VAT

• VAT is charged on goods or services sold or supplied

• There are different rates but many items have been
charged at 20% from Jan 2011
• Collected by HMRC
 Input/Output Tax
• Jordan Maxwell will be charged on the value of services it sells:
• VAT on goods/services sold by firm is OUTPUT TAX
• VAT on goods/services bought in by firm is INPUT TAX
• Jordan Maxwell will pay to HMRC: Output Tax – Input Tax

• An example….
 Vat on goods bought in
• The firm buys business furniture for £10,000 + £2,000
Vat.

– Is the Vat Output tax or Input tax?

 VAT on services
• Firm conducts conveyancing for client and charges £500
+ VAT (£100)

• £500 is profit costs earned and retained by firm

• £100 will be recorded in Vat ledger and passed to HMRC
 VAT on invoices from 3 party rd

• 2 methods of dealing with VAT on disbursements:

– Agency – if invoice in name of client

– Principal – if invoice in name of firm

 VAT: Agency Method
• Invoice in name of client

• Can assume invoice in name of client unless told otherwise

• If in name of client decide whether can be paid out of client

account is it earmarked? Have we informed client?

• Charge full amount (VAT inclusive) in normal way of paying

expense
 VAT: Agency Method
• What entries are made on the ledgers?

– Client ledger: debit Vat inclusive amount

– Cash book: credit Vat inclusive amount

– NB no entries in VAT ledger

 VAT: Principal Method
• Invoice in name of firm
• Must pay out of business account:
• Dealt with in 2 stages
 VAT: Principal Method
• At the time firm is invoiced: business account
– Client Ledger: debit amount of invoice exclusive of VAT
– Cash book: credit amount of invoice exclusive of vat
– VAT ledger: debit VAT amount (input tax)
– Cash book: credit VAT amount
– NB the client is only liable for Vat when client is billed
• When client is billed: business account
– Client ledger: debit profit costs amount
– Profit costs ledger: credit profit costs amount
– Client ledger: debit total amount of VAT from invoice plus VAT on
profit costs
– VAT ledger: credit total VAT amount from profit costs and invoice
(output tax)
 Jones Business Client
DR CR Bal DR CR Ba;
Date Particulars
Feb 21 Cash/ enquiry 40 40 dr
agent VAT paid
£8
 Cash Business Client
DR CR Bal DR CR Ba;
Date Particulars
Feb 21 Jones/ enquiry 40
agent

Feb 21 Enquiry agent 8

VAT
 HMRC Business
Date Particulars DR CR Bal
Feb 21 Cash/enquiry agent 8
jones
 Jones Business Client
DR CR Bal DR CR Ba;
Date Particulars
Feb 21 Cash/ enquiry 40 40 dr
agent VAT paid
£8

Feb 28 Costs 120

VAT(24 +8) 32 192 dr

 Summary
– Agency - vat inclusive sum charged can be paid from client
account ( if we have funds and have written to the client or
billed them )
– Principal – 2 stages need to hide vat on client ledger until we
bill the client and then we can show the hidden vat. Must
always come from business account.
– Exception of counsel fees