Remember - VAT is due on all taxable supplies made by a taxable person in the course or furtherance of any business.
Once someone is in business, anything they do is likely to be in the course of that business. So, if a business charges for doing something, it has to account for VAT, unless the supply happens to be zero-rated, exempt or outside the scope.
If a business starts from the principle that tax is payable unless it can find a good reason why not, it will be less likely to make errors.
Journal entries and non-invoiced sales
Some sources of income miss out the normal invoicing procedures and the VAT can be missed off. The most common sources of un-invoiced income are sales of:
• (to staff) items such as surplus or substandard goods;
• scrap;
• supplies from the canteen or from vending machines;
• assets, such as machinery or commercial vehicles; or
• management services.
Transfers within the accounting records of a business, such as management charges, are known in accounting jargon as “journal entries” and are especially dangerous because they are outside the main VAT accounting system. It is all too easy for the person making the journal entry to forget about the VAT.
Management charges to associated businesses are often shown in the accounts. The formal approval of the accounts by the directors creates a tax point and VAT then becomes due.
Salaries recharged by an employer to another UK business are standard-rated as a supply of the services of the employee to the other business. This is so even if there is no profit element.
Partnerships often require that fees received by their partners for outside appointments are paid into the business. HMRC are likely to argue that such fees are payment for a standard-rated supply of the services of the individual if the appointment results from and involves the use of the professional expertise exercised in the business.
For example, a directorship of a building society was held to be partnership income because the partner was expected to provide the experience of a property solicitor, and to keep the board up to date on conveyancing practice. Since the fees from the building society were paid into the partnership as compensation for the time spent on the appointment, and were treated as income of the practice, they were received in the course or furtherance of the partnership business and were subject to VAT.
For a partnership, the way round this problem is to allow the individual partner to receive the income personally.
There are a few special cases which are outside the scope of VAT. These include dividend payments, government grants and compensation (for example, an insurance payment following a fire).
Practical Tip :
Don’t forget to account for VAT on sundry income received and on journal entries or else you may get an assessment plus interest and penalties.
Andrew Needham
