Value added tax is an indirect form of tax that is levied on the end user of products and services which means that the tax is not collected directly by HMRC from end user like income taxes. Rather, HMRC requires the VAT registered businesses to charge the tax on their products and services where applicable.
Calculation of liability
A VAT registered business needs to keep all records of their sales, purchases and corresponding returns for each quarter. Amount payable or receivable from HMRC is calculated as follows:
Tax charged on sales – Tax suffered on purchases = Payable/(Receivable)
Important dates and submissions
A registered business is required to file VAT return within one month and seven days of the subject quarter ended if the business is not using annual VAT scheme. Failure to do so may result in fines and penalties.
Evidence to retain
A business must keep proper accounting record for the return filed with HMRC. A business is required to issue VAT invoice to its customers which show detailed breakdown. Similarly, it also requires to retain valid VAT invoices to claim VAT on its purchases. HMRC may ask for VAT invoices if a business is selected for VAT inspection by HMRC.
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