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Get to Grips With Book Keeping: Value added tax

by Andy Lymer and Nick Rowtbottom

Many countries levy a sales tax which requires businesses to add a fixed percentage to the selling price of their goods and services on behalf of the tax authorities. In the UK, this is known as Value Added Tax (VAT) and the appropriate percentage (currently 17.5% for most goods and services) has to be accounted for to Her Majesty’s Revenue & Customs (HMRC).

Because businesses generally pay VAT on purchases from suppliers (called ‘input tax’), they are allowed to deduct those amounts paid from the level of VAT which they collect on behalf of HMRC from their sales to customers (called ‘output tax’). This requires businesses to compute the balance of VAT charged to customers over the VAT suffered on purchases (i.e. output tax – input tax), and submit this to HMRC. If the VAT paid on purchases exceeds that which has been charged on sales, a repayment is given.

In the UK, only registered businesses are affected by VAT. Any business may register, but VAT registration is not compulsory unless turnover exceeds £69,000 per annum (for tax year 2009/10 – this sum usually increases each year). A business that is not registered cannot charge VAT nor can it recover VAT suffered on its purchases.

For further information, see http://www.hmrc.gov.uk/index.html


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