Key Terms

• Value Added Tax (VAT)

  A tax imposed on the sale of goods and services
• Indirect Tax


  A tax which is imposed indirectly on consumers by taxing their spending
• HMRC 


  The government body that regulates and administers the collection of taxes
• VAT Guide 700


  The online guide published by HMRC which explains the workings of VAT
• Taxable Person

  A business that is registered for VAT
• Output Tax


  Vat on sales of goods and services
• Input Tax


  VAT on purchases of goods and services
• VAT Return


  The HMRC VAT form that calculates VAT to be paid or refunded by deducting input tax from output tax
• Standard Rate


  The percentage rate at which VAT is charged on most goods and services
• Reduced Rate


  A reduced rate allowed for socially beneficial items
• Zero-Rated Supplies


  Supplies which are liable to VAT but have a rate of 0%
• Exempt Supplies


  Supplies that are not liable to VAT at all
• VAT Registration


  The formal procedure by which a business registers with HMRC and will then charge VAT and account for VAT due to HMRC
• VAT Threshold 


  An amount set by HMRC for annual taxable sales of a business above which the business must register for VAT
• Voluntary Registration


  VAT registration of a business with annual turnover below the VAT threshold
• Deregistration


  Where the annual sales of a VAT registered business fall below a certain threshold and the business applies to HMRC to cease to be VAT registered and no longer charge VAT
• VAT Visits and Inspections

  Control visits to VAT-Registered businesses by HMRC VAT officers who check that VAT is being charged and accounted for correctly
• Full VAT Invoice


  An invoice issued by a VAT-Registered supplier which must contain certain details
• Modified Invoice


  A VAT invoice issued by a business for supplies of more than £250 which shows the price of the product both inclusive and exclusive of VAT
• Simplified Invoice


  An invoice for £250 or less (including VAT) that does not show the VAT amounts seperately
• Pro-Forma Invoice


  Issued by a supplier for a buyer to pay for goods before they are supplied. It is not a VAT invoice
• VAT Receipt


  A document issued for a cash sale, often by a retailer, which shows the name, address and VAT registration number of the supplier and the VAT amounts and rates of the goods and services sold
• Tax Point


  The date on which the supply is recorded for the purposes of the VAT return
• Basic Tax Point


  The date on which the goods are sent or collected, or the service performed
• Actual Tax Point


  Any variation to the basic tax point
• 14 Day Rule


  If a VAT invoice is issued up to 14 days after the basic tax point, the date of issue is the tax point
• Partial Exemption


  Where a business makes both taxable and exempt supplies and has to calculate the amount of input tax it can reclaim, based on the extent of its taxable supplies
• 'De Minimis' Limit


  Where the amount of input tax which relates to a supplier's exempt supplies is so insignificant that HMRC allows the business to reclaim it
• Business Entertainment


  Entertainment provided free of charge to people wo are not employees of a business
• Blocked Expenses


  Expense of the business on which the input VAT cannot be reclaimed
• Fuel Scale Charge


  A charge based on the CO2 emissions of a vehicle to account for the VAT on fuel for personal use of a company vehicle
• Exports and Imports


  The sale and purchase of goods to/from businesses located abroad
• Postponed VAT Accounting


  Businesses declare the VAT on imports and reclaim the VAT on the same VAT return, rather than paying the VAT when the goods arrive in the UK
• Reverse Charge


  Businesses that import services must treat the supply as a sale and a purchase, and include the VAT on the imported service as both output and input VAT on the VAT return
• Annual Accounting Scheme


  A scheme which enables businesses (with annual taxable turnover of £1.35 million or less) to make VAT returns annually rather than quarterly
• Flat Rate Scheme


  A scheme which enables businesses with an annual taxable turnover of up to £150,000 to pay VAT at a flat percentage rate based on tax inclusive turnover
• Limited Cost Business


  A business operating the flat rate scheme, with costs of goods that are less than either 2% of its turnover, or £1,000 a year (if its costs are more than 2% of turnover), must use a flat rate of 16.5% if it wishes to operate the FRS for VAT
• Cash Accounting Scheme


  A scheme which allows businesses (with annual taxable turnover of £1.35 million or less) to account for VAT on the basis of payments received and made rather than the tax points on invoices received and issued; it provides automatic relief for VAT on bad debt
• VAT Control Account


  A control account that collects all the accounting data needed for the VAT return
• Net Errors Reporting Threshold

  Net VAT errors of £10,000 or less, or 1% of quarterly turnover, subject to a £50,000 maximum limit can be corrected on a subsequent VAT return