Dada Adefolami

Typical areas for VAT errors can include:
1. Cash sales
2. Sale of scrap
3. Incentive payments
4. Property income
5. Management charges
6. Commissions
7. charges to sub-contractors
8. Supplies of staff
9. Payphone and vending machine receipts
10. Recharges
11. Asset disposal
12. Barter transactions
13. Cross-border transactions have the correct place of supply rules been applied
14. Using the right VAT rate particularly with new products or services
15. Supplies relating to land and buildings and options to tax
16. Non-business supplies.

Supplies relating to land and buildings, while generally exempt, can be subject to VAT as there are a number of exceptions. In addition there is an option to tax which can change the VAT liability of land and building based on a taxpayer’s action. The issue with land and building transactions is exacerbated by the sums involved, the VAT element can be significant and getting it wrong will be a major burden on a business.

Finally
Where a business has mixed supplies, it is important to charge the correct rate of VAT on the appropriate element. If a business offers a discount the right amount of VAT has to be accounted for on the VAT return. VAT is accounted on the discounted amount even if the discount is not taken up.

It is important to show the right VAT liability and include this on the VAT invoice. There are items separate from a main supply that are often shown as separate items on the VAT invoice and carry their own VAT liability such as:
1. Disbursements
2. Delivery charges.

International transactions
The difference between exports and dispatches is that exports are goods sent from the UK to outside the European Union (EU) and dispatches are those sent within the EU. There are 27 countries within the EU, so it is worth checking when you trade with a country whether it is within the EU. The main issues for exports and dispatches is obtaining the right evidence is order to obtain VAT zero rating. 

On the other side input tax charged when goods are imported into the UK can be claimed provided the right VAT evidence is retained.
When goods are acquired from other EU states, a business has to acquisition account.

When services are received from overseas suppliers under the reverse charge mechanism, the correct VAT has to be accounted for at the correct VAT rate.

Credit notes and bad debt relief
Common errors on credit notes are:
1. Credit note raised but not issued to the customer/client
2. Wrong VAT rate used when compared to the original sales invoice
3. Obtaining relief for the credit note even though the original output VAT was not posted
4. Credit note issued as an adjustment for bad debt.

The main issue with bad debt relief is claiming it too early or claiming the full amount when part payment has been received. Bad debt relief can be claimed based on the following conditions:

1. The output tax on the item has already been declared
2. The debt is written off in the accounts/ledgers and transferred to a separate VAT bad debt relief account
3. The value of the supply cannot not be more than the selling price
4. The debt has not been paid, sold or factored. ‘ ‘ ‘ ‘ ‘  

Private and non-business use
Assets that are used privately or are used for non-business activity can mean that there is a deemed supply and output tax is due. This is when input tax was claimed on expenditure or on the purchase of the asset.

On the input tax side of things there must be restriction of input tax recovery on private usage; for assets used 100% privately no input tax can be recovered. This treatment is reflected for expenditure incurred for non-business.

Note that the effect of offsetting VAT on purchases against VAT on sales is to impose the tax on the added value at each stage of production – hence Value-Added Tax. For the final consumer, not being VAT-registered, VAT simply forms part of the purchase price.

Indirect tax on the domestic consumption of goods and services, except those that are zero-rated such as food and essential drugs or are otherwise exempt such as exports. It is levied at each stage in the chain of production and distribution from raw materials to the final sale based on the value (price) added at each stage. It is not a cost to the producer or the distribution chain members, whereas it’s full brunt is borne by the end consumer, it avoids the double taxation (tax on tax) of a direct sales tax. This was Introduce by the European Economic Community (now the European Union) in the 1970s.

Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855