When a business registers for vat the vat rate should be added to all sales from the date of registration. The standard vat rate is 17.5 per cent of the sales value. The value added tax added to sales is known as the output tax.
Value added tax paid to suppliers on purchases is known as the input tax. When completing the vat form the amount paid to HMRC is the total output tax after deducting the input tax.
Vat on goods purchased up to three years prior to vat registration can be reclaimed against the output tax liability. A business can also claim vat paid on services incurred up to 6 months before vat registration.
To be able to claim vat paid before the vat registration a business must have kept vat accounting records of items bought and sold to enable the business to claim vat on those items still in stock at the time of the company became vat registered. The vat claim for goods and services incurred before registration should be made on the first vat form after vat registration. A good accounting software package to enable record keeping is useful for this purpose.
Claim Vat on Goods Purchased Prior to the Vat Registration
A business can vat input on purchases made by that business for up to three years prior to vat registration provided those goods are also available for resale either as stock, raw materials or work in progress at the date of the vat registration and do not relate to exempt items.
If the goods were bought by another business, for example, pre incorporation then the vat claim would not be allowed. The vat claim would also be disallowed if the goods purchased have already been sold. In the same context vat on items such as petrol, gas and electricity would also be disallowed if they have been consumed prior to vat registration.
The vat claim is restricted when goods are used for personal and business purposes. The restriction being the proportion those goods are used for non business purposes.
Claim Vat on Services Purchased Prior to the Vat Registration
A business can vat input on purchases made by that business for up six months prior to vat registration provided those services do not relate to exempt items or goods that have already been sold before vat registration.
The services must have been bought by the registered business and as with goods purchased only the business proportion may be claimed.
Vat Accounting Records
In order to claim vat on goods and services purchased prior to registration the business must have kept accounting records which include valid vat invoices and there should also be an audit trail through the accounting records to support the completion of the first vat return.
When the first vat return is submitted and contains a large refund it is not unusual for the HMRC vat office to inspect the vat accounting records before authorising a refund payment.
The vat accounting should also include detailed stock records to demonstrate the goods on which vat is being reclaimed existed at the time of registration and also show when goods have been disposed of after vat registration
Detailed vat accounting records must also be kept of any services on which the vat claim is based. Those records stating the date received, description and should be capable of supporting the fact those services had been or would be sold after the vat registration.
If the items being sold are exempt from vat then the value added input tax cannot be claimed. If part of the goods and services being sold are exempt then only the proportion not exempt may be claimed.
Terry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.
Tag: vat
Accounting Software Strengths
Easy to use by non accountants requiring no previous Accounting knowledge and is basically a list of sales and a list of purchases on preset excel spreadsheets. Each workbook is arranged as 12 monthly spreadsheets with preset columns and uses an entry code letter to analyse both sales and expenditure.
Cash and bank spreadsheets are included as optional extras for those businesses that require them with a built in automated bank reconciliation. The sheet is designed to be completed by copying the figures from the bank statement into the bank spreadsheet and the bank reconciliation is achieved by also entering the statement total which is automatically checked against the entries made.
Monthly profit and loss account also includes a financial health check based upon an automated tax forecast to enable businesses to monitor their financial performance. By entering drawings the package then compares the net profit made with the likely tax liability plus the drawings.
Quarterly vat returns are generated for vat registered business and is also suitable for non vat registered business. To produce a vat return clients simply go to the vat file and select the quarter end date from a drop down menu and the figures for the vat return are automatically generated.
The vat calculations can be disabled by non vat registered small businesses by simply changing the standard vat rate from 17.5 to zero making the accounting software suitable for both vat registered and non vat registered businesses.
The accounting package includes a stand alone sales invoice generator which requires invoices generated to be manually input into the sales sheet.
The fixed asset schedule is preset with the capital allowance tax rates to automatically calculate capital allowances when fixed assets are entered. Depreciation is also automatically calculated with preset percentages that can be changed as required.
A major benefit of using this small business bookkeeping software is the templates are arranged in such a way to automatically generate an excel copy of the self assessment tax return. The excel self assessment tax return is arranged in the same layout as the official inland revenue form with the same box numbers making it easy to copy the figures from one to the other for submission.
Accounting Software Weaknesses
The Self-employed Accounting Software UK is based upon single entry of transactions and does not produce a balance sheet which is an optional requirement for self employed and therefore not a problem for the vast majority of businesses. DIY Accounting actually recommend clients who are self employed and wish to produce a balance sheet to use their Limited Company accounts package which does produce a balance sheet being based not on single entry but on double entry principles. The small business accounting software is suitable for a single tax year, the latest being 2007-08 and does not cater for accounting periods other than April to April. There are benefits in anyone self employed adopting the standard April to April financial year as this avoids tax allowances from two separate years being a feature of the accounts. When used by small businesses using the cash accounting system the bookkeeping entries to the sales and purchase sheets must be entered according to the dates money is paid or received rather than the dates invoices were issued. At the end of the financial year any invoices not yet entered require to be listed to adjust the final profit and loss account figures. This a major disadvantage if using the vat cash accounting scheme rather than the Accounting Software being reviewed.
Very Low Priced
At £12.99 the accounting software is basically available for loose change and will save many businesses the need to employ an accountant potentially saving hundreds of pounds in professional fees. For the financial year 2008-09 the basic package for non vat registered business is available at just £11.99 and the standard accounting software for vat registered small business is £12.99.
Other Features
The product has a stock control feature to monitor any stock losses. The small business accounting software contains a wages interface that fully integrates the DIY Accounting Payroll Software when those files are saved into the same folder as the accounting software files. Being written on excel spreadsheets all transactions are visible and capable of being changed by for example overwriting any errors as opposed to a database system that requires new transactions to be entered to reverse previous entries. The sales and purchase spreadsheets include columns for entering CIS tax deductions and payments and the certificate numbers. The CIS tax being then automatically entered on the self assessment tax return. As the small business accounting software is written on excel spreadsheets then it is essential that users have a version of excel from 1998 onwards installed to use the program. The accounting software also works fine with an Open Source spreadsheet package.
Conclusion: to Buy or not to Buy
Exceptionally good value, very easy to use and produces exactly what every small business requires, automated accounts requiring no bookkeeping skills and no previous accounting experience with the valuable end product of a fully automated self assessment tax return.
Terry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.
Value added tax is the tax amount added to the value of goods and services by a vat registered business when sold or transferred. Vat is not charged by businesses that are not registered for vat. This guide covers the vat threshold, accounting for value added tax, registration and submitting the quarterly vat tax return online
When the sales turnover of a business reaches the vat threshold, currently 64,000 pounds per annum until reviewed in April 2008, then registration for vat is compulsory. If financially beneficial, businesses can register for vat prior to sales turnover reaching the vat threshold.
When a business registers for vat it becomes responsible for charging vat at the correct percentage on every sales invoice and transfer of goods and services and also maintaining accurate financial accounting records of the vat charged hat are subject to vat inspections. If the sales turnover has breached the vat threshold that business is liable for the vat on sales even if it has not charged the customer.
The vat charged to customers is called output tax and the vat on purchases is called input tax. When a business has registered for vat in addition to maintaining records of sales and input tax it must also keep accurate financial records of purchases and input tax in order to calculate the vat payment to be made. The amount of vat to be paid each quarter is the difference between the sales output tax and the purchases input tax and is paid quarterly to HMRC.
Specific types of business transactions are exempt from vat such as insurance and loans. If the business only supplies exempt items then the business cannot register for vat to reclaim the input tax paid on purchases.
Registering voluntarily for vat when the sales turnover is below the vat threshold is a financial planning decision that each small business should consider. There are both advantages and disadvantages to a voluntary registration and the timing of the registration may also be a feature to be taken into account.
The advantages include being able to reclaim the vat input on purchases which is otherwise lost as a financial cost to the business. However as a consequence of a voluntary vat registration that business would also have to charge vat on all its sales invoices.
If the business has mainly vat registered clients then charging vat would probably not affect sales volume and has the advantage of enhanced credibility within the business community in which it operates. Charging vat to non vat registered clients such as members of the public would increase the amount being charged and make the small business less competitive.
When a business moves from being non vat registered to being vat registered changes may have to be made to the bookkeeping records being maintained. Not normally a problem if accounting or bookkeeping software is being used provided the financial system employed can fulfil the enhanced requirements being vat registered.
The accounting requirements of being vat registered require the business to issue vat invoices which show the name and address of the business, the vat registration number, sales invoice date and the vat being charged. An accounting record must be kept of all sales invoices issued in a format that permits a subsequent audit check when the customs and excise visit to conduct an audit check of the vat records.
In relation to purchase invoices and reclaiming the vat input tax vat may only be reclaimed on those invoices for which the business has a vat purchase invoice. A valid vat purchase invoice contains the vat number of the supplier who issued the invoice. An accounting record must be kept of all purchase invoices showing the vat output tax being reclaimed.
Vat returns are normally required to be prepared on a quarterly basis and submitting to customs and excise before the end of the following month. If registered for the online service vat returns can be filed online. There are benefits to filing the tax return online in that many businesses may receive up to 7 days longer than normal to file the vat return if the vat payment is being made electronically.
There are penalties for failing to submit the vat tax return on time and interest may be charged on the outstanding amount. When a vat return is not submitted on time an assessment may be raised which has to be paid as a legal debt until such time as the return is submitted and the amount due corrected.
It is important to submit the vat return on time even if there is a problem paying the full amount. Failing to submit on time brings the business to the attention of the tax authority that is more likely to inspect and investigate persistent offenders. A business can be expected to receive an inspection every three years however in the worst case scenario of a delinquent vat registered business the customs and excise could inspect every quarter.
Terry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.