VAT – Guide to outputs and output tax

‘If it moves, put VAT on it!’ is a rule of thumb that many have heard, but, of course, it is not always correct. Whilst it is true that most supplies of goods or services attract VAT at 17½%, there are a number of key areas where that is not true. Further, if you, as supplier, apply VAT incorrectly, then your customer has no right of recovery of that VAT as input tax.

VAT can apply at the following rates: 17½%, 5%, 0%, and exempt. The default position is that the standard (17½%) rate applies. VAT Law lays down those supplies which fall into the other rates. It is as well to identify as early as possible whether your activities fall within any of those ‘Schedules.’

One High Court Judge commented; “Value added tax is surely now well enough established in our daily commerce that anyone, however inexperienced, ought to recognise the need to become acquainted with its basic requirements when embarking upon a career.”

Although the contact was concerning registration for VAT, his words can be applied equally to finding out what rate of VAT applies. There is a useful leaflet, available on Revenue & Customs’ web site, number 701/39. The latest edition is August 2004, so it may be out-of-date in some places. However, it will indicate those areas which may be applicable to you.

A person is required to issue a VAT invoice when he makes any ‘taxable supply’ (i.e: at 17½%, or 5%, but not at 0%) to another taxable person. Where an invoice includes supplies at, for example 17½% and 0%, then the obligation remains. This has to be issued within 30 days of the date of the supply, either the delivery or making available of goods, or the carrying out of a service.

The invoice has to contain certain information, and this changed from the start of 2004. In particular, the invoice has to include sufficient description of the goods or services supplied, and the unit price(s) of the supplies made. Fuller information is found in Notice 700, chapters 16 and 17.

The date of the supply is called the ‘basic tax point.’ This is overridden when an invoice is issued if that is within 14 days of the basic tax point, or if a payment is received before the supply is made. The tax point is the date on which VAT becomes due. Again, Notice 700 is helpful; chapters 14 and 15 describe the tax point rules.

Where supplies of service continue for a significant period, i.e: several months, or more, then the tax point rules are slightly different. This can occur in a wide variety of businesses; construction, engineering, legal, professional services, etc. The basic tax point would be when the service is completed.

However, the supplier may wish to seek stage payments, to assist his cash flow. A tax point is created, in such circumstances, when he issues a tax invoice, or receives a payment, whichever is sooner. If he issues a tax invoice in one VAT period, and receives the payment in the next, then he will have to account for the VAT before he is paid. One alternative, which should be considered, is to issue a request for payment, which is not a VAT invoice. The document should be clearly marked; “this is not a VAT invoice. A VAT invoice will be issued on receipt of payment.” This means that VAT will only be accounted for when the money is received.

Quite different rules apply where services are supplied either in another country, or to a customer in another country. In some circumstances, a UK supplier will be required to register for VAT elsewhere. This will be the subject of a later article.

Article kindly written for Bytestart by Les Howard, VAT Consultant, www.vatproblem.com