VAT SEMINAR. Rebecca Young July 2011. 1. REASON FOR HOLDING THE WORKSHOP 2. EXPLANATION OF HOW VAT WORKS 3. SALES – IN THE UK 4. NON-INVOICED INCOME 5. EXPORTS 6. SUMMARY OF VAT RATES & CODES ON SALES INVOICES 7. PURCHASES & PAYMENTS IMPORTS
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Rebecca Young July 2011
2. EXPLANATION OF HOW VAT WORKS
3. SALES – IN THE UK
4. NON-INVOICED INCOME
6. SUMMARY OF VAT RATES & CODES ON SALES INVOICES
7. PURCHASES & PAYMENTS
9. ZERO RATING OF GOODS USED IN MEDICAL RESEARCH ETC.
11. SUMMARY OF PURCHASE VAT RATES & CODES
To increase your understanding of VAT and ensure that VAT is dealt with correctly in Agresso.
Why is an understanding of VAT rules important?
VAT rules can be complicated, if in doubt, don’t guess, please ask. Contact Rebecca Young on ext 29041 or firstname.lastname@example.org.
VAT is a tax charged on the supply of goods and services in the UK by a taxable person in the course of their business.
There are currently three rates of VAT:
standard - 20%
reduced - 5%
zero - 0%
Certain items are exempt from VAT and certain items are outside the scope of VAT.
VAT charged by an organisation on its sales is paid to HM Revenue & Customs (HMRC) quarterly.
An organisation making only taxable sales, ie ones on which VAT is charged at standard, reduced or zero rate, can fully recover from HMRC each quarter any VAT it has incurred in carrying out its business.
An organisation making only exempt sales cannot recover any of the VAT it incurs on its purchases and payments.
An organisation making a mixture of taxable and exempt sales, eg the University, is known as partially exempt and VAT is recoverable as follows:
(i) VAT incurred on purchases relating entirely to the provision of taxable sales is fully recoverable.
(ii) VAT incurred on purchases relating entirely to the provision of exempt sales cannot be recovered.
(iii) Where VAT is incurred on general expenses relating to the provision of both taxable and exempt sales, a proportion of the VAT can be recovered.
3.2 Health Services
3.3 Examples of Goods/Services Supplied by Schools
3.4 Sales Invoices - Important Points
Education, research and vocational training
The provision by an eligible body of:
The University of Southampton is an eligible body.
i. is precluded from distributing and does not distribute any profit it makes; and,
ii. applies any profits made from supplies of education towards the continuance or improvement of such supplies.
A course or lesson of instruction or study in any subject whether or not that subject is normally taught in schools, colleges or universities and regardless of where and when it takes place. It includes lectures, educational seminars, conferences and symposia. There is no definition of education in the law. Almost any course run by the University will be deemed to be education.
‘Research’ is defined as original investigation in order to gain, advance or expand knowledge or understanding or using existing knowledge in experiments to produce new or improved materials, products, processes etc...
it excludes routine testing
The provision of medical services by a health professional are exempt from VAT.
Medical services are services within the profession in which the health professional is registered to practise and for which the primary purpose is the protection, maintenance or restoration of a person’s health.
Services not performed directly be a health professional but which are supervised by a health professional (except for services supervised by a pharmacist) will qualify as exempt medical services. For example blood tests carried out by a lab technician whose work is supervised by a doctor registered with the GMC.
3.3 Examples of Goods/Services Supplied by Schools and the appropriate VAT rate & Code
Education Exempt SE Short courses Exempt SETraining courses Exempt SESummer schools Exempt SEExamination services Exempt SEStudent fees Exempt SEBench fees Exempt SE
Research services supplied: - to an eligible body Exempt SE- to anyone else Standard SS
Research grants No supply SN
Consultancy (not patient care) Standard SS
- nothing given in return No supply SN - something given in return Standard SS(See 3.3.1 for examples)
Royalties Standard SS
- to students Exempt SE
- to anyone else Standard SS
- pure room hire Exempt SE
- room hire incidental to the
use of facilities in the room Standard SS
- organised by the University,
including incidentals Exempt SE
- organised with another
body if subject matter is
of an educational nature Exempt SE
Supply of staff Standard SS
(However see 3.3.2)
Books, publications Zero SZ
Editorial services Standard SS
Delivery charges Same as item
20% or 0% SS or SZ
Medical services aimed Exempt SE
at protection, maintenance or
restoration of a person’s health
Diagnostic medical tests Exempt SE
Recovery of costs (See 3.3.4)
Sales of second-hand goods (See 3.3.5)
(i) Not deemed to be giving something in return, eg:
(ii) Deemed to be giving something in return, eg:
If in any doubt please contact Rebecca Young ext 29041.
(i) Where an individual employed by the University is made available to another organisation and is under the direction and control of that other organisation and the University receives consideration for the supply, then the supply is standard rated. Tax Code SS.
(ii) It is important to distinguish between a supply of staff and a supply of services. If the individual remains under the direction and control of the University then rather than supplying the individual there may be a supply of services being made. If those services are exempt, then the supply is exempt. For example, someone supplying ad hoc lecturing services or medical services. VAT Rate Exempt, Tax Code SE.
(iii) Where a joint contract of employment exists and the salary is being recharged, there is deemed to be no supply, Tax Code SN.
To be accepted as joint employment, the contract of employment must specify who the joint employers are.
School incurs costs on behalf of a third party and then charges those costs onto the other party.
One supply to the school and a second supply from the school to the third party.
Sales invoices must be raised showing net and VAT amounts exactly as they have been incurred on the supplier’s invoice.
VAT incurred by the school is recoverable.
Care must be taken to distinguish between the above agency agreement and the provision of a service, though the basis for raising a charge may be actual costs incurred. The appropriate VAT rate is that applicable to the service provided.
It may be the case that an external organisation has agreed to cover certain costs incurred by a school ie the school is receiving sponsorship. So long as nothing is given in return, there is no supply - Tax Code SN.
(i) Time Of Raising A Sales Invoice
VAT on sales invoices must be accounted for to HMRC in the correct period. To ensure compliance, sales invoices must be raised within a maximum of 14 days from the date of supply of the goods or services.
Where supplies of services are on-going, then sales invoices should be raised periodically in accordance with the agreement with the customer.
(ii) Sales invoice tax codes
You must only use sales tax codes on sales invoices ie codes starting with an ‘S’. When raising a sales invoice in Agresso a default tax code will be generated from the income account selected. This should be checked and overwritten where necessary. For example, account 7865 – Other income external – has a default tax code of ‘SS’ – Sales -Standard rated, if you are supplying exempt goods and services you will need to change the tax code to ‘SE’. Income should NOT be credited to expenditure accounts.
Schools will frequently receive money where sales invoices have not been raised. The appropriate tax code for the income received must be entered on the paying in slip. Where money received relates to the provision of goods and services which are subject to VAT, then the VAT must be accounted for to HMRC and shown separately on the paying in slip.
eg: £1,000.00 received for sponsorship of a workshop at which the sponsor’s logo was displayed:
The net amount that will be credited to the school’s sub-project is £1,000.00 divided by 1.2, ie £833.33, and the VAT amount to be paid to HMRC is £1,000.00 - £833.33 ie £166.67, or £1,000 divided by 6. The VAT is NOT 20% of £1,000.
NB: You must always consider VAT prior to the provision of goods and services and wherever possible, sales invoices should be raised.
5.1 Exports of Goods
5.2 Exports of Services
(i) Customer in the EU:
- customer is registered
for VAT and gives us their 0% SC
VAT Registration No*
- customer is not registered UK Rate
for VAT 20% or 0% SS or SZ
(ii) Customer outside the EU 0% SZ
Proof of Export must be obtained in order for zero rating to apply, otherwise receipts may have to be netted down for VAT. The method of export will affect the type of proof obtainable. If goods are exported by post, then a certificate of posting must be obtained from the Post Office when you hand over the goods.
*EU VAT numbers must be quoted on sales invoices and also checked on the European Commission’s website: http://ec.europa.eu/taxation_customs/vies/vieshome.do
5.2.1 The General Rule
Under the general rule, the VAT rate to charge depends on whether the services are supplied to another business - a Business to Business supply - or to a private consumer - a Business to Consumer supply.
(a)Business to Business Supplies (B2B)
The general rule for B2B supplies is that the place of supply is where the customer belongs. If this is outside the UK, the supply is outside the scope of UK VAT.
(i) Business Customer in The EU
If the Customer is in another EU country, you must obtain and check the Customer’s VAT registration number as evidence that they are in business. All sales of services to VAT Registered customers in other EU countries must be identified for reporting to HMRC by use of tax code SD.
The supply is outside the scope of UK VAT, tax code SO, Sales - Outside the Scope – Supply.
(b)Business to Consumer Supplies (B2C)
The general rule for B2C supplies is that the place of supply is where the supplier belongs. Supplies made by the University to consumers are subject to UK VAT at the appropriate UK rate.
5.2.2 Exceptions to the General Rule
Some services are supplied where they are physically carried out. If they take place in the UK, then the appropriate UK VAT rate applies. If they take place overseas, there may be a requirement to charge local taxes.
An examples of such a service is “admission to an educational event”, eg charging a fee for a delegate to attend a conference or workshop. If the conference takes place in the UK then, as an eligible body, a charge made by the University will be exempt from VAT.
A charge for someone to attend a degree course is not considered by HMRC to be a charge for admission to an event, thus the general rule applies. If an overseas business were charged for a degree course, the supply will be outside the scope of VAT.
5.2.3 Recovery of VAT
Where a service is supplied to an overseas business that is outside the scope of UK VAT but would have been subject to VAT if supplied to a UK business, any VAT incurred to provide the service is fully recoverable.
If there is no supply of a service and you are merely receiving a grant from an overseas body to fund research, then the receipt of income is outside the scope of VAT – tax code SN – and any VAT incurred is an expense to the grant.
Schools cannot avoid paying VAT simply because University of Southampton is an educational charity, though there are certain reliefs available to the University because of its charitable status and many items the University purchases may be zero rated or exempt anyway.
7.1What VAT Rates Apply to Purchases Made in the UK by the University?
7.2 How is VAT Recovered in Agresso
7.3 Important Note Re Suppliers’ Invoices
(i) Examples of zero-rated items – Tax Code PZ:
(iii) Examples of exempt items – Tax code PE:
(iv) Examples of outside the scope items – Tax Code PO:
All items which are not either zero, reduced, exempt or outside the scope will have VAT charged at 20%. Some specific examples are:
VAT recoverability is determined in Agresso by the sub-project to which expenditure is posted. Each sub-project has been given a ‘Tax System’ of Fully-recoverable (FR), Non-recoverable (NR) or Partially-recoverable (PR).
As documents are processed onto Agresso, the VAT is calculated from the Tax code and charged to the VAT account, 9465. If the sub-project has a tax system of NR or PR, then the VAT will be credited to the VAT account and added to the net value of the invoice and the gross amount of the invoice is posted to the school’s sub-project and account code.
If the sub-project has a tax system of FR, the VAT amount is posted to the VAT account, 9465, and only the net value of the invoice is posted to the school’s account and sub-project.
NB When looking at reports/transactions on Agresso, the entries on the VAT accounts MUST BE IGNORED ie all the entries on accounts ‘946*’
In order to recover VAT, a valid tax invoice must be received from the supplier. To ensure compliance, any supplier's invoice with VAT levied on it must only be passed for payment if the following information is contained on the invoice:
Please note - VAT cannot be reclaimed on a pro-forma invoice, once you have received the goods or services you must ensure the supplier issues a VAT invoice.
A retailer selling items for less than £250 may issue a simplified VAT invoice that only needs to show:
the retailer's name and address
the retailer's VAT registration number
the time of supply
a description of the goods or services
If the sale includes items at different VAT rates, then for each different VAT rate, a simplified VAT invoice must also show:
the total price including VAT
the VAT rate applicable to the item
8.1 Imports of Goods
8.2 Imports of Services
8.3 Import Duty
8.4 Other Imports of Goods
(i) From The EU:
All purchase orders for goods imported from other EU countries must quote the University’s VAT Registration Number - GB 568 6304 14. The supplier will not charge VAT on their invoice.
However, VAT must be paid to HMRC at the UK rate of tax. Agresso calculates the VAT payable and this is charged to the school’s account and sub-project unless the sub-project has a status of Fully- recoverable.
In order to calculate the VAT, all purchases of goods from the EU must be identified by Tax code ‘PA if the goods are standard rated in the UK or Tax code ‘PB’ if the goods are zero rated in the UK.
Various details of all goods purchased from suppliers in other EU countries have to be returned to HMRC every month. It is therefore essential that the tax codes PA and PB are used on all such purchases.
Imports of goods from the rest of the world will have VAT levied at the port of entry to the UK at the UK rate of tax.
The shipping company, will normally pay the VAT, and any duty that is due, on behalf of the University and then send us an invoice for the import VAT, duty and their administration charge.
The VAT on these types of invoices cannot be identified as VAT in Agresso and should be processed with tax code PN. If the VAT is fully recoverable it will have to be posted directly to the VAT account. If you are uncertain how to deal with a shipping company’s invoice please contact Rebecca Young.
Where goods purchased qualify for zero rating, please ensure that a VAT Zero Rating Certificate is sent to the overseas supplier and ask them to send the certificate with the documentation that accompanies the goods. This will ensure that the goods are imported without VAT.
(i) From the EU:
You must quote the University’s VAT Registration Number, GB 568 6304 14, on all orders for services from EU suppliers. For most services, the supplier will not charge VAT.
(ii) From The Rest Of The World:
Imports of services from the rest of the world will not have VAT levied.
(iii) Charge to VAT on certain services
Whether services are purchased from the EU or the rest of the world, VAT has to be accounted for to HMRC at the UK rate of tax. All purchases of such services from overseas must be identified by VAT code PX. A journal will be raised in Finance to charge the appropriate VAT to the school, unless it is recoverable (see section 2).
Examples of services on which we have to account for VAT at the UK rate are:
Some services purchased from overseas suppliers are not subject to reverse charge VAT, or if they are, the applicable UK rate to the University will be exempt or zero. Examples of such services on which we will not have to account for reverse charge VAT and which should be coded with tax code PN are:
Please note that payments for the following should NOT be coded with tax code PX as they are not regarded as overseas services, these purchases should be coded with tax code PN, except where indicated:
When purchasing goods from outside the European Union, import duty becomes payable at the port of entry.
8.3.1 Reliefs from Duty
(i) Scientific instruments and apparatus
Imports of scientific instruments and apparatus are eligible for relief from duty so long as they are used in non-commercial scientific research or for educational purposes.
Scientific instruments and apparatus are defined as any instrument or apparatus which, by reason of its objective technical characteristics and the results which it makes possible to obtain, is mainly or exclusively suited to scientific activities.
Relief also extends to spare parts, components and accessories specifically for scientific instruments and apparatus which have been granted relief and tools to be used for maintaining, checking calibrating or repairing eligible instruments or apparatus.
Application for exemption from duty under this releif must be made in advance of import by contacting the National Import Relief Unit of HMRC in Northern Ireland on 028 6632 2298.
Relief from duty is available on animals imported for use in scientific research. VAT is still payable unless the animals are provided free of charge.
(iii) Certain biological and chemical substances
Relief from VAT and duty is available on certain biological and chemical substances imported for use in non-commercial educational or scientific research.
(iv) Goods for Test
Relief from VAT and duty is available for goods imported for testing to find out their composition, quality or other characteristics for information, or for industrial or commercial research. You must completely use up or destroy the goods in the course of the testing and send NIRU a return once the testing is complete.
For (ii), (iii) and (iv) you must ensure the shipping agent uses the correct Customs Procedure Code (CPC) on the import declaration for the relief to be applied.
(i) Donated goods
Import VAT and duty are payable on the market value of imported goods which have been donated to the University.
(ii) Temporary Imports
Relief from VAT and duty is available for temporary imports, either Temporary Admissions (TA) or goods coming into the country for processing or repair, under what is known as Inward Processing Relief (IPR). It is essential that the shipping agent handling the import uses the correct CPC to identify the type of import or VAT and duty may be charged incorrectly.
When goods are imported temporarily either as a TA or under IPR, there are other conditions that must be met in order to obtain relief including using the correct CPC on re-export. For Temporary Admissions, the VAT and duty usually has to be paid on deposit and then claimed back once proof of export has been supplied to HMRC.
If the repair is carried out free of charge under warranty, then no VAT and duty is payable but if there is a charge, then VAT and duty is due on the cost of the repair. The shipping agents exporting and importing the goods must be informed of the situation so that the correct CPCs are used on both export and re-import.
(iv) Return of University’s Own Goods
Relief is also available under Returned Good Relief for items belonging to the University which are sent overseas temporarily eg for an exhibition or to be used in research overseas. Again the correct CPCs must be used on both export and re-import
If you have any queries on the liability of imports to VAT and duty please contact Rebecca Young on ext 29041 or email@example.com
9. ZERO RATING OF GOODS PURCHASED FOR USE IN MEDICAL RESEARCH ETC
9.1 Supplies of Equipment.
9.2 Supplies of Drugs and Chemicals.
9.3 Issue of Zero Rating Certificate
Supplies of relevant goods purchased by an eligible body with charitable funds will be zero-rated. A supply includes the hire of relevant goods.
The repair and maintenance of relevant goods is also zero-rated.
(i) Relevant goods means
Medical, scientific, computer, video, sterilising, laboratory or refrigeration equipment purchased for use in medical research, training, diagnosis or treatment.
Equipment means articles designed for a specific purpose.
Consumables are not included, e.g. chemicals, powders, paper, medicines. (However, see 9.2 for medicines and chemicals).
The use of the equipment must be mainly for a qualifying use.
Mainly is defined by Customs as “real, substantial and continuing”.
Substantial may be taken to be more than 50% of the time. If a piece of equipment is purchased for use partly in the department’s medical research activities and partly to perform scientific analysis tests for commercial companies, so long as the use for research is more than 50% of the time the equipment may be purchased zero rated.
Medical research is original research into disease and injury of human beings.
Medical training includes teaching medical students.
University of Southampton, as a research institution whose activities are not carried on for profit, falls within one of the categories of eligible bodies defined in the VAT Act.
(iv) Charitable funds
As a charity, all funds held by University of Southampton are charitable funds, regardless of source.
9.1.1Examples of eligible and ineligible items
Computers and peripherals, including toner cartridges
Software solely for research purposes (see 9.1.2 below)
Electron and other microscopes
Laboratory glassware and plasticware
Video equipment (including cameras and tapes);
Audio equipment eg tape recorders
Standard camera equipment and films
The rules on software are slightly different. The purchase of software is regarded as a service.
With ‘off-the-shelf’ software, if the invoice does not separately identify the goods and services, eg if the invoice refers merely to ‘Windows CD-ROM’, then the purchase will be treated as a good. If the goods are used mainly in medical research, training, diagnosis or treatment they will qualify for zero rating.
If the invoice refers to a licence to use software, this is a service and to qualify for zero rating, the service has to be used solely in medical research, diagnosis or treatment. (Training is NOT included).
Relief from VAT is also available to charities for the purchase of medicinal products and substances.
(i) Medicinal products
University of Southampton, by means of it being a charitable institution engaged in medical research, may obtain zero rating of medicinal products which are used solely for medical care, treatment or research.
The University may also obtain zero rating of substances directly used for synthesis or testing in the course of medical research.
In order to claim zero rating of equipment, drugs or chemicals a certificate declaring the University’s eligibility must be sent to the supplier.
When raising requisitions in Agresso, the tax code ‘PM’ must be selected so that the order is raised zero rated and the certificate generated.
If ordering goods eligible for zero rating from suppliers in other EU countries, the tax code ‘PB’ must be used.
All types of charity advertising, including recruitment advertisements, in all types of media are eligible for zero rating. The relief also covers the design and production of advertisements that qualify for zero rating.
For zero rating to apply:
Thus, marketing and advertising addressed to selected individuals is excluded eg direct mail.
When raising purchase orders on Agresso, the appropriate tax code to use is ‘PV’ – Purchases – advertising eligible for zero rating. Agresso will then generate a zero rating certificate to be sent with the order.
When completing forms in Agresso, net amounts must be entered against the school’s account and sub-project. The appropriate Tax code from the list on the next page should then be entered in the Tax code box.
When raising requisitions in Agresso, a product code is selected, this links into an account code from which a default Tax code is generated. In most cases the default tax code will be the correct tax code, but it should ALWAYS be checked and OVERWRITTEN where necessary and in particular where purchases are eligible for zero rating eg advertising or medical equipment used in medical research etc.
Tax codes are also attached to all entries made by journal in Agresso. Default tax codes will be generated by the system in accordance with the account code to which the journal entry is being posted. In most instances the default tax code may be overwritten with the code ‘0’ – No supply, which has been especially set up for use with journals which are not subject to VAT. For example, correction of income mis-posted between accounts, corrections of minor items of expenditure, allocations between subprojects, internal sales. When code ‘0’ is used the system does not calculate any VAT.
However, when larger items of expenditure have been mis-posted, it is important to ensure that NET amounts are processed so that the recoverability of the VAT is dealt with correctly. For example if a purchase for £1,200.00 inclusive of VAT has been entered on the wrong subproject, the journal entry to transfer this to the correct sub-project must be made for the NET amount of £1,000.00 with Tax code PS. The system will calculate the VAT as £200.00 and the total of £1,200.00 will then be corrected.