VAT Basics
Jargon Buster
Unfortunately, VAT is littered with phrases, acronyms and jargon which can be impenetrable to people that have to deal with the tax. I have explained the main terms used below and tried to demystify the gobbledygook!
Accounting period
This is the period of time reported in your VAT Return, usually three months.
Acquisitions
Goods brought into the UK from other EC countries (different from goods brought into the UK from outside of the EC; which are known as imports).
Capital Goods Scheme (CGS)
A mechanism for spreading the input tax incurred on certain goods exceeding £50,000 or property exceeding £250,000 of standard-rated cost.
Consideration
Something that is done or given in exchange for something else. Consideration can be in monetary or non-monetary form. If there is no consideration there is no supply.
Corporate body
An incorporated body, eg; a limited company, limited liability partnership, friendly, industrial or provident society.
Distance sales
When a business in one EC country sells and ships goods directly to consumers in another EC country, eg; internet sales.
Exempt supply
A supply that is exempt from VAT by law eg; rent, insurance and financial services. It is not a taxable supply and generally does not allow the recovery of VAT incurred on associated expenditure.
Exports
Goods sent to countries outside of the EC.
Dispatches
Goods sent to another EC country.
Imports
Goods brought into the EC from countries outside of the EC.
Input tax
Refers to the VAT you pay on your purchases – goods or services you use when running your business.
Invoice
Document provided by a taxable person to customer/client. It must contain certain information.
New building
A commercial building less than three years old where a freehold disposal is compulsorily standard-rated.
Non-residential
A building not used as a dwelling.
Option to tax
Changes the supply of a commercial property from exempt to standard rated. This is done solely to recover or avoid input tax attributable.
Output tax
Refers to the VAT you charge on your sales which your clients/customers pay you.
Outside the scope of VAT
Goods and services that are completely outside the scope of VAT altogether, eg; taxes, supplies in other countries, TOGCs and wages paid to employees.
Partial exemption
A business which incurs input tax relating to both taxable and exempt activities is partially exempt and will probably not be able to recover all of its input tax.
Place of supply
The country where a supply of goods or services is deemed to be made for VAT purposes. This is the country in which VAT must be accounted for.
Reduced rate
The rate applied to essential goods and services, such as gas and electricity for residential purposes. Currently at 5%.
Registration
Being VAT registered – accounting for output tax on sales and recovering input tax. A business needs to VAT register when its turnover exceeds certain limits.
Self-billing
Where a customer raises a self-billing document and sends a copy to its supplier with its payment – rather than the supplier issuing an invoice.
Standard rate
A taxable supply subject to UK VAT at the current standard rate of 20%.
Supply
Providing goods or services in return for consideration, normally monetary.
Supply of goods
When exclusive ownership of goods passes from one person to another.
Supply of services
Supply, for consideration, of something provided which is not goods.
Tax period
(Also known as accounting period) The period of time covered by your VAT return. Usually quarterly or monthly.
Taxable person
Any business which supplies goods or services and is required to be registered for VAT. This includes; individuals, partnerships, companies, clubs, associations and charities etc.
Taxable supplies
Goods and services supplied by a taxable person which are liable to VAT at the standard, reduced or zero rate. They usually permit the recovery of VAT incurred on the costs incurred in making them.
Taxable turnover
Taxable turnover is the total value, net of VAT, of the taxable supplies you make in the UK within one year. It is used to establish whether registration is necessary.
Tax point (Time of supply)
The date when a business must account for VAT on supplies and when input tax may be reclaimed. This dictates on what VAT return the transaction is accounted for.
Transfer Of A Going Concern (TOGC)
A sale of a business which continues after transfer. This is a VAT free transaction if certain tests are met.
Zero-rated
Is a taxable supply but subject to UK VAT at a rate of 0%.