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What Do You Charge Vat On?

You charge VAT on the taxable sales you make; this is known as output tax. The amount of VAT is worked out on the price for the goods or services you are supplying. Occasional sales of second-hand goods are treated in the same way as new goods, but if your business involves buying and selling secondhand, you’ll usually be covered by a special scheme.

You cannot escape charging VAT if you decide to take other goods, for example, rather than money in full payment or in part exchange. In this case, you have to work out the Vat to add on the basis of the open-market value of the goods or services you are supplying.

With discounts, the treatment varies depending on the type of discount. If the discount is unconditional, the Vat is charged on the discounted amount. This is also what applies if the discount is for prompt payment. Whether the customer pays promptly or not, VAT is worked out on the discounted amount. If the discount you offer is dependent on something happening later, for example, the customer buying more, VAT is worked out on the full amount for the first payment. If the discount is subsequently taken, the VAT is adjusted at that time. Packaging is treated as part of what you are selling, so there will normally be no extra VAT to pay; and if the thing you are selling is zero-rated, that also applies to the packaging. With delivery, if you charge extra for it, VAT is due on that extra amount. But, if the delivery is included in the selling price, no extra VAT is due.

Exports of goods are normally zero-rated and this also applies to many exports of services, although some are standard-rated.

WHAT YOU CAN CLAIM VAT BACK ON

You can claim back VAT on the goods and services you use in your business; there include imports and goods you remove from bonded warehouses. However, there are some supplies on which you cannot claim back the VAT. These include:

? motor cars (but private taxi and self-drive hire firms and driving schools can recover the VAT they pay on cars purchased for their businesses; however, they will have to pay VAT on any private use. And businesses which lease cars to them can claim back the VAT on cars bought on or after 1 January 1994. In both cases, VAT has to be paid on the ultimate sale of the car)

? business entertainment expenses

? if you are a builder, on certain things you install in buildings

? on some imports if you do not wholly own them

? on assets of a business transferred to you as a going concern (because you should not have been charged VAT if the going concern conditions have been met)

? on goods which are zero-rated or are exempt suppliers (because you have not been charged VAT).

WORKING OUT THE AMOUNT OF INPUT TAX YOU HAVE PAID

In Chapter 28, ‘Keeping the record straight’, you can see how to organize your records to obtain the information you need for VAT purposes. There are also guidelines overleaf on some of the records you need. Basically, if your business is very simple, you can work out the input tax like this:

1. Get all your purchase invoices in date order.

2. In your records, you will have some way of showing the VAT you have paid on each invoice.

3. You cannot claim back VAT on exempt or zero-rated supplies.

4. Some invoices show the amount of VAT you are charged, so these are quite straightforward. Enter the amount in the column marked VAT.

5. Other invoices are not so detailed and you will have to work out the amount of VAT yourself. See example overleaf for how to do this.

6. Remember you can only claim back the proportion of VAT for goods which you only use partially in your business. For example, if you run your business from your home, you could only claim back the VAT on the part of your telephone bill which was due to your business.

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