Indirect Tax Report: VAT Calculation, Reporting, and Compliance

This report delves into the intricacies of indirect tax, with a primary focus on Value Added Tax (VAT). It begins with an introduction to indirect taxes, explaining their nature and providing examples like VAT, service tax, and GST. The report is structured into four tasks, each addressing a specific ...Read More

INDIRECT TAX

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Identification of sources of information on VAT.............................................................1
1.2 The way in which an organisation should interact with the relevant government agency1
1.3 VAT registration requirements.........................................................................................2
1.4 Identification of information that must be included on business documents of VAT
registered businesses..............................................................................................................3
1.5 Requirements and frequency of reporting under 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 in case of failure to abide by VAT regulations:....................8
3.2 Adjustments and declarations for any errors or omissions identified in previous VAT
periods:...................................................................................................................................8
TASK 4............................................................................................................................................9
4.1 Impact of VAT payment on an organisation’s cash flow and financial forecasts:...........9
4.2 Advise for relevant people regarding changes in VAT legislation affecting organisation:. .9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
An indirect tax is a tax which is collected by one entity in the supply chain process and
paid to the government of the country, but it is passed to the customer as part of the purchase
price of a product or service. The customer is ultimately pays the tax by spending more for the
goods and service. Value added tax, service tax, goods and service tax etc. are some of the
examples of the indirect taxes. Value added tax (VAT) was introduced in 1973 and it is now
third largest source of revenue for the government after income tax and national insurance. The
given project is divided into four tasks. First task involves information regarding VAT sources,
registration requirements etc. Second task includes information regarding VAT returns, third task
involves VAT penalties and adjustments for earlier errors and the last task contains the details
regarding communication of VAT informations (Adema, Fron and Ladaique, 2014).
TASK 1
1.1 Identification of sources of information on VAT
VAT is levied on most of the goods which are provided by registered entity in the UK
and some of the goods and services which are imported from outside the European Union. For
levying the VAT and other legal requirements, it is very important to identify the various sources
of information on VAT. The sources of information of VAT are taxpayers' registration
information like tax identification number, information from tax returns, reports and statements
like VAT return with annexes (input tax, turnover and IC acquisition), information on tax
payments like payment acknowledgement, information on the actions which are taken by the
administration of tax like risk analysis, information from the tax administration departments like
criminal cases, explanation registry like organization's economical activities which are given by
the officials of the risky companies and registry by the fictitious companies like tax
administration assumed some companies as risky ones and meeting the certain criteria
(examples- registered, using the documents of the third person etc.)
1.2 The way in which an organisation should interact with the relevant government agency
The business organisations should comply with the rules and regulations for operating its
business operations in the country. HMRC relevant government agency of UK that deals with the
various taxes like value added tax, custom tax, service tax etc. HMRC interact with the
organisation and the government (Bargain and et. al., 2015). There are 25 departments of
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HMRC that are established in the UK and that have direct interaction with businesses in the
country relating to indirect taxes like service tax, custom tax, value added tax etc. For all the
issues, these departments can be communicated. The departments of HMRC consist of qualified
and experienced persons that are available there to provide every possible solution to these
issues.
1.3 VAT registration requirements
The department of HMRC in UK frames the policies for registration under various
indirect taxes like value added tax, service tax, custom duty etc. The threshold limit for
compulsory registration under VAT in the UK is £83,000 of non-VAT exempt income per
financial year. The threshold limit for compulsory registration in UK for distance-selling is
£70000. This threshold limit is based on the VAT taxable turnover of the financial year that
means sales that are not exempted from VAT. Distance selling in threshold limit means when a
registered person of a European Union country sells goods to a another country in European
Union. For registration under VAT in UK the following documents or information are required:
 National Insurance (NI) number
 Tax identifier i.e. Unique Taxpayer's reference (UTR) number
 Certificate of incorporation and incorporation details
 Business banks accounts details
 Details of all associated businesses within last two years
 Details of all the business that has been transferred (acquired), if appropriate
If business organisation is dealing in the wholly exempt goods and services then they are
not required to take the registration under value added tax such as insurance and education
business organisation. Companies that do their businesses in UK but don't have any physical
presence within the UK that is working through online mode, needs to demonstrate that they are
making sales to UK to have VAT registration. When this process of registration is complete then
registration certificate is provided to the business organisation that includes VAT number and
other details regarding submission of first return (Duclos, Makdissi and Araar, 2014).
1.4 Identification of information that must be included on business documents of VAT registered
businesses
Businesses that are registered under VAT while preparing invoices must be included in
the information that specifies that business is registered. Business organisations will issue
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invoices are considered as business documents. While generating a invoice by business
organisation, registration number that is provided by the HMRC department of UK of VAT must
be mentioned. This registration number is a unique number that is possessed by business
organisation that are registered under VAT. Government of the country collects the taxes under
VAT and make refund (if applicable) of the tax collected by business entities on the basis of
registration number. Together with this invoice generated for sale or received by businesses must
contain name and registration number of the enterprise that is involved in the transaction. In
addition to this information location of the business and legal form of the business must also be
present in documents. Corporate identification number that is provided to each business must me
mentioned in business documents with VAT number for the companies. Agreements that are
entered by the business organisations are to be considered as business documents and the
different goods and services may differs for VAT rate. It will be easy for the business
organisation when the rate of VAT is specified in the agreements that are entered by various
entities for business transactions entered by them (Fabbri, 2015).
1.5 Requirements and frequency of reporting under VAT schemes
VAT accounting schemes helps the business organisation to make complex processes
simpler by improving cash flows analysis in the business. Introduction of these schemes is done
to make administration and general burden of accounting for tax is easier for smaller business
organisations. Various VAT schemes that are used by the business organisation are as follows-
 Annual accounting scheme- It helps the small business organisation by allowing them
to submit only one VAT return annually rather then four quarterly returns as compared
to large business organisation. During the year they pay instalments for expected liability
for VAT with the balancing payments due with the annual return. The scheme is
intended to help with budgeting and cash flow and reduce paperwork.
 Cash accounting scheme- This scheme helps small business organisation with their
finances by preventing them to pay over VAT to revenue and customs without receiving
the proceeds of sale from their consumers. As new and small business organisation
grants credit to consumer to gain their trade and realisation of revenue gates delayed due
to this. Imposing taxes before realisation of revenue creates problem of cash in running
business. Therefore, this issue can be resolved by cash accounting scheme.
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 Flat-rate scheme- Under this scheme, an optional flat rate scheme is available to
business organisation for simplification of VAT accounting burden on small business
organisation with taxable turnover of £150000 (excluding VAT) or less. This scheme
remove the burden of detailed records of purchase and sales.
 Standard scheme- This is a method of reporting VAT on the basis of issuance of VAT.
Business organisations under this scheme will have to submit a VAT returns four times a
year that is quarterly. Amount of tax which is paid quarterly and similarly refunds are
also granted to the business organisations quarterly (Jiang and Shao, 2014).
1.6 Maintaining an up-to-date knowledge of changes to code of practice, regulation or legislation
Code of practice, regulation or legislation are followed by organisations to have smooth
functioning of business operations. It is advisable to have an up to date knowledge regarding
various laws and regulations that are provided by the government. As by following this improved
legislation and code of conduct of services provided can be achieved. This also helps to maintain
all the informations relating to finance that belongs to taxes in more appropriate manner. Any
changes in the government regulations may reduce loop holes that are present in current law.
Therefore for adopting changes more accurately, it is necessary to keep an up-to-date knowledge
about legislation. Chances of mistakes are minimised and conflict in the organisation reduces
when everyone in the organisation is aware about changes in the legislation. Calculation of taxes
as per new regulations helps to minimise government intervention in business activities.
TASK 2
2.1 Extraction of relevant data for a specific period of accounting period
In the UK, VAT returns can be submitted either monthly or quarterly. Most of the returns
are completed on a quarterly basis. Once registered, a business will be assigned to a “VAT
stagger group”. Let us assume stagger group on 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 £ 256658
Less: Credit Note £ 2762
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Total £ 253896
Cash Book £ 9858
EU Acquisitions £ 21630
Correction of error £ 1763
Grand Total £ 287147
For Input VAT:
Purchase Book £115680
Less: Credit Notes £ 1860
Total £ 113820
Cash Book £ 7950
Petty Cash Book £160
EU Acquisitions £ 23650
Bad Debt Relief £ 6960
Grand Total £ 152540
2.2 Calculation of relevant inputs and outputs
VAT payable:
Sales Sales Value (£) VAT Payable (£)
Standard Supplies 180600 17835.5
Exempt Supplies 25450 -
Zero Rated Supplies 30900 -
Exports 16946 -
Sales Book £ 18110.50
Less: Credit Note £ 275.00
Total £ 17835.50
Cash Book £ 960.50
EU Acquisitions £ 2110.00
Correction of error £ 175.69
Grand Total £ 21081.69
Input VAT:
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Purchase Purchase Value (£) VAT Input (£)
Standard Supplies 75260 10325
Exempt Supplies 15620 -
Zero Rated Supplies 12960 -
Exports 9980 -
Purchase Book £10500
Less: Credit Notes £ 175.00
Total £ 10325.00
Cash Book £ 750
Petty Cash Book £15.95
EU Acquisitions £ 2110.00
Bad Debt Relief £ 675.00
Grand Total £ 13875.95
Input Tax:
 Purchase Day Book contain £10500 of total input and the figure of £175 is the input
VAT total of purchase return day book out of which £10325 whole is standard supply
input.
 Cash Book contain £ 750 and Petty Cash Book contain £ 15.95 are taken from the total
of the VAT analysis column of the cash book.
 EU Acquisition are the purchases made from another EU state.
 Bad debt relief is a amount 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 contain £ 18110.50 of total output and the figure of £275 is the output
VAT total of sales return day book out of which £ 17835.50 whole is standard supply
output (Raj, 2017).
 Cash Book contain £ 960.50 which are taken from the total of the VAT analysis column
of the cash book.
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 Correction of error is the case in which business owes a net £ 175.69 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 (Kumar, 2014).
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 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 with associated payment within the statutory time limits
VAT Return
Particulars Amount (£)
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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
Return for the quarter ended 31st December 2018 will have to submit to HMRC till 7th
February, 2019 and the payment of £ 7205.74 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 in case of failure to abide by VAT regulations:
Following are Implications and penalties in case of failure to abide by VAT regulations,
as follows:
 Late filing: In US tax system there are no penalties are provided in case of late filing of
VAT return however there is penalty for non payment or late payment of VAT.
 Late payment: A Surcharge Liability Notice may be issued if there is one return is
missing, if this problem remain, a penalty will be charged. If criteria of Surcharge
Liability Notice are not met a surcharge of 2% of the VAT due will apply and it will
increase to 5%, 10% or 15% in case mistake is repeated or an extended Surcharge
Liability Notice will be issued (Madden, 2015).
 Late registration: There is no penalties are prescribed in case of late VAT registration.
Late VAT payment penalties for time duration in which you are not VAT registered will
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be fined as follows:Less than 9 months late: 5% of VAT due, 9 to18 months late: 10%
of VAT due and more than 18 months late: 15% of VAT due.
3.2 Adjustments and declarations for any errors or omissions identified in previous VAT periods:
There are following are major ways in terms of Adjustments and declaration required in
case of any error or omission, as follows:
 Error correction in case of any previous year return is done through form VAT 652, This
is available on government' official site website or user can use VAT Helpline numbers.
 Rectification of error related to claiming of excessive input credit can be claimed
through transitional arrangements.
 Some time government also give relief by introducing temporary scheme for correction
of particular error to an extent.
TASK 4
4.1 Impact of VAT payment on an organisation’s cash flow and financial forecasts:
Following are the major impact of VAT payment on organisation's cash flow and
financial forecasts, as follows:
 Due to sudden imposition of any penalty for error about which management is unknown
can affect cash flow or financial forecast.
 Imposition of increased VAT rate on product can affect financial forecast of managers.
 In case of organisation that has large amount of credit sales and purchase, liability of
VAT payment affects its cash flow because of late payment or receipt from or to parties.
 Any sudden Demand notice from VAT authority also increases the payment towards
consultants and legal charges which also affects cash flow of organisation.
 Due to regular payment of VAT some times organisation may face working capital
requirements which may lead to decrease in cash flow (Pomeranz, 2015).
 Carry forward of inputs and outs in VAT system form one quarter to another quarter
creates uncertainties for management while preparing cash flow and financial forecast.
4.2 Advise for relevant people regarding changes in VAT legislation affecting organisation:
Government create changes time to time by issuing circulars or notification, which
affects various interested person in an organisation such as accountant, managers, related parties,
suppliers etc. Accounts should aware about recent updates, changes in VAT legislation and
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amendment in filing dates etc. in order to avoid any error and difficulties in filing of VAT
returns. It is advised to manager to keep a provision for any sudden possible financial burden in
the context of VAT and also managers should make analysis to identify any possible liability of
VAT due to change in VAT legislation (Mathur and Morris, 2014). Suppliers associated with
organisation should make proper arrangements to make easier the way of filing while avoiding
any mismatch in input and output under VAT system. Coordination between organisation and
suppliers are necessary in order to avoid any discriminations (McNabb, K. and LeMay-Boucher,
2014).
CONCLUSION
From the above report it is concluded that indirect tax is a tax which has an burden to the
consumers of goods. Organisation are required to get registration under VAT laws that are
dealing in purchase and sale of goods and services. Business organisations that are registered
under VAT law of UK has to follow all the required regulations of VAT in preparation of
financial statements. Returns under VAT has to be filled accurately and timely manner to avoid
penalties. Any error or default in VAT regulations and filling returns can attracts various
penalties. Taxes that are paid by organisations to the government as value added tax can impact
cash flow of the business organisation and therefore they must deal in efficient manner to cope
with the complication involved with the finance related issues.
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