How is adjustment made in value added tax (VAT) on an annual basis, and what is the scheme of capital goods and regulations related to VAT applicable on exports, imports, dispatches and acquisitions in a business formation of UK


The terms of export and import in UK are the sales and purchases of goods with countries that are not inside the European Union. On the other hand, the terms dispatch and acquisition refer to sales and purchases of goods with countries in the European Union. The countries that are the part of the European Union includes: Austria, Bulgaria, Belgium, Cyprus, the Czech Republic, Denmark, Finland, Estonia, France, Greece, Germany, Hungary, Italy, Republic of Ireland, Latvia, Luxembourg, Lithuania, Malta, Poland, Netherlands, Portugal, Slovakia, Romania, Slovenia, Sweden, Spain and United Kingdom.

This article will discuss the topics of adjustment of value added tax, scheme of capital goods, exports, imports, dispatches, acquisitions, and special schemes in the case of VAT when starting a ltd company UK.

Adjustment of Value Added tax

The adjustment on an annual basis is done with the tests of de Minimis, applicable to the year in a complete form or as a whole.

The comparison of the result for the year with the total of results for the individual periods of VAT is done and the addition of any difference is performed or subtracted from the input tax either on the return for the first period after the termination of the year or on the return for the final period.

Scheme of Capital Goods

The capital goods scheme (CGS) permits the HMRC to make sure that the VAT whose claim is made on the buying of some specific capital items in an accurate manner that shows the taxable use for which they are used over one period of time.

The partially exempt businesses are mainly affected by the scheme and lets the recovery of the amount of VAT to be adjusted for the use of each year. The CGS is applicable to land and building equivalent to the cost of about £250000 or more than that, whose dealing is done with over 10 years of VAT and to the boats, computers and aircraft that is equivalent to the cost of about £50000 or more, whose dealing is done with over 5 years of VAT.

In the year of VAT in which the acquiring of asset is done, the recovery of input is done based on the utilization for the quarter of purchase, and then the annual adjustment is done in a manner as described before. For each subsequent year of VAT, over the period of recovery of 5 or 10 years, then an adjustment is made to the recovery of value added tax.

The second return of VAT is made subject to adjustment following the end of the year of VAT. If the asset is sold out before the termination of period of recovery, then there is a need of two types of adjustments:

  • The normal adjustment for the sale of year of VAT considering that the usage proportion for the period from the beginning of the year up till the date of sale had applied for the entire year of VAT, and
  • An extra adjustment to be made for every recovery year of VAT that remains, whose computation is performed by supposing 100% usage for the supplies liable to tax.

Exports, Imports, Dispatches and Acquisitions

After the business registration UK, exports that are made outside the European Union are known to be zero-rated whereas the imports that are acquired from outside the European Union are liable for the value added tax. The acquisitions that are liable to tax from the other states of European Union are also subject to VAT whereas the sales made to the traders residing in other states of European Union are considered to be zero-rated.

It should be noted that different rules exist for the transactions that take place between the member states of the European Union and in the case of the transactions made with countries that are not a part of the European Union.

Importance of Place of Supply

The place of goods and services’ supply holds importance because it helps in determining that how the supply should be treated for the value added tax. For example, a supply will come under the rates and rules of VAT of UK if the supply is made in the UK.

If the goods are present in the UK at the time of their supply, and the supply of goods, then it will be considered as the one made in UK. In a similar way, a supply of goods will not be considered as the one made in the UK, and the payment of output tax of UK will not be required to be the supply of goods that are not in the UK.

If the supply is a services’ supply, then the general rule for services that are made to a business (B2B Supplies) is that the supply is made where the customer has made an establishment of his business.

The general rule for supplies to services to other consumers (B2C Supplies) is that the supply is made in the case where the supplier has done an establishment of his business. However, some exceptions exist to this rule. For example, some specific services related to land are considered as made in the case where the land is located.

Trade of Goods in Non-European Union Countries

A person who imports the goods from outside the European Union should provide the accountability for the output VAT when that’s good entry in made in UK for a business having formation of UK and can make a claim of the input VAT to be paid on his next return of VAT.

On the contrary, the export of goods made outside the European Union is considered to be zero-rated. It is important for the trader to provide a proof of the export in the form of consignment notes or copy of invoices.

Trade of Goods confined within the European Union Countries

If a person who is VAT registered and makes the acquiring of goods in the UK from another member state of European Union, then the goods are liable to VAT in this country. As a result, the accountability of the output tax has to be done on the relevant return of VAT.

Such acquisitions’ point of tax is the earlier of the date an invoice is issued and the month’s 15th day following the acquisition month.

The entry of a transaction is done on the relevant return of VAT in the form of an output and an input. So, it subject to the provisions of partial exemption and the effect remains neutral. Hence, the trader is in the same position as he would be in, in the case if a UK supplier had provided the goods to him.

In the case if the received goods are exempt or zero-rated according to the legislation of UK VAT, then there is no need to make an accountability of VAT at a standard rate.

On the other hand, when the sale of goods is done to a customer residing in some other member state of European Union, then the supply is considered zero-rated in the case of satisfaction of the following conditions:

  • The VAT number of customer is quoted by the supplier on the invoice.
  • A registered trader acquires the supply.
  • A proof is contained by the supplier that the delivery of goods was done to another state which is a member of the European Union.

In the case if the above conditions are not met, a charge of VAT must be made by the trader in the same manner as in the case of a supply made to a customer within the same member state as the trader.

What if VAT-registered businesses need international services?

The customer is required to make an accountability of both the input and output tax according to the rules of reverse charge when the VAT-registered businesses need to use the international services. The accountability of output tax on other foreign services is usually done by the supplier in the usual manner.

As seen earlier, the services of B2B are considered as the ones supplied at place where the customer had establish company in UK. According to these rules, when the supply is considered as the one made in the UK, the customer of UK business should apply for the reverse charge. According to this, the person who establish company in UK, charges himself an output tax whose recovery is done as input tax in a usual manner. This means that the international supplier is not bound to make the registration of VAT in the UK or to make charge of UK VAT on such supplies. Rather than this, it is required by the customer to account for VAT.

In the scenario where the customer is not registered for VAT, the buying of services is counted as a deemed supply in order to measure the turnover for the customer that is registerable. This may result in the customer becoming liable for the registration of VAT.

If the customer of business only makes the supplies liable to tax, then the reverse charge’s overall effect will be normally neutral in the case of tax as the input tax and output tax will cancel out each other. However, in the case if the customer of business is partially exempt, then any of the input tax is not recoverable and so the reverse charge will result in the total payment of output tax.

The point of tax for a single supply for which a reverse charge is applicable, is the earlier of the time the service comes to a completion and the time at which the payment is made for the service.

If the supply is said to be continuous, the point of tax will be the termination of every payment or billing period. When the service does not require the payment of billing or payment periods, the point of tax will then be December 31st every year until and unless a payment has been made already, in which scenario the point of tax will be the payment date.

For the services of B2C, the supplier will make the supply when he has made the establishment of his business and a charge of output tax will be made by the supplier in a usual way. An input tax cannot be recovered on the supplies of B2C as by its definition, the consumer does not have a VAT based business registration UK.

Special Schemes

The scheme of cash accounting, scheme of annual accounting and the scheme of flat rate are included in the flat schemes. These schemes make it easy to account for VAT for specific types of trader usually with a turnover that is relatively low.

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