BIM31525 - VAT: general accounts treatment

SSAP5 is relevant to how VAT should be dealt with in accounts.

A trader who supplies taxable goods and services (including zero rated items) is effectively a collecting agent for VAT. Any VAT they charge their customers is borne by the customer and paid to the trader as part of the inclusive purchase price. The trader then passes this on to HMRC with a credit for any VAT they have borne on his ’input'. Where the input tax exceeds the tax on his taxable goods and services, the trader will get a repayment from HMRC.

Normally for VAT registered businesses:

1. the VAT charged to his customer on the trader's own taxable sales, and
   
2. the VAT borne by they on his taxable input, and
   
3. the balancing cash payments to and from HMRC,

is carried to a VAT account. The flat rate VAT scheme is an exception - see BIM31585. The other entries in the accounts are exclusive of VAT. Thus the sales are exclusive of VAT, purchases forming part of the input are exclusive of VAT and the cost of any ’capital' items in the input (see BIM31520) are exclusive of VAT. In such cases the VAT does not normally enter into the Case I computation at all. The amount of the profits for Case I purposes is the balance of the receipts and expenses exclusive of VAT and the cost of any capital items forming part of the input is for capital allowances the cost exclusive of VAT.

In such cases the balance of the VAT account appears in the balance sheet and is an amount due to or from HMRC. Neither the balance of that account nor the entries appearing in it enter into the Case I computation or the capital allowances figures.

Following the principle in Jay's the Jewellers Ltd v CIR [1947] 29TC274 (see BIM63151) if amounts charged to customers as VAT are not payable to HMRC they will be trade receipts. The timing of the recognition of these receipts is a matter of correct accountancy. Recognition may be as late as the date the amounts are no longer payable to HMRC. However, on the basis of the particular facts an accountant could reasonably conclude that it was appropriate to recognise the refund at an earlier point. SSAP7 (dealing with post balance sheet events) is particularly relevant.