Learn About VAT Tax And Get Tips On Its Administration

VAT tax is a tedious tax which you cannot afford to ignore.

Its quite important for you to understand the basics of VAT, because your small business will have no option about registering for it, as soon as your annual sales reach the national allowed limit.

If you are going to register, you will also have to cope with the paperwork and the deadlines. Being efficient will minimize the time you spend on VAT. Simple over sights could cause you heavy penalties.

The brief guide on this page will explain to you the basic modalities of VAT as outlined below:

• How Vat tax works.


• Whether you need to register.


• How to charge and reclaim VAT.


• How to complete your VAT return.


• How or when to opt out.

Vat tax is a transactions tax, on sales of goods and services.

It is not a tax on profits. VAT is charged on standard-rated supplies made by VAT-registered businesses which act as tax collectors for the Government.

All businesses pay VAT on most purchases.

Your business, if you are registered, charges VAT on the goods and services you sell.

The difference between the output tax you charge your customers and the input tax you claim is handed over to the National Tax Authority.

The advantage of registering is that you can claim back VAT tax on business purchases. But if you add VAT tax to your selling prices, you may lose customers.

You must notify the National tax authority, within 30 days of the end of the month, if your taxable sales in the last 12 months exceed the allowed limit. For example £61,000 in UK

• Exceptionally, if you expect your sales to fall back below this level, you can ask Revenue & Customs to let you remain unregistered. Otherwise, you will be registered immediately.


• You must also register if your sales during the next 30 days are expected to exceed the allowed limit — eg if you set up a new company with customers ready to place orders totaling the allowed limit or more.

You may register for VAT before commencing regular business, in order to reclaim VAT on your pre-trading business expenses.
You will have to provide evidence of your intention to start trading at the Tax Authorities.

You may opt to register voluntarily for VAT tax if your sales are below the registration level. It should be worth registering (to claim back VAT on purchases) if:

• You make zero-rated supplies — because your customers will not have to pay VAT.


• Your customers are themselves VAT-registered — because they may be able to claim back VAT you charge them.

Charge customers VAT tax as soon as you are required to register. Do not wait until registration is complete. You will probably have to pay VAT from the date you were liable to register.

Contact Your National Tax Authority and start the registration process.

For the time being, add a percentage of the Vat sales tax(output) to your prices (or less, as you can offset the VAT you will save on purchases). Show only the gross amount — don’t show VAT as a separate item on invoices. Explain to customers that you will send out VAT invoices once you are registered.

Once registered for VAT, you must provide a VAT tax invoice, and keep a copy yourself for every sale to a VAT-registered customer. This does not apply to sales of exempt or zero-rated supplies.

The tax invoice must show a number of specified pieces of information.

• Invoice number.


• Tax point (and date of issue, if different from the tax point).


• Your business name and address.


• Your VAT registration number.


• Customer’s name and address.


• Type of supply (eg sale, lease, rent).


• Description of goods supplied.


• Quantity supplied, cost, tax rate (national rate) and the VAT on each item.


• Discounts, if any.


• Total cost, excluding VAT.


• Total VAT.


• Total cost, including VAT.

A less detailed invoice can be used for sales below say $50, showing just the name, address, VAT number and total cost.

No tax invoice is necessary for sales direct to the public — for example, in a shop — unless one is asked for.

To claim back input tax (the VAT tax you pay on purchases), you must keep all the VAT invoices for the purchases you make.

If you work from home, you can claim back a proportion of VAT on certain items of expenditure.

If you reclaim VAT on fuel used by cars, extra VAT will usually be payable.,

Input tax is not normally reclaimable on certain types of purchase, such as company cars used for private purposes.

If you make only exempt supplies, you are not entitled to register for VAT and cannot reclaim input tax. If you make exempt and taxable supplies, you should be entitled to VAT registration and can recover part of your input tax. Special rules apply here.

In general, you pay VAT on a quarterly or monthly basis depending on national legislation. Each month or three months is called a ‘VAT period’. Ask the Tax Authority to make your VAT periods fit in with your accounting year.

NB Timing transactions in relation to your local VAT cycle can help your cash flow. Buy at the very end of the VAT period and you’ll effectively get your VAT money back straight away. Send out goods and invoices just after the period ends and you can delay paying in the VAT for up to three months depending on your local national limits.

• Every month to three months, you will receive a VAT tax return form.


• The completed VAT return, plus any VAT owed by you, must be received by the tax authority not later than the stipulated date following the VAT period.

Take the information directly from your accounting records.

• The records, which you must keep, should show input tax, output tax and payments due to or from your tax authority. Your records must separate out standard-rated, exempt and zero-rated supplies. You must also detail any overseas sales.


• If you use a simple book-keeping system to control your business — and for your national tax returns — you have already done most of the work for VAT.

Each sale has a tax point. This is the date by reference to which you become liable to pay VAT.
The tax point may be:

• The date of supply.


• The date of issue of the invoice.


• The date you receive payment.

Tax inspectors may visit your premises to check your records. If your VAT returns are incorrect you will be charged interest on late payments and may be fined.

• If, after sending in a return, you find you have miscalculated your tax obligation, send a voluntary disclosure letter to your tax department explaining the error, and enclosing a payment of the VAT due (or asking for a repayment of VAT over declared).
• If a VAT tax inspection audit later uncovers any ‘mis declaration’ of liability on your part, the penalties can be severe.

You must keep copies of all your invoices and VAT returns for at least six years because tax audits are normally conducted 5 years back wards.

Contact your national tax authority to de-register from VAT if you sell or liquidate the business.

• You can also de-register if you expect your sales to be less than the allowed limit in the next 12 months.

De-registration is quick and easy: fill in a form at your VAT tax office and complete a final, supplementary VAT return.

We advise you to ask a local qualified accountant to guide and assist you on your obligations. Meantime you can subscribe to our small business accounting e-zine on the left to receive our free tips and advise on effective VAT tax management

Return from Vat Tax to Starting a Small Business.