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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. These 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.
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
Cash: V
Debtors: V3
Creditors: R1
Cash: R
Debtors: R3
Creditors: Z1
Cash: Z
Debtors: Z2
Creditors: X1
Cash: X
Debtors: X2
Creditors: N1
Cash: N
Debtors: N2
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:
Registered traders may only reclaim input tax on supplies used in the course of making taxable business supplies and are not allowed, except to a very limited extent, to reclaim VAT incurred on expenditure relating to exempt activities and not at all on non-business transactions. However, as local authorities incur significant expenditure in relation to non-business services provided as part of their statutory duties there is a special provision which allows them to recover all input VAT on such supplies.
In order to prevent VAT being a burden on funding the special provision also allows local authorities to recover VAT incurred on making exempt supplies, subject to the amount of VAT involved being ‘an insignificant proportion’ of the total VAT incurred in a year. The proportion accepted by HMRC as insignificant is currently less than 5% of the total input tax incurred and if breached requires the local authority to pay HMRC all the input tax incurred on the exempt supplies.
In order that the authority can recover VAT paid, officers must ensure that prior to passing invoices to Financial Services:
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.
VAT receipts should be requested from suppliers when vatable purchases are made that are to be reimbursed from petty cash. Till receipts are, however, sometimes adequate for reclaiming the VAT element.
Without any kind of receipt the only VAT that can be reclaimed is on the reimbursement of car parking charges, vending machine purchases or telephone calls. All other items must be coded as outside the scope (N1).
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.
Yes: Go to 3.
No: Go to 2
Yes: HMRC allows the VAT to be reclaimed against payment on a contract certificate provided the supplier is VAT registered and a tax invoice or receipt is received at a later date. Procedures should be set up to ensure this occurs. Proceed to 5.
No: VAT cannot be reclaimed unless the payment is for reimbursement of car parking charges, vending machine purchases or telephone calls. Use indicator N1.
No: The supplier should not have charged any VAT. Only indicator N1 may be used. (The invoice should be queried with the supplier if VAT has been charged.)
Yes: Go to 4.
Yes: Normally any VAT cannot be reclaimed against these and VAT should not be separated out when coding the invoice for payment. However, HMRC will allow it provided a proper tax invoice is received at a later date. Procedures should be set up to ensure this occurs.
No: Go to 5
(If the value of the supply exceeds £250 the VAT amount must be shown separately. If £250 or less than the total can include the VAT but the rate of VAT charged should be shown.)
Yes: Go to 9.
No: Go to 6.
No: Use indicator N1.
Yes: Go to 7.
Yes: Use indicator X1.
No: Go to 8.
Yes: Use indicator Z1.
No: Go to 1 and start again, you have missed something.
(VAT on business entertainment and certain other expenditure cannot be reclaimed, and there are special rules on the purchase of vehicles.)
No: If none can be reclaimed then the total cost should be coded to the expenditure code and indicator N1 should be used. If part can be reclaimed then the relevant cost should be coded using indicator V1 and all the remaining cost should be coded using indicator N1.
(Example: Cost of goods £200, VAT at 20% £40, Invoice total £240, 50% reclaimable:
ABCD EFGH - £100 - V1 - £20
ABCD EFGH - £120 - N1)
Yes: Go to 10.
No: To calculate the VAT amount apply the VAT fraction to the invoice total. (VAT fraction = rate of tax/(100 + rate of tax).)
(Example: Invoice total £150
5% VAT: VAT = 150 * 5/105 = £7.14
ABCD EFGH - £142.86 - R1 - £7.14
20% VAT: VAT = 150 * 20/120 = £25
ABCD EFGH - £125 - V1 - £25)
Yes: Go to 11.
The amount coded as VAT must be the same as shown on the invoice.
Yes: Use indicator R1.
No: Go to 12
Yes: Use indicator V1.
No: Go to 13.
Yes: The VAT should have been calculated on the reduced cost of the goods after allowing for the discount. The VAT amount shown on the invoice still applies even if the discount is not taken. The reduced cost should be coded using indicator V1 and any balance using indicator N1.
(Example: Cost of goods £200, 10% cash discount, VAT at 20% £36:
Discount taken:
ABCD EFGH - £180 - V1 - £36 - Total £216
Discount not taken:
ABCD EFGH - £180 - V1 - £36
ABCD EFGH - £20 - N1 - Total £236)
No: Go to 14.
Yes: The invoice should be coded using the split given. The indicator to be used for the cost that does not have VAT applied depends on the VAT status of the goods/services supplied.
No: A special rate of VAT has been used. The invoice may state the rate of VAT but the Council’s systems can only deal with the common VAT rates. It is necessary to determine the value of goods to which the VAT is applicable and code this using V1 and the balance of the expenditure using either Z1 or X1 as relevant.
(Example: Cost of goods (reference material consisting of books and CDs) £200, VAT rate 9%, VAT £18, invoice total £218:
ABCD EFGH - £90 - V1 - £18
ABCD EFGH - £110 - Z1
£90 = £18 / 20 *100
Z1 has been used as the indicator on the balance as the books are the element on which no VAT is charged and these are specified as zero-rated in the VAT Act.
(Provided by schools, colleges, universities and local authorities)
In respect of domestic use and small quantities:
Where supplied on an unmetered basis the VAT liability follows that of the accommodation. Otherwise it should be charged at the reduced rate (R).
The general rule is that such transactions are exempt (X). However there are some exceptions which are always standard rated and these are set out below:
Special rules apply for the letting out of sports facilities: See Sport and Leisure facilities below.
If action is taken as part of the Council’s statutory obligation, without being requested by the other party, the recharge is outside the scope of VAT (N).
If the other party requested the action to be taken the recharge is standard rated (V).
If the action taken was of benefit to the public at large (for example, damage to street furniture) rather than to the person being charged, the income is non-business (N).
Where costs incurred by third parties are reimbursed by the Council the VAT cannot be reclaimed (N).
The sale of goods to another local authority is taxable and the appropriate indicator should be used.
Services made under a statutory obligation and not in competition with the private sector are non-business (N).
Services not made under a statutory obligation and not in competition with the private sector are non-business (N) but may be treated as taxable (V) if both parties agree.
The supply of services which are in competition with the private sector on a significant scale should be treated as business transactions and subject to the appropriate rate of VAT.
The supply of services that includes any supply of goods should be treated as business and is subject to the appropriate rate of VAT.
All of the VAT incurred on purchasing a phone and the network connection can be reclaimed providing the charges do not contain any element for calls.
If employees are not allowed to make private calls all of the VAT on the call charges can be reclaimed. If only minimal calls are allowed then the VAT may also be reclaimed. There is no definition of what constitutes minimal but it is expected that it would only be the odd one or two.
If employees are charged for any private calls made then the VAT on the call charges can be reclaimed providing VAT is accounted for on the charge to the employee.
If employees are not charged then the VAT must be apportioned between the private and business calls and only that relating to the business calls can be reclaimed.
If the Council carries out repair and maintenance work which is the responsibility of the tenant any charge to the tenant should be standard rated.
If a tenant leaves premises in an unfit condition any charge made to them for repairs and making good is treated as compensation and not subject to VAT (N).
The recovery from a third party of the cost of repairing damage to the Council’s property is outside the scope of VAT (N).
All mandatory service charges paid towards the upkeep of common areas of the estate or common areas of the block of flats, the general maintenance of the exterior of the block of flats or individual dwellings and the provision of the estate warden, caretaker and the like are exempt from VAT (X).
This does not apply to optional service charges paid by the occupants of non-domestic property.
(for example, central heating, double glazing)
A lump sum payment is taxable at the standard rate (V).
If payment is made in instalments with the rent, and for a limited time only, the payments are taxable at the standard rate (V).
If the items are installed irrespective of the wishes of the tenant and paid for by a permanently increased rent the whole amount takes the same indicator as the rental charge.
(Charges made to owners in respect of work carried out to private property under the Public Health Acts, the Housing Acts or similar legislation where the owner has defaulted by failing to perform the necessary repairs.)
If the charges are a contribution towards the cost of the repair work which the Council is required by law to undertake itself then they are non-business (N).
If the repairs were the responsibility of the individual then they are standard rated (V).
VAT charged by a contractor performing the repairs can only be recovered if the Council was responsible for undertaking the work.
Generally, payment for the use of sport and leisure facilities is standard rated (V), but if facilities are let for over 24 hours or for a series of sessions the supply may be exempt (X).
A single let for a continuous period of over 24 hours to the same person is exempt provided they have exclusive control of the facility throughout the whole period.
All of the following conditions must be met:
Cancellations of sessions and variations to the duration of lets can invalidate the exemption. Additional sessions cannot be included within the series after pre-booking and even if they fall within the period of the original booking are liable to tax at the standard rate (V).
Supplies that are considered to be of an educational nature where instruction is received are exempt (X). Examples are; swimming lessons, aerobics classes and induction sessions at a gym.
Where a fixed allowance is paid to employees no VAT can be reclaimed.
Where reimbursement is for the exact amount incurred then VAT can be reclaimed provided invoices or sufficient evidence is produced.
Where actual expenses subject to a maximum are reimbursed then VAT may be reclaimed up to the amount actually reimbursed.
No VAT can be recovered on travel and subsistence expenses paid to job interviewees. They should be coded as non-business (N).
Goods and services supplied to charities generally have the same liability as when supplied to any other party. There are certain items that can have a zero or reduced rate applied, but specific conditions have to be met for the charity to receive this relief and the charity must provide an eligibility declaration.
Charges for the alarm service will be standard rated (V) unless the service is being provided to a disabled person, in which case they are zero rated (Z).