Non-registered individuals (the final consumer) cannot reclaim input tax and the VAT becomes a real cost to them.
The basic rules and principles of VAT are established in the 6th VAT Directive of the European Union., which all member states are required to implement in their domestic legislation. The final court of appeal on VAT matters is the European Court of justice.
If you are registered for VAT, you must keep certain business records and VAT records of sales and purchases for six years. There should be a separate VAT account too. The main thing is to ensure that they are complete and up to date it is easy for VAT officers to access them when you have a VAT inspection. Overall responsibility for the VAT system goes to Commissioners for Revenue & Customs. The VAT Central Unit deals with the collection of VAT.
Businesses prepare accounts using generally accepted accounting practise for tax purposes. This means that income and expenses are dealt with on an accrual basis (accruals accounting).
The 20-year time limit applies where there has been a loss of tax and:
a person has failed to notify liability to register for VAT, or
a non-taxable person has failed to notify HMRC for VAT purposes about the acquisition in the UK from another EU member state of
goods subject to excise duty, or
In summary, whatever the legal entity considering registration, registration can be broken down into a compulsory registration or a voluntary registration. The compulsory registration test can be broken down into an historic test and a future test. For the historic test at the end of every calendar month, you look at taxable supplies in the previous 12 months and if you have exceeded the annual threshold, currently £81,000, then you have an obligation to register.
Examples of compulsory deregistration would be:
Ceasing to make taxable supplies - a business may cease trading for example.
HMRC can charge you a penalty (between 15% and 100% of the unpaid amount owed) if your VAT Return is inaccurate.
- The subject matter of the transaction. The courts take the view that certain commodities are more likely to be acquired as investment than as the subject of a deal. Ali, a motor mechanic, bought an old car for resale. The car was sold at a good profit. Although this was not the first transaction and all cars were sold to different customers true to auction, so this could be held as a trade.