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Value Added Tax (VAT) was introduced in 1974 and the Value Added Tax Act 1994 was produced to consolidate all of the previous legislation. This Act still provides the
main framework for the tax.
As a Local Authority which makes taxable supplies, the Council is registered for VAT. The Council’s VAT registration number is GB104169792. It must, therefore, properly account for VAT on its income and expenditure transactions and submit regular VAT returns to HM Revenue and Customs (HMRC).
HMRC has for some time been taking an increasingly tough line with taxpayers who deal with VAT incorrectly and has the power to levy quite severe financial penalties against taxpayers who do not submit accurate VAT returns and comply with the rules.
Ignorance of the rules is not an acceptable excuse.
The Accountancy Section in Financial Services is responsible for completing the Council’s monthly VAT return and transmitting it to HMRC but the general accuracy of the returns is dependent on all officers correctly processing income and expenditure transactions.
It is essential that all officers who deal regularly with financial transactions are aware of the general principles of the tax and also know where to obtain help and advice. This document has been prepared as a source of guidance on the VAT issues most commonly encountered. If, during the course of your work, you are unsure how to treat a transaction for VAT or you encounter more complex VAT problems please seek advice rather than guess. This advice can be sought from Finance. Accountancy also has access to external VAT consultants who will assist with difficult and/or complicated scenarios.
VAT is a tax on consumer expenditure collected on business transactions. Most business transactions involve supplies of goods or services. VAT is payable if they are:
A supply of goods is described as the passing of the exclusive ownership of goods to another person. The VAT guide also includes the supply of water and power and a major interest in land under this category.
A supply of services is described as doing something, other than supplying goods, for a consideration which may be in money or in kind.
All supplies of goods or services fall into one of five categories for VAT purposes:
Standard-rated – 20% (From 4 January 2011)
Applied by VAT registered traders to all their supplies of goods and services, unless these fall within one of the other categories. (If different VAT categories are combined within a supply of goods or services a company may have a special VAT rate agreed with HMRC.)
Lower-rated (reduced rate) – currently 5%
Applied to a restricted range of supplies including fuel and power for domestic use and low-usage business premises.
Zero-rated – 0%
A rate of VAT which applies to specific items as detailed in the Value Added Tax Act 1994. Examples include:
However, strict criteria have to be met for the zero rating to apply and items falling within these descriptions can still be standard-rated.
Exempt
No VAT is added and it relates to specific items as detailed in the Value Added Tax Act 1994 which have been exempted from VAT. These include:
Again, strict criteria have to be met for the exemption to apply and items falling within these descriptions can still be standard-rated.
Non-business / Outside the Scope
Supplies outside the scope of the tax and therefore not subject to VAT.
Activities undertaken by local authorities which can be, or are, provided in competition with the private sector are generally considered to be carried on by way of business and are subject to the normal requirements of VAT and must be taxed in the relevant way. Local authorities are not considered to be carrying out a business activity where they engage in activities as a public authority under a statutory requirement (special legal regime) and which are not carried out in competition with the private sector. These are non-business supplies and are outside the scope of VAT.
In the case of local authorities outside the scope supplies, generally but not exclusively, fall under one of the following types
On the face of it there seems little difference between zero rated, exempt and outside-the-scope supplies as no VAT is added to any of them. However it is important to understand the subtle difference between the categories, particularly in the case of exempt supplies, as these may have considerable financial implications for the Council outside the regular monthly VAT returns (see 1.3.4 below).
All coding of expenditure and income (other than internal transactions) must be followed by a VAT indicator. The indicators to be used are:
Creditors: V1
Debtors: V3
Creditors: R1
Debtors: R3
Creditors: Z1
Debtors: Z2
Creditors: X1
Debtors: X2
Creditors: N1
Debtors: N2
General
In order that the authority can recover VAT paid, officers must ensure that prior to passing invoices to Payroll and Payments:
Financial Services is responsible for the payment of invoices. However, it is not its function to check invoices to ensure that VAT has been correctly accounted for.
This is the duty of the spending departments. Officers are reminded of the Council’s Financial Procedure Rule 9.5.4. which states that a certifying officer must be satisfied “that the allocation of VAT has been correctly made”.
The tax invoice is the basic document from which input tax may be reclaimed. These documents are important items and must be retained for inspection by HMRC. Claims for repayment of input tax can be disallowed if the tax invoice in support of the claim is not retained.
Eligible tax invoices:
Invoices up to £250 must include the following information:
Note: Although these invoices need not show the name and address of the person to whom the goods or services were supplied, officers should ensure that all invoices, irrespective of value, are addressed to the Council.
Invoices over £250 must include the following additional information:
Officers should always check invoices to ensure they contain all the information required to be a proper tax invoice. If VAT has been charged and the invoice does not include all the required information officers should insist that the supplier forwards a proper tax invoice. It should not be assumed that a supplier’s invoice is adequate for VAT purposes.
Note: In certain circumstances non-tax invoices may have to be paid and the notes in section 2.3 cover this eventuality.
It will sometimes be necessary to make a payment without a tax invoice. The situations where this is most likely to occur are:
Wherever possible officers should try to avoid making payments with orders or against pro forma invoices. Where this is unavoidable the officer should ensure that a proper tax invoice or tax receipt is received at a later date to support the VAT claim. The invoices/receipts must be retained for at least 7 years and should be filed in such a way as to be retrieved in the event of any query or visit by a VAT inspector.
Invoices which include VAT must not be altered. If there is an error on the invoice the supplier must be informed and an amended account or credit note obtained. If you think that VAT has been incorrectly charged, or not charged, you should query this with the supplier. If the supplier confirms the invoice to be correct it should be paid as it stands. Although there is a duty for the recipient to check the VAT liability of an invoice the responsibility ultimately rests with the supplier.
The amount shown for VAT on the certification slip should (apart from a few exceptions) match that on the invoice.
Where a less detailed tax invoice (not exceeding £250) shows a VAT inclusive total only, the VAT element may be calculated using the VAT fraction, as follows:
VAT fraction = Rate of tax divided by 100 + Rate of tax
VAT = “inclusive figure” multiplied by VAT fraction.
With VAT currently at 20% the VAT fraction is 1/6.
Where suppliers offer discounts for prompt payment the VAT charged should have been calculated on the discounted amount whether or not the Council takes up the discount. The VAT figure on the invoice should always be the one taken and must notbe amended.
To code:
If the discount is taken: Calculate what the value of the goods/services would be with that VAT amount. (VAT amount/VAT rate *100). Code this to the account/cost codes with VAT at the standard rate.
If the discount is not taken: As above and code the balance of the value of the goods/services to the account/cost codes with VAT N1.
Credit notes including VAT must contain the same information as tax invoices and should be coded as for payments using the relevant VAT indicator.
Receipts should be requested from suppliers when any purchases are made that are to be reimbursed from petty cash. Till receipts are, however, sometimes adequate for reclaiming the VAT element.
If a proper tax receipt has been obtained the VAT indicator appropriate to the VAT liability of the goods should be used.
If there is a till receipt it should be checked to see whether it contains the company’s VAT registration number. If yes then the VAT indicator appropriate to the VAT liability of the goods should be used.
If there is no VAT registration number but the supplier is known to be VAT registered the VAT indicator appropriate to the VAT liability of the goods should be used. If it is not known then all items should be coded as outside the scope. Registration should be checked and not assumed.
In order that the Council properly accounts for VAT in respect of goods and services it provides, officers must ensure that:
VAT should be charged on all goods or services supplied by the Council unless you are sure that they are not subject to VAT. Whilst it is impractical to supply a definitive list of the VAT position relating to all the Council’s activities the VAT indicators for many income items are in the Council’s Scale of Fees and Charges, which is the responsibility of Services to update and for each Service will be available via the decisions on Modern.Gov.
The responsibility for ensuring that VAT is correctly charged on income rests with the Council. Failure to charge and account for VAT correctly could lead to penalties being applied.
VAT regulations require that the VAT element of all cash income must be accounted for in the month in which it was received. As the submission of returns is the means by which many areas of the Council account for income collected any delay could lead to an incorrect VAT return being provided to HMRC. Officers must ensure that there are no delays in the submission of returns as under-declaring VAT in areas where significant income is received could result in the Council incurring penalties.
If there is a change in the rate of VAT Financial Services will issue guidance regarding procedures to follow over the changeover period and notify officers of the new indicator to be used.
Depending on the circumstances VAT will need to be accounted for at either the new or the old rate on both expenditure and income. Particular care must be taken to ensure that the correct rate is applied.
If you discover that an error has occurred in the VAT treatment of a transaction you should notify Financial Services immediately giving full details.
Minor errors, such as incorrect coding of income, can be easily corrected but major errors, such as consistently charging the incorrect VAT rate, may involve a declaration to HMRC and a subsequent penalty charge.