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If a business is registered for VAT (mandatory if annual turnover £>85,000) then it has to charge VAT on many items it sells. The commonest rate is 20% but there is also 0% and 5% depending on the goods.
The business must pay over the VAT collected to the Government, but in turn can reclaim VAT that suppliers have charged it. The VAT paid over and reclaimed are not counted as sales or purchases
So if a business bought goods costing £60 for cash and sold them for £100 cash (both before VAT) then it would have to actually charge the customer £120 and would be charged £72 by the supplier.
The double entry is:
Purchase:
DR Purchases 60
DR VAT 12
CR Cash 72Sale
DR Cash 120
CR Sales 100
CR VAT 20The net balance on the VAT account of £8 is paid to the Government
DR VAT 8
CR Cash 8Thank you sir.
However sir, this book line created a confusion,
“If a business is unable to pay VAT with due period, HMRC warns the business that if the business defaults in respect of an accounting period within 12 months, then default surcharge is issued.”In my example above, the business had to pay the government (HMRC) £8. If it fails to do that the there will be a penalty to pay also.
That’s all a bit advanced for this paper.
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