ACCOUNTING - VALUE ADDED TAX

    A full explanation of the working of Value Added Tax would be out of place in this book, but the following summary is given in order that the book-keeping entries which are entailed may be better understood.  86

    1. The Finance Act 1972 introduced in the United Kingdom, as from 1st April 1973, VAT which replaces Purchase Tax and Selective Employ- ment Tax. It is managed by the Commissioners of Customs and Excise.All persons trading in the U.K., including non-residents, must register with the Commissioners of Customs and Excise unless specifically excluded by statute. In particular, traders whose turnover does not exceed £10,000' are excepted. 

    2. VAT is, theoretically, a tax paid by a trader in respect of the value which he adds to goods or services during his stage of the production or the distribution of those goods or services. However, in effect, VAT is a tax on the amount expended by the final consumer of goods or services.

    3. VAT is collected whenever goods or services are transferred for value during the production-wholesale-retail process. When a trader purchases goods or services liable to VAT he must pay the supplier a price which includes the appropriate rate of VAT on the taxable purchase prices. In turn, the trader when selling goods or services to his customers must charge, them a price which includes the appropriate rate of VAT on the taxable sales price.

    4. VAT is chargeable at the appropriate rate2 on the supply of all goods

'From 12th April 1978 the VAT registration limit was raised to £10,000.

There are two positive rates, viz., the standard rate, currently 8%, and the higher rate. currently 12%.

CONTAINERS. GOODS ON APPROVAL. COD. FIC

    And services in the U.K. in the course of a business and on all imports of goods, except where specifically excluded. Exceptions to tax at the stan- dard rate take the form of either, exemption or zero rating. In respect of goods or services which are exempt the trader does not charge his customer with any 'output tax'. Exemption, however, does not mean that VAT will not apply to exempt goods or services. What it means is that the purchaser does not pay tax directly on the goods or services purchased. The consequences of this are twofold, viz. (i) the supplier is not able to set off any 'input tax', in respect of the exempted goods or services, against output tax. (ii) the supplier in these circumstances, is a final consumer and the tax ends there; however, to recover the tax he has paid he will doubtless increase the selling price of his goods or services. When 'goods or services are zero-rated it means that such goods or services are taxable but that the tax charged is nil. The zero-rated trader can sell his goods or services VAT-free because he can reclaim any 'input tax' which he paid to his suppliers.

    5. The registered trader is liable for tax on chargeable goods transfer- red to a separate retail branch or section of his business or which have been appropriated to other purposes, e.g. private use.

    6. Returns are required by the Commissioners in respect of each quarter's trading. Such returns must be made-and the tax paid-within one month of the end of each quarter. The amount of tax due is calculated by deducting from the VAT collectible on goods or services sold (output tax) the VAT payable on goods or services purchased (input tax). If, however, the amount of VAT exceeds that collected, a refund for the excess may be claimed.

    7. In the event of the bankruptcy or liquidation of a registered person, VAT is a preferential debt if due up to twelve months prior to the Receiving Order (in Bankruptcy) or the commencement of the liquidation which will be the date of the resolution in Voluntary Liquidation or the date of the Court order or appointment of provisional liquidator in Compulsory Liquidation; or where there is a Receiver for Debenture Holders by way of floating charge, the date of appointment of the Receiver. or where the Debenture Holders take possession the date of their taking possession.

Accounting Entries

    All registered persons are required to keep such records of their dealings in chargeable goods and services as will enable them to compute the proper tax chargeable and to pay such tax to the Commissioners of Customs and Excise at the due time. The actual records must vary with and be adapted to suit the requirements of each particular concern. The records and procedures for purchases and sales accounting and invoicing 

must be adequate to:

    (a) calculate tax due or refundable:

'Tax quarters are generally staggered according to trade classification but may be fitted in with a business' financial year.

    (b) complete the quarterly returns;

    (c) facilitate verification by Customs and Excise officials. Vouchers must be preserved for at least three years. Where there are internal transfers of goods during manufacture or as mentioned in (5) above, specia! records will be required...

Periodic yearly accounts may be either VAT inclusive or VAT exclusive pending upon the circumstances. Accounts of non-taxable traders must, of course, be prepared on the VAT inclusive basis, i.c. purchases and expenses (sales are not affected) will include VAT where charged. Accounts of wholly taxable traders may be VAT inclusive or VAT exclusive-either method is acceptable to H.M. Customs & Excise and to the Inland Revenue-but the VAT-exclusive method is recom- mended. Accounts of partially exempt traders may be either VAT inclu- sive or VAT exclusive in respect of taxable transactions-but the VAT- exclusive method is recommended-and the VAT-inclusive method will apply to exempt transactions.

    In regard to ordinary tax-inclusive sales and purchases, the following procedure is recommended:

1. Purchases

    (a) Separate columns should be provided for VAT in the Purchases Journal and in the Returns Inwards Journal.

    (b) A VAT Account should be opened in the Nominal Ledger.

    (c) The Supplier's accounts will be credited with the tax-inclusive prices and the total of the VAT columns in the Purchases Journal and Returns Inwards Journal will be posted periodically (e.g. monthly, but certainly at the end of each calendar quarter so that the necessary returns may be prepared) to the debit and credit respectively of the VAT Account; the Purchases (or Expense) Account will be debited with the total VAT- exclusive values for the period.

    (d) Payments to suppliers will be entered in the Cash Book and posted to the debit of the respective accounts in the Creditors Ledger in the usual way.

2. Sales

    (a) Separate columns should be provided for VAT in the Sales Journal and the Returns Inwards Journal.

    (b) The ordinary sale price will be dealt with throughout in the usual way. The VAT on each sale will be entered in the special column in the Sales Journal, the amount agreeing with the tax shown on the invoice, and the tax-inclusive price will be posted to the debit side of the customers account. Credits for returns, etc., will, mutatis mutandis, be dealt with Sumiarly.

    (c) The total of the VAT columns in the Sales Journal and Returns Journal will be posted periodically (e.g. monthly, but certainly at the end of each calendar quarter so that the necessary returns may be prepared) to the credit and debit respectively of the VAT Account. The Sales Account will be credited with the total VAT-exclusive value of sales for the period.

The VAT Account will be debited, and Bank (or Cash) credited, when payment is made to the Commissioners.

    (d) Receipts from customers will be entered in the Cash Book and posted to the credit of the respective accounts in the Sales Ledger in the usual way.

Illustration 7

Write up the VAT Account from the following transactions of a registered

trader:

Value (Excluding VAT)

£

Purchases

12,000

Credit for Returns to Suppliers

250

Sales-Home

15,000

-Overseas

8,000

Wages

6,000 

Heating, Lighting and Cleaning

560

Telephone.

45

New dictating machines

120

Postal Charges

15

Debt Collection fees

54

Heating, Lighting and Cleaning includes £120 for fuel oil and £65 for cleaning materials. Assume VAT at 10 per cent.

INPUT TAX

VAT ACCOUNT   

£p

OUTPUT TAX Sales (Home) 12-00 Returns to Suppliers

Capital Goods

(10% of £120)

Other Goods and Services

£

Purchases

12,000

Cleaning Materials

65

Telephone

45

Debt Collection

54

£12,164

10% thereof

1.216-40

Balance c/d-Net tax

payable

296-60

£1,525-00

Balance b/d

£p

1,500-00 25-00

£1.525-00

296-60

Notes. (a) Goods or services exported are zero-rated.

    (b) All fuel and power is zero-rated.

    (c) Certain postal services are exempt. The carrying of letters, parcels, etc. is exempt Hut the Cxemption does not extend to telegrams which are deemed not to be postal packages. Alo telephone charges are chargeable to tax.

    Statement of Standard Accounting Practice. Statement of Standard Ac- counting Practice 1/5 concerns Accounting for Value Added Tax the main aspects of which follow:

1. VAT is a tax on the supply of goods and service which is eventually borne by the final consumer but collected at each stage of the production and distribution chain. As a general principle, therefore, the treatment of VAT in the accounts of a trader should reflect his role as a collector of the tax and VAT should not be included in income or in expenditure whether of a capital or of a revenue nature. There will however be circumstances. as noted below, in which a trader will himself bear VAT and in such circumstances the accounting treatment should reflect that fact.

2.Persons not accountable for VAT will incur VAT on their inputs. For them VAT will increase the cost of all goods and services to which it applies and should be included in such costs. In particular, the VAT on fixed assets should be added to the cost of the fixed assets concerned.

    3. In the case of persons who also carry on exempted activities there will be a residue of VAT, which will fall directly on the trader and which will normally be arrived at by division of his activities as between taxable outputs (including zero-rated) and those which are exempt. In such cases, the principle that such VAT will increase the costs to which it applies and should be included in such costs will be equally applicable. Hence the appropriate portion of the VAT allocable to fixed assets should. if irrecoverable, be added to the cost of the fixed assets concerned and the proportion allocable to other items should, if practicable and material, be included in such other items. In some cases, e.g. where financial and VAT accounting periods do not coincide, an estimate may be necessary.

    4. All traders will bear tax in so far as it relates to non-deductible inputs (e.g. motor cars other than for resale and certain business entertain- ing expenses). Such tax should therefore be included as part of the cost of those items.

    5. The net amount due to or from the Revenue Authorities in respect of VAT should be included as part of debtors or creditors and will not normally require separate disclosure.

    6. The estimated amount of capital commitments should include the appropriate amount, if any, of irrecoverable VAT.

    7. Turnover shown in the profit and loss account should exclude VAT on taxable outputs. If it is desired to show also the gross turnover, the VAT relevant to that turnover should be shown as a deduction in arriving at the turnover exclusive of VAT..

    8. Irrecoverable VAT allocable to fixed assets and to other items disclosed separately in published accounts should be included in their cost where practicable and material.

P.A.Y.E.

The system of collecting Income Tax from employees known as Pay As You Earn or P.A.Y.E. has been in force since the beginning of the year

CONTAINERS. GOODS ON APPROVAL. C.O.D., ETC.

    1944/45. The amount of tax which the employer must deduct on any pay-day depends on (a) the employee's total gross pay since the beginning of the Income Tax year; (b) his Income Tax allowances and reliefs (or 'free pay') for the same period, determined by his code number; and (c) the total tax deducted on previous pay-days. By the end of the year, the total tax payable for the year from 6th April to 5th April following will have been deducted.

    For each pay-day the employer ascertains the pay due to the employee, and adds to that pay the total of all previous payments made to the employee from 6th April up to date. In the Free Pay Table (Table A) he finds, from the employee's code number, the proportion of the employee's allowances and reliefs from 6th April up to date, and subtracts this figure from the total gross pay to date in the Taxable Pay Tables (Tables B to D), which shows the total tax due on any amount of taxable pay. From the total tax shown in Tables B to D the employer subtracts the total tax already deducted; the remainder is the amount to be deducted from the employee's gross pay on the pay-day in question. Sometimes-for exam- ple, if the employee has worked a short week-the total tax shown by the Tax Tables is less than the tax already deducted; the employer must then refund the difference to the employee instead of making a deduction.

    The total of tax deducted on previous pay-days represents the total tax due to the date of the payment last made, and is obtained from the Deduction Card, or its equivalent. Weekly and monthly Tax Tables arex issued.

    Accounting Entries. There is no standardized method for accounting for P.A.Y.E. provided that the wages and the tax deductions (less refunds, if any) are clearly shown and that the latter are fully accounted for and agree with the sums shown on the Tax Deduction cards. The basic entries are:

Debit Wages with the gross amount.

Credit Cash with the net wages paid.

Credit P.A.Y.E. (or C.I.R.) with the tax deducted.

When the tax deducted is handed over to the Inland Revenue, the entries will be:

Debit P.A.Y.E. (or C.I.R.). Credit Cash.

    The exact manner of carrying out these entries will depend upon the circumstances in each case; there are many methods in use, two of which are:

    1. On the credit side of the Cash Book are entered net wages paid and, in a special column, tax deducted. The two entries are together posted to the debit of Wages and/or Salaries. The monthly total of the Tax deducted column is posted to the credit of P.A.Y.E. Account.

     'The detailed operation of P.A.Y.Es governed by the Income Tax (Employments) Regula 1970. Copies of the Regulations can be obtained from H.M. Stationery Office or through most booksellers.

ACCOUNTANCY

    2 The gross wages are debited to Wages and/or Salaries and credited to Cash. Tax deducted s debited to Cash and credited to P.A.Y.E. Account as before

    The Wages Book (in addition to the usual columns for N.I. and other deductions) will be ruled with two columns, one for tax deductions, the other for tax refunds. The wages and tax figures will either be summarized in a separate book or carried forward cumulatively, week by week, up to the last pay day before the 6th of April of each year. These summarized or cumulative figures should agree with the tax deduction/refund figures on the employees' cards, subject to adjustment for employees who have left during the year, and. in the case of new employees during the year. subject to the amounts introduced on to the cards (in respect of the previous employment) in accordance with the notification by the Inland Revenue.

    The employee's code number is fixed by the Income Tax Inspector from the information supplied by the employee on his Income Tax Return. The Inspector notifies the code number to the employer and sends a Notice of Coding to the employee, giving the employee a statement of how the number has been computed. This Notice of Coding gives the amount of the Income Tax allowances and reliefs to which the employee is entitled and which are to be set against his pay for the succeeding year. As they are fixed at the beginning of the Income Tax year, they are based on the circumstances existing at the time of coding and are therefore provisional.

    On receipt of the Notice the taxpayer (the employee) should check it and inform the Inspector of Taxes of any errors therein. If any change in the circumstances affecting allowances and reliefs takes place, eg. mar- riage, birth of a child, death of a wife or child, the taxpayer should at once notify the Inspector so that he may alter the code number and notify the new number to the employer.

    The employer receives in respect of each employee a Deduction Card. On this he must enter particulars of the wages paid and Income Tax deducted. Each month he pays over to the Collector of Taxes the tax deducted in the preceding month; at the end of the Income Tax year he sends the card back to the Collector so that the whole tax may be checked, and gives to the employee a certificate showing the amount of total tax (less refunds) deducted during the year.

    It may be that from time to time, owing to a decrease in wages or absence without pay from work, the employee is entitled to a repayment of tax. This arises where, owing to decreased earnings for any cause, the Income Tax which has already been deducted from the employee is greater than the total tax payable up to date as shown by the Tax Tables. In this event, the employer either repays the amount at the pay-day or adds it to the payment of wages made after resumption of work. If a taxpayer becomes unemployed, any repayment to which he is entitled is arranged by the Inspector of Taxes.

    After the end of the fiscal year, the Inspector may issue to the taxpayer a Notice of Assessment showing the total tax due and the amount of tax,

CONTAINERS, GOODS ON APPROVAL. COD., FIC

    which has been paid by deduction from wages or salaries. If too much tax has been deducted, a repayment will be made either by direct remittance r by alteration of the code number for the next year so as to give repayment by decreasing future tax deductions. If too little tax has been deducted, future tax deductions will be increased so as to collect the tax still owing by spreading it over the succeeding year.

No formal Schedule E Assessment is made unless:

    (a) Within five years after the fiscal year the taxpayer requires it; 

    (b) The emoluments paid during the fiscal year are not the same in amount as in the remuneration assessable for that year;

    (c) Deductions have not been made in accordance with the Tax Tables:

    (d) There has been a change in the circumstances not known throughout the year.

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