How the value added tax (VAT) calculated in case of discounts and penalties, and working of administration of VAT in setup UK


If you are thinking about how to open a company in UK or to register ltd UK and how the payment of tax or VAT be done without any problem and to make the payment of the due taxes at time, this blog is for you. In this blog we will discuss about the calculation of VAT in case of discounts in good and what are the penalties in case of VAT including the default surcharge and penalties of errors. Further emphasize will be given on administration of VAT including the local offices, appeals, avoidance of tax and evasion.

VAT in Case of Discount

VAT is to be charged on the total amount irrespective of the discount being taken up when an offer of a discount is made for quick payment, excluding the discount for imports from outside the European Union, unless the discount is taken up, it is ignored. The supplies of voucher of retailers that are made on the discount terms such as relying on the level of purchases should be invoice with VAT that is based on the total amount, and upon the earning of discount an adjustment is made. When at a discounted rate items and good are sold to the staff, then the VAT only remains due to be paid at the discounted price.

In the case if the supplying of goods is done under the agreement of a hire purchase, then VAT is only to be charged at the selling price when the contract commenced.

If a trader has set different prices to be paid by the customers who make the payment via different means, such as the credit cards and any other means, then the VAT is to be paid according to every sale of standard rate, and is equal to the total amount that the customer makes payment of multiplied by the fraction of VAT.

The accounting of VAT in the formation of United Kingdom should be done on the market value of goods in the case if the goods are taken away permanently from a business or if you register ltd UK for another purpose that is non-business in nature. The cost of the resultant supply of services is the value to the person liable to tax who provides the services if the goods from the business are acquired to be used for a non-business or a private purpose. The VAT must be taken into account on the cost of services, if the services bought originally for the purpose of business are utilized for the purposes out of the scope of business, without charge. In this case, the VAT accounted for is not permitted to be more than the amount of input tax that is to be subtracted while buying the services.

Administration of VAT

The administration of VAT in setup UK is done by the HMRC and the hearing of appeals is done by the tribunal of tax.

Responsibility of the Local Offices

It is the responsibility of the local offices to locally administrate the VAT and to give advice to the persons who are registered and whose business’s main place is in their vicinity. They are under the control of regional collectors.

In order to make sure that the understanding of law and its following is done in a proper manner, the HMRC staff from a local office will visit from time to time to the person who is registered. If a trader is in disagreement with any decision of the application as provided by the HMRC, then he can request his local office for the re-consideration of the decision. When the review of a case is being made in this manner, then it is not mandatory to make an appeal in a formal manner. In the case where the settlement of an appeal can be done with the help of an agreement, a statement in the written form has the same authority as the decision that is made through the process of normal appeals. Even if a trader has already made an appeal to a tribunal of VAT, he can still claim for a re-consideration.

If the HMRC believe that a trader has not succeeded in making returns or if they think that the returns are not correct or complete, then they have the authority to make an issuance of VAT assessments depending on the best of their judgments. The normal time limit provided for making the assessments is four years since a VAT period came to an end, but an extension can be given up to 20 years if they face a dishonest conduct, some irregularities of registration, fraud and issuance of the invoices of VAT through an unauthorized procedure.

Before the issuance of assessments, HMRC writes to the traders mentioning their calculations, sometimes. Then the traders are allowed to ask about their calculations.

Appeals by the Trader

A trader having company formation of United Kingdom is allowed to make an appeal in the same manner as in the case of corporation tax and income tax. The returns and payments of VAT shown on the appeal should be made before the hearing of an appeal is held.

In any cases of difficulty, the tribunal can choose not to claim for the payment of all VAT displayed on returns prior to the hearing of an appeal. It cannot permit an appeal made against a matter that is completely administrative, for example, the refusal of HMRC to apply an extra statutory concession.

There can be a case of disagreement over the subtraction of input tax which is dependent on the purposes for which the services or goods were brought under use or if their usage was limited to making the supplies liable to tax. The trader should be able to prove that HMRC refused a subtraction that was unreasonable, if the services or goods are amusements, luxuries or entertainment.

Evasion and Avoidance of Tax

The deployment of some important resources is done in order to tackle with evasion of tax, avoidance of tax or fraud.

If the traders make use of a scheme that avoids VAT, that is to be disclosed to HMRC, then this can also be considered as an avoidance of tax.

Penalties in case of VAT

The occurrence of default can be noticed when a trader makes the submission of his return of VAT late, or the submission of return is done on time while the VAT payment is delayed. A default surcharge becomes applicable if there is a default that involves delayed payment during a period of default surcharge.

Occurrence of Default Surcharge

A default can also occur when a payment is delayed on account from a substantial trader. The HMRC will issue a notice of a surcharge liability on a trader if a trader is the defaulter. A surcharge period is specified in the notice that is effective from the date of notice to the one-year completion of the termination of period for which the trader is a defaulter.

In the case of the occurrence of a further default, with respect to the period of return that is ending during the mentioned period of surcharge, the original period of surcharge will be then given an extension to the anniversary of the termination of the period to which the new default is related. Moreover, if the default includes the payment of VAT made late, as opposed to a simple return that is late, a surcharge is levied.

The surcharge is dependent on the number of defaults that include the payment of VAT that is late, which have arisen in the respect of periods terminating in the period of surcharge.

The surcharges that are at a rate of 2% and 5% respectively are not made a demand for, until and unless the amount that is due will be minimum £400 but in the case of the calculation of surcharges at the rates of 10% and 15%, there is a least amount of £30 that needs to be paid.

If a substantial trader is late in payment having one or more payments due, final or on account, for a period of return, this is only considered as one default. The net VAT whose payment is made late is the sum of late final payment and the late payments on account.

A trader is supposed to make a submission of the returns of one year on time and make the payment of the VAT that is displayed on them in time, to break out of the period of surcharge liability and the escalation of percentages of surcharge.

For all the purposes of default surcharge, a default will be ignored if the trader succeeds in showing that the payment or the return was shown at this time, and in this manner, and that it was adequate to have the expectation that HMRC would acquire it by the due date. A default is also to be ignored in the case if the trader can provide a demonstration of an adequate excuse for the payment or the late submission.

The application of the regime of the default surcharge to small businesses is subject to modification. A business that has a turnover below the amount of £150000 is considered to be a small business. When this type of business gets late in the submission of a return of VAT, or its payment, first it will get a letter from HMRC that offers help and there will be no charge of a penalty. If within the 12 months of the letter, another default occurs, then the issuance of a notice of surcharge liability is made, and the beginning of a surcharge system commences finally as described above. The surcharges of 2%, 5%, 10% and 15% respectively, are then caused due to the subsequent defaults, if the payment of VAT is late, with the period of surcharge subject to extension each time.

In an effective manner, it is permitted to the small business to have an extra chance to default by getting a letter of help first, prior to the commencement of usual system of default surcharge.

Penalties in the Case of Errors

A common penalty regime exists if there is an error in the tax returns. VAT is also a part of this. Corrections of errors can be made in a VAT return in the next return.

Regime of Common Penalty

The regime of common penalty in the case of errors made in the returns of tax is also applicable for the VAT.

Correction of Errors in the Next Return

 The following errors that occurred in the previous return of VAT can be corrected in the next return: The errors not greater than £10000, over declaration subtracted from the total under declaration or 1% multiplied by the total turnover of VAT for period of return, maximum £50000. A notification of other errors should be issued to HMRC on the VAT652 form or by the means of a letter. In both of the cases, an imposing of a penalty of error may be done.

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