Indirect Tax refers to the amount collected by an entity present in the supply chain, for instance, a producer or retailer, which in turns get paid to government (Wang, Caminada and Goudswaard, 2012). This amount is paid by customers on purchase of the company's offerings. The most prominent example of indirect tax is the Value Added Tax.. The report covers a detailed understanding of VAT regulations and calculation of VAT returns in a timely and accurate way. It also includes a detailed discussion of VAT penalties and various adjustments for previous errors and communication of VAT information
1.1. Identification of sources of VAT information
Value Added Tax is a form of indirect tax which is placed on a company's offerings whenever a specific value is added at stages of supply chain, i.e., from production to ultimate sales of the product. Within the UK government, there are various sources which provide effective information on VAT.
One such source of information is Value Added Tax Act, 1994. This act within the country is related with VAT and provides effective information on this aspect which provides effective information on the same. In addition to this, there are various provisions that are covered under this act which are required by companies to comply with to effectively manage VAT within their organisation.
Another source of information is government websites, which consists of online portals where individuals as well as organisations could collect information related to VAT. These sites provide information about the changes that take place each year in the acts associated with VAT, which are necessary for the organisation be updated with (Sterner, 2012).
Another source by which organisations could get effective VAT information are the journals that are issued by government and various taxation agencies which could provide the organisation with the data and information on how the firm could effectively manage, calculate, collect and pay VAT to the government.
1.2. Interaction of organisations with relevant government agency
It is imperative for any organisation to effectively interact with various government agencies to gain a better understanding on how to develop a legal framework of managing and filing indirect taxes. One such government organisation is Her Majesty's Revenue and Customs which is a department within the UK which undertakes collection of taxes as well as administration of various other regulatory regimes which also includes National Minimum Wage.
There are various ways in which companies could interact with this organisation regarding indirect taxes. This entity has its own website which enlists information about various taxes and systems that are required by companies to perform ethical work frame regarding the taxation system. The company could use this website to interact with this organisation regarding various queries associated with filing of taxes. In addition to this, the company has postal service too which allows the firms to interact the officials of this agency via formal letters where the company could receive formal notices from the agencies regarding information associated with their taxation (Pradhan and Ghosh, 2012).
Within the website there are details of the operative timings of the company throughout the week where the agency is functional and open for interaction. Such information could be quite useful for organisation so that they could approach the agency within in an appropriate and timely manner.
1.3. VAT Registration Requirements
For any functional organisation, it is imperative that it be acquainted with various requirements that are necessary for VAT registration. These requirements are necessary to be complied by the organisation for appropriate filing of VAT returns. Within UK, it is crucial for companies to register its business with HMRC for VAT in case the VAT taxable turnover of the company gets more than £85,000. It is required by the firm to charge right amount of VAT and effectively submit their VAT returns. In addition to this it is needed by the company to keep their VAT records as well as VAT account (Penu, 2016).
There are two types of methods which are required to be considered by companies for their VAT registration. These methods are as follows:
- Compulsory Registration: It is essential and compulsory for firms to register for VAT if the firm expects its VAT taxable turnover to be higher than £85,000 in a period of next 30 days or if the VAT taxable turnover be more than the this amount over the past 12 months. It is also required for the firm to register even if it sells goods that are exempted from VAT but buy commodities more than £85,000 from registered suppliers for business use.
- Voluntary Registration: An organisations could register for VAT if its business turnover is less than £85,000. However, it is required for the company to pay HMRC any VAT amount which is owed to it from the date the firm is registered (Nie and Yue, 2012).
Companies, after receiving its VAT number from HMRC, could sign up for the online account on its website for submitting VAT returns. In case any company fails to register online, the firm is required to register online by using various forms which are listed below:
- Form VAT1A in case the firm is an EU business and indulged in distance selling to the UK.
- Form VAT1B in case it import goods that more than £85,000 form any other EU country.
- Form VAT1C in case the company disposes assets whose 8th and 13th Directive refunds are claimed.
1.4. Identification of information included on business documentation of VAT registered businesses
It is quite imperative that firms include effective information on its business documentation for an appropriate management of VAT within the company. It is imperative for firms that effective invoices are produced which are considered as the most prominent business documentation for VAT registration (Karagöz, 2013). There are various information that could be included in these invoices which are mentioned below:
- One imperative information is the date on which the invoice was issued.
- It also must include unique sequential number which is quite effective for conducting and managing the sales.
- It must also full name and address of the supplier as well as the customers. In addition, it must also include the registration number of supplier as well.
- The invoice must involve the nature and quantity of the supplied goods.
- It also must include unit price exclusive of VAT and breakdown of VAT rate.
- It also involves the total amount of VAT payable.
1.5. Requirements and Frequency of reporting VAT schemes
VAT scheme refers to the VAT amount that is paid by business or is claimed back from HMRC which is the difference between the VAT charged from customers and VAT paid by the business for its purchases. These schemes effectively aid the business to enhance their cash flow system within the company. There are various schemes that could be used by companies which are as follows:
- Annual Accounting: This scheme would allow firms to submit a single VAT return annually. Throughout the year, companies are required to pay instalments which is based on its estimated liability with balancing payment due along with the return. Firms could apply for this scheme in case it expects its taxable supplies to stay below £35M in following 12 months (VAT Annual Accounting Scheme,2019).
- Cash Accounting:This scheme is one of the methods of VAT reporting where the VAT is recorded as per the payments received or paid. It requires organisations to pay for its sales and reclaim VAT on the purchases after payments made to the suppliers. The VAT taxable turnover of the firm must be £35M or less.
- Flat Rate Scheme: Under this scheme, the tax paid by the firm would be calculated by multiplication of VAT flat rate by VAT inclusive turnover. All the businesses regarding of its nature get a discount of 1% in their first year. The firm is required to have VAT turnover of £150,000 or less to apply for this scheme.
- Standard Scheme: In this VAT reporting method, the VAT is recorded as well as paid as per the issue of invoices. The company is required to submit the returns quarterly, i.e., four times a year. It is required by the firm to pay the difference to HMRC in case the amount of sales is higher than that of the cost.
1.6. Maintaining up-to-date knowledge of changes to codes of practice, regulation or legislation
Each organisation follows legislations, regulations and codes of practice to effective operative functions. For an organisation to smoothly conduct its business, it is imperative that the firm gather up-to-date knowledge in regards with various legislations and regulations that are provided by government (Joumard, Pisu and Bloch, 2012). It would help organisations in managing their tax related information in a systematic manner. The changes witnessed in the regulations aim at reducing the limitations and loopholes of the previous laws. More accurate practices could be adopted by the firm if it has effective knowledge about these regulations. It limits the chances of errors and enhance the possibilities of effective business practices such as appropriate calculation of taxes in accordance with the legal standards.
2.1 Extract relevant data for a specific period from the accounting system
Example 1- VAT's standard rate is currently is 20% within the country.
Mark is undergoing the process of completion of his VAT return for quarter ended 31 March, 2018. the following information is available:
- Sales invoices totalling is£100000 were issued in respect of standard rated sales.
- Standard rated expenses were amounted to £20700.
- On 17thFebruary 2018, Mark purchased machinery worth £23100 inclusive of VAT.
Example 2- Thomas is planning to commence trading in future. He operates an aircraft and is taking three alternative business types in consideration. These are
- Training, where sales will be standard rated for VAT
- Transport, where sales are planned at Zero rated for VAT
- An air ambulance service, where sales will be exempted for VAT.
For each alternative Thomas sales will be £75000 per month (VAT exclusive) and his standard rated expenses would be £12500 per month(VAT inclusive).
2.2 Calculation of inputs and outputs using VAT classifications
- Standard supplies: Example 1
In this example Cathy will be required to register for VAT as taxable supplies are made by her. Output VAT of £15000 (75000*20%) per month will be due and input tax of £2083 (12500*20/120) per month will be receivable.
- Exempted supplies: Thomas will not permitted to register for VAT taxable supplies will not be made.
- Zero -rated supplies: Exemption from registration for VAT could be applied by Thomas since zero-rated supplies are being made, otherwise he should still register as these are taxable supplies (Hansen, 2014).
Output VAT will not be due but input VAT of £2083 per month will be recoverable.
- Exports: VAT is charged on the goods that are used in European Union otherwise no VAT would be charged. Exported goods could be charged with zero-rated which would allow businesses to enjoy input credit.
2.3 Calculation of VAT due to, or from the relevant tax authority
Amount due to tax department is that amount which is required to be paid to other business organisations is higher than the received amount.. To effectively calculate amount of due from or due to the appropriate authority input and output tax calculations will be done.
- Standard supplies- General applicable rate is 20% on which VAT amount will be calculated. Mark will be liable to pay £12010 to VAT department which is authorised by HMRC. In another case Cathy is required to pay an amount of £13500 to the department as net VAT payable.
- Zero-rated supplies: This means the offerings which are not exempted from tax but rate with which tax charged remains zero. This aids in taking credit to the business input tax paid. Thomas is exempted from registration and does not require to pay any output tax to the government. Input tax receivable is worth £2083.
- Exempted supplies: Registration is not required for supply of commodities and services which are registered as exempted. So, output VAT will not be payable and no input tax would be recovered (Fukuyama, 2013).
3.1 Implications and Penalties for an organisation Resulting from Failure to Abide by VAT Regulations
The results and penalties which HMRC Department will charge are different for different types of mistakes made by a company. These can be related to the maintenance of records. firms must have to keep records of last six years in order to avoid the penalty from HMRC (Ehrhart, 2013). The amount of penalty is £ 500 for breaching this requirement. The amount of penalties increases as the frequency of the mistakes done increases. For the very first time, £ 5 per day will be charged, and if the mistake is also occurred earlier than the charge will increase to £ 10 per day within the period of previous two years, and it is £ 15 in case an organisation is breaching the same law for more than one time.
It is also important to know that these penalties will not be deducted in already paid amount of the VAT Return, instead the company has to pay the VAT amount without involving the Penalised amount in the Return amount (Deb Pal, Pohit and Roy, 2012).
Mostly the penalties are calculated on the basis “PLR” which stands for Potential Lost Revenue. It is additional amount that is to be paid by the business in b reach of law. It is used for the calculation of the amount to be charged from a business for the breach of certain law of VAT. Certain criteria are set by HMRC for different types of errors such as for the careless errors- the charge will be 30% of PLR, Deliberate Errors- the charge will be 70% of PLR, and for Deliberate and Concealed Errors- the charge will be 100% of PLR.
In case a firm does not follow the rules and regulations of VAT, it will have to incur these penalties.
3.2. Adjustments and Declarations for Errors or Omissions Identified in Previous VAT Periods
As HMRC sets up the penalties and implications for the non follow of rules and regulations related to tax payment, it also provides measures to companies in making over their mistakes, errors and omissions in their previous records of VAT Return. The best is to self declare the mistake in any to HMRC before the department finds out it. It will prevent the business from being effected by their intervention (Dalton, 2013).
If any omissions or errors of equal to or less than £ 10,000 are to be adjusted than they can be easily rectified by a company by informing to the HMRC Department. But the Deliberate Errors made by the company must be shown separately. For this, companies have to calculate the net amount remaining due to HMRC Department and the amount that it has already paid to HRMC and then payment of remaining amount will settle down the omission.
The adjustment will be done while filing the next Return to HMRC, in case if any amount is remaining due to HMRC, than it will be recorded in the Box 1 and if any amount has to be taken back from HMRC than it must be written clearly in Box 4.
4.1. Informing Managers about the Impact of VAT Payment on an organisation's Cash Flows and Financial Forecasts
The impact depends upon the type and turnover of any business. In order to get tax advantages the managers of the should hire experts of tax legislations. There are two impacts of value added tax on the profitability of a firm. The neutrality in the purchase and sales is sue to the fact that companies register themselves for VAT and get net value of their sales and purchases made by them (Aasness and Nygård, 2014). Due to this, they get and proper estimation of their future forecasts regarding the expenses and income which will incur of their relative sales and purchases. It will help them in knowing the VAT, they have to pay in future. In case if an organisation is dealing in good which are exempted from the payment of VAT but the value of those obtained goods are relatively high then VAT will be charged on the cost of acquisition of those goods or services. The costs also affects the cash flow. As the business is providing goods to their customers on credit basis, them the difference between the time of selling and the time of getting the amount of those goods from the customers are different.
In these ways, managers can know the VAT Payment affects on cash flows and future forecasts of companies.
4.2. Advising People about Changes in VAT Legislation's Effect on Organisation's Record Keeping System
The affect of changes in the legislations of VAT can vary from companies to companies and apply in various situations. For getting positive or eradicating the negative affects of change in the legislations related to VAT, organisations can hire tax advisor to deal with these situations. But is not always possible that the change in these legislations will led to negative change only (Arauco and et. al., 2014). The changes are such as now HMRC Department is not accepting the manual records instead it suggests companies to keep digital records. It is helpful for a firm as it reduced the chances of damaging the data or loss of files as they can be now stored without covering extra space of office. Not only this but it also made easier to store more data than manual record keeping. The system enhanced the way of working of not only for one firm but also for other companies. In addition to this, HMRC had made changes such as it will accept the data only in spreadsheets form by the use of various software and it will be directly connected to HMRC. It saves time of both HMRC and a company. It also helped in making all the tax related information into one easy access form (Braunerhjelm and Eklund, 2014).
From the above given data, it is summarised that firms should be aware about all the rules and regulations of VAT so that the company can file VAT Return at right time by doing proper calculation so that the errors and omissions can be avoided. It will also help in proper working and avoiding the intervention of HMRC Department in the functioning of companies. Proper filing of tax will also help in the growth and development of the country.
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