Andrew Needham highlights circumstances where output tax is due but not taken into account.
Most businesses know when to charge VAT on their main supplies, but they often forget to account for VAT on items of sundry income where no VAT invoices are issued.
Here are some common examples of items where output tax should be accounted for, but often is not:
- sales to staff, such as surplus or sub-standard goods;
- sales of scrap;
- sales from the canteen or from vending machines;
- sales of assets, such as machinery or commercial vehicles;
- restaurant owners are liable for VAT on service charges (tips) unless they are voluntary and given to the staff; and
- supplies of management services and management charges between associated businesses.
Remember the VAT!
Transfers in a businesses’ accounting records, known as ‘journal entries’, 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 to account for the VAT.
When completing the VAT return, businesses should check that sundry income has been included and that all journal entries have been accounted for correctly.
Management charges to associated businesses are often shown in the accounts. Once the accounts are formally approved by the directors, a tax point is created and the VAT is due.
Additionally, tax points can be created earlier than approval of the accounts if any sums have been received on account, either in cash or by offset against amounts owing to the associated business.
Similarly, 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.
The exception is where the salary is being collected from a business that the employee is employed by. This only happens when a business administers the payroll of another business and reclaims the salaries which it has paid out on its behalf.
Disbursements
Another area that causes problems for businesses, particularly solicitors, is disbursements. A disbursement for VAT purposes is a sum of money which is paid on behalf of someone else for a supply they receive. A disbursement is outside the scope of VAT. However, what a solicitor calls a ‘disbursement’ is often not a disbursement for VAT purposes.
HMRC states that to qualify as a disbursement for VAT purposes, a payment must meet all the following conditions. It must be:
- for goods or services received and used by the client, not by the adviser, and which are clearly additional to those supplied by them;
- shown separately on the adviser’s invoice as the exact sum paid out;
- paid as the agent on behalf of the customer;
- a sum for which the customer was responsible for paying the third-party;
- authorised by the customer to be paid on his or her behalf;
- for a supply which the customer knew would be provided by a third party.
A disbursement should be shown as a separate entry on a VAT invoice. For clarity, it is best to subtotal the sum subject to VAT, add the VAT, and then add the disbursement.
Some things don’t have VAT
There are some things that do not attract VAT:
- grant income;
- donations;
- gifts valued at less than £50 exclusive of VAT;
- compensation and liquidated damages; and
- returnable deposits.
Practical tip
Make sure to account for VAT on sundry income, as it is one of the first things that HMRC checks during an inspection; that way, you can avoid paying interest and penalties.
