indirect tax world is in constant motion
which means that if company ignore the recent development and changes in the laws of indirect
tax or are not complaint with the indirect tax obligation will become an expensive. It result the
provision into standard, zero-rated, exempt, and imports and examine tax computation, substance
and time limits respect the same. In conclusion it is also stated that companies must implement
and follows specific rules and regulation for VAT act that help in smooth functioning. There are
certain penalties and charges levy by government if they determined that following company do
not apply specific rules. It can be finished that VAT has come through many alteration since its
origin and befitting care necessarily to be taken while evaluating and complying with definite
standard of value added tax.

REFERENCES
Books and Journals: