What value do you account for VAT on?

Valuation

For VAT purposes, the value of a supply is not just the cash payment received but any other additional consideration. This means any goods or services received in return for the goods or services supplied.

The accountable amount is the full value of the goods or services supplied by the other party. However, getting the correct value of the supply isn’t always easy and can lead to common errors being made. Let’s look at some problem areas.

Commissions

Small businesses selling through Internet marketplaces such as Amazon or eBay make sales to individuals and charge a VAT-inclusive amount. The online marketplace collects the money and deducts charges and commissions. They pay the balance over to the trader.

Example. The business has £4,000 of sales in the period and the online marketplace has charges and commissions of £250 and so passes on £3,750 to the business. The business has received £3,750 which it treats as VAT inclusive and accounts for VAT of £625 (£3,750/6). This is incorrect as the actual sales are £4,000 and the VAT due is £666.67 (£4,000/6) an under-declaration of £41.67. The business should not net off commissions or charges made by a sales agent from the value of its sales.

Part exchanges

A business sells reconditioned mobile phones and takes in old phones in part exchange. It sells a reconditioned phone for £400 and takes in the customer’s old phone and allows him a trade-in value of £150.

The business receives £250 in cash and accounts for VAT on £41.67 (£250/6). This is incorrect as the actual consideration the business has received is £250 in cash and a mobile phone valued at £150 giving a total consideration of £400 and VAT due of £66.67 (£400/6).

Services

A property rental business opts to tax a property that is in need of refurbishment and agrees to allow a tenant a rent-free period of twelve months on condition that it undertakes £20,000 of renovations to the property.

As it is a rent-free period the business does not account for any VAT. However, as a condition of the lease the tenant has agreed to undertake £20,000 of building work on the property so in reality the landlord has been paid £20,000. As it has opted to tax the property, VAT of £3,333.33 (£20,000/6) is due.

Tip. The tenant should provide the landlord with an invoice for the £20,000 building work and then the business can recover the VAT on the building work so that it is not out of pocket.

Discounts

If a business offers discounts on goods or services and it only receives a payment in cash, e.g. buy four bottles of wine and get one free, VAT is only due on the cash received and not on the aggregate value of five bottles.