Any person who makes taxable supplies (i.e. that which is taxed at either the standard, lower or zero rates of VAT) but does not meet the conditions for compulsory registration is entitled to register voluntarily for VAT. Eligible individuals might make the choice to register for VAT for a variety of reason, such as improved cash flow or to project a more influential status.
However, most taxable persons are registered for VAT not for voluntary reasons but because they have triggered the conditions set for compulsory registration. There are two different conditions which must be reviewed to establish whether registration is required for a person receiving taxable income. The conditions are:-
- At the end of any month if the value of a person’s taxable supplies in the past 12 months exceeded the annual VAT threshold or
- At any time if there are reasonable grounds for believing that the value of a person’s taxable supplies in the next 30 days will exceed that annual VAT threshold (VATA 1994, Sch. 1, para. 1(1)).
If a threshold is exceeded, notification has to be made and any exemption applied for. Exemption can still be applied for even if notification was late but, following Shephard (1986) 2 BVC 208, 121, it will only be granted if:-
- The annual threshold is not exceeded and
- A reasonable body of commissioners would, at the time, have granted exemption having reached the conclusion that the taxable supplies in the year would not have exceeded the annual limit.
The VAT threshold announced in the 2007 Budget and operative from 1st April 2008 is £67,000. The value of the threshold usually increases annually in the Budget, and the government has pledged that the UK’s VAT registration threshold will remain one of the highest in the EC as a spur to the growth of small business.
30 Day Notifications
Notification must be made within 30 days of the end of the 12-month period in which the annual past threshold was exceeded. Although there is no published concession extending the 30-day time-limit, in Lowinger Partners (1987) 3 BVC 1,324, indications were given by a Customs officer that HMRC might exercise their discretion and not assess in cases where the failure to notify was less than three months late.
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A person must notify HMRC of his liability to register if (VATA 1994, Sch. 3):-
- He acquires in the course or furtherance of a business in the United Kingdom, taxable goods from a person in another member state
- That person is registered in that member state and
- The acquisitions in a calendar year exceed the acquisition tax threshold which mirrors the ordinary registration threshold and currently stands at £67,000.
In deciding whether a person has exceeded a threshold, again the following supplies should be ignored:-
- Goods subject to excise duty
- New means of transport and
- Goods installed or assembled at the customer’s premises.
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Subject to certain conditions, a person can correct on a VAT return certain errors which he made on one or more previous returns. The rules apply to errors both in favour of the trader and HMRC and apply whether the net effect is in favour of either party. If an error is adjusted in accordance with the conditions, no default interest arises.
Conditions for Correcting Errors
The conditions for making such a correction are as follows:-
- All over-declarations and under-declarations of liability that are discovered during the course of a return period are corrected on the return for that period. An ‘underdeclaration of liability’ is the sum of all input tax overstatements and all output tax understatements. An ‘overdeclaration of liability’ is the sum of all input tax understatements and all output tax overstatements
- The difference between the under-declaration of liability and the over-declaration of liability does not exceed £2,000.
- If any overstated output tax exceeds any understated output tax, the excess is shown as a negative entry in the tax payable portion in the VAT account which is kept in accordance with reg.32(1)
- If any understated output tax exceeds any overstated output tax, the excess is shown as a positive entry in the tax payable portion in the VAT account which is kept in accordance with reg. 32(1)
- If any overstated input tax exceeds any understated input tax, the excess is shown as a negative entry in the tax allowable portion in the VAT account which is kept in accordance with reg. 32(1)
- If any understated input tax exceeds any overstated input tax, the excess is shown as a positive entry in the tax allowable portion in the VAT account which is kept in accordance with reg. 32(1)
- All corrections refer to the returns to which they apply and
- All corrections refer to such documentation as relates to the errors.
Current Period Correction
HMRC usually do not assess default interest if an under-declaration is no more than the limit and is correctly adjusted in the trader’s VAT account and included on the current return (Leaflet 700/45/March 2002, para. 4.2).
However, this practice applies only to under-declarations corrected on a VAT return. From 1 September 2008, default interest will be charged on disclosures of whatever amount if they are not adjusted for on a VAT return. See the section below dealing with voluntary disclosure.
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Liability to Register
Distance Sellers to the UK
A distance seller is a person who supplies goods and delivers them to an unregistered person in another member state. A distance seller must register (VATA 1994, Sch. 2) in the UK if:-
- His taxable distance supplies to the UK exceed £70,000 in a calendar year or
- There are reasonable grounds for believing that the value of his distance sales in the next 30 days will exceed the same threshold.
In deciding whether a person has exceeded the distance sales threshold, the following supplies should be ignored:-
- Goods subject to excise duty, e.g. alcoholic drinks, oil, petrol and tobacco
- New means of transport, e.g. certain aircraft, boats and vehicles and
- Goods installed or assembled at the customer’s premises
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At the end of each prescribed accounting period, every registered person must make a return to HMRC on the VAT 100 form provided, showing the amount of VAT payable (VATA 1994, Sch. 11, para. 2(1)). The return must usually be made not later than the last day of the month next following the end of the period to which the return relates and any VAT due for that period must accompany it. A prescribed accounting period is normally a period of three months.
Under VATA 1994, s. 25(1), it is possible for a taxable person to account for and pay VAT in accounting periods of other than three months.
Monthly returns have the effect of disclosing a VAT-registered person’s VAT liability to HMRC sooner than any other form of return submission. The use of monthly returns is therefore recommended only to those persons who are in a repayment situation (their input tax exceeds the output tax collected) e.g. exporters, food producers (whose supplies are taxed at the zero rate).
In certain cases, perhaps where the trader has been late in sending in his returns or where he has been connected with some business which has been in default with its VAT liabilities, HRC may insist that a trader actually submits monthly returns (Value Added Tax Regulations 1995 (SI 1995/2518), reg. 25(1)(c)).
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Finance Act 2008, s. 115 and Sch. 37, introduced a new recordkeeping requirement that applies to all taxes administered by HMRC, including VAT. The new provisions:-
- Require taxpayers to maintain the records specified by statute and
- Permit HMRC to specify by legendary legislation the additional records that must be maintained and retained, for example, to comply with EU law.
In addition, HMRC will provide guidance on the records that they would expect to find for particular types of business.
HMRC acknowledges that normal business records will generally be sufficient for satisfying the statutory requirement. It is not expected that the record keeping requirement for Vat purposes will change greatly from what was required prior to FA 2008. This is explained below.
Every taxable person shall, for the purpose of accounting for VAT, keep and preserve the following records:-
- His business and accounting records
- His VAT account
- Copies of all VAT invoices issued by him
- VAT invoices received by him
- Documentation relating to acquisition or dispatch of goods to and from the EC
- Documentation relating to importation and exportation by him and
- All credit notes or other documents which evidence an increase or decrease in consideration that are received, and copies of all such documents that are issued by him (Value Added Tax Regulations 1995 (SI 1995/2518), reg. 31(1)).
HMRC can add to this list for any trade or business of a description specified by them or for the purposes of any scheme established under the Act or regulations. They may also vary the terms of any notice either by issuing a fresh one or by issuing a notice which amends an existing one.
The records must be preserved for a period of six years, or such lesser period as HMRC may allow (Value Added Tax Act 1994, Sch. 11, para. 6(3)).
The VAT account is divided into separate parts relating to the trader’s prescribed accounting periods. These parts are divided into two portions – ‘the tax payable portion’ and the ‘tax allowable portion’. The tax payable portion comprises the total output tax payable for the prescribed accounting period, adjusted as required in accordance with reg. 34 and 38 and any other regulations made under the Act. The tax allowable portion comprises the total input tax allowable for the same prescribed accounting period, similarly adjusted.
For VAT purposes, the trader’s records must include records of all operations connected with his business which affect the amount of VAT which he has to pay or can reclaim.
Set out below are the guidelines published in Notice 700 (April 2002), para. 19.2.2:-
You must keep records of all operations connected with your business which affect the amount of VAT you have to pay or can reclaim.
- Every supply of goods or services you receive on which you are charged VAT by your suppliers
- Services listed in Section 31 (Sch. 5 services) which you receive from abroad
- Every EC acquisition, importation or removal from warehouse
- All the supplies made by your business (including any zero-rated or exempt supplies)
- Any goods you have exported
- Any gifts or loans of goods
- Any taxable self-supplies – for example, cars
- Any goods which you acquire or produce in the course of the business which you put to private or other non-business use
You must also record adjustments such as:-
- Corrections to your accounts
- Amended VAT invoices
- Any credits you allow or receive and
- Any goods which you acquire or produce in the course of your business which you put to private or other non-business use.’
Under VATA 1994, Sch. 11, para. 6, HMRC can specify what records must be kept for VAT purposes and, after specifying that ‘taxable persons must keep and preserve certain records and accounts’, HMRC issued Notice 700 to amplify this general requirement. Some of the guidance provided in the notice is now included in the specific requirements of the Value Added Tax Regulations 1995, reg. 31.
Regulation 31(1)(a) refers to business records, examples of which are given in Notice 700 (April 2002), para. 19.2.3:-
- Annual accounts, including profit and loss accounts
- Bank statements and paying in slips
- Cash books and other account books
- Credit or debit notes you issue or receive
- Documentation relating to dispatches/acquisitions of goods to/from EC Member States
- Documents or certificates supporting special VAT treatment such as relief on supplies to visiting forces or zero-rating by certificate
- Import and export documents
- Orders and delivery notes
- Purchase and sales books
- Purchase invoices and copy sales invoices
- Record of daily takings such as till rolls
- Relevant business correspondence and
- Your VAT account.
Computer Produced Invoices
HMRC have special powers under VATA 1994, Sch. 11, para. 3 relating to the production and transmission of VAT invoices by computer.