08a. VAT

Question 1

what is VAT charged on?

Answer 1

• Any supply of goods or services made in the UK
• Where it is a taxable supply
• Made by a taxable person
• In the course or furtherance of any business carried on by that person

Question 2

what is a supply of goods and services?

Answer 2

Any supply made in the UK of goods or services done in return for consideration.

Question 3

what is the meaning of Made in the UK?

Answer 3

The place of supply of the relevant goods or services must be in the UK. There are complex rules for working out the place of supply for VAT purposes in cross-border transactions, which are outside the scope of these materials.

Question 4

what is a taxable supply?

Answer 4

Any supply made in the UK which is not an exempt supply. See below for the various types of supply.

Question 5

what is a taxable person?

Answer 5

A person who is, or is required to be, registered for VAT purposes. ‘Person’ includes individuals, partners, companies and unincorporated organisations.

Question 6

what is output tax?

Answer 6

VAT charged by a business on its supply of goods and services

Question 7

what is input tax?

Answer 7

VAT paid (bought in) by a person on goods and services

Question 8

what is the meaning of In the course or furtherance of any business carried on by them?

Answer 8

‘Business’ is a very wide term and basically is any economic activity carried on, on a regular basis.

An employee’s services to an employer are excluded.

All of a person’s business activities are included in one VAT registration.

Question 9

what is the current registration threshold for VAT?

Answer 9

£90,000

Question 10

when is a person required to be VAT registered?

Answer 10

• At the end of any month if the value of their taxable supplies in the period of one year or less has exceeded the VAT registration threshold (the person must notify HMRC within 30 days of the end of that month and will be registered from the beginning of the second month after the taxable supplies went over the threshold); or
• At any time if there are reasonable grounds for believing that the value of their taxable supplies in a period of 30 days then beginning will exceed the VAT registration threshold (the person must notify HMRC within the 30 days and will be registered from the beginning of the 30-day period).

Question 11

when else can a person become VAT registered?

Answer 11

voluntarily

Question 12

what does voluntary VAT registration mean?

Answer 12

✅input VAT can be recovered (which is helpful to a business in reducing costs).

❌the business will have to charge output VAT on supplies of goods and services to its customers (which may make the business less attractive to customers than its unregistered competitors).

Question 13

when may a VAT registered person apply to have the registration cancelled (de-registered) and accordingly cease to be
‘taxable’ (even though continuing to carry on the business)?

Answer 13

where the value of their future annual
taxable supplies will not exceed the VAT deregistration threshold (currently £88,000)

Question 14

what is the current deregistration threshold?

Answer 14

£88,000

Question 15

on what figure does a VAT registered business account to HMRC?

Answer 15

the DIFFERENCE between input tax (on goods and services it has purchased) and output tax it has charged customers or clients (on its own supplies)

Question 16

why does VAT registered business only account for the difference between input tax suffered and output tax charged?

Answer 16

The business acts as a tax collector in collecting and paying to HMRC the tax on the value added by the business in the supply chain

Question 17

what is currently the standard rate of VAT?

Answer 17

20%

Question 18

if a price does not mention VAT, does that price include or exclude VAT?

Answer 18

includes VAT (ie nothing additional payable)

Question 19

where the standard rate applies, how can you calculate the VAT element of a VAT inclusive price?

Answer 19

multiply price by 1/6

Question 20

when might a supply be outside the scope of VAT?

Answer 20

eg the transfer of a business as a going concern, subject to certain conditions

Question 21

what are the 4 kinds of supply a business can make?

Answer 21

• Standard rated
• Reduced rated
• Zero rated
• Exempt

Question 22

when is a supply standard rated (20%)?

Answer 22

• A supply by a business will be standard rated unless it falls within one of the other three categories.
• A VAT registered business charges VAT at standard rate on its outputs and recovers any VAT suffered on its inputs (unless it makes supplies which fall into the exempt category below).

Question 23

when is a supply reduced rated (5%)?

Answer 23

• domestic heating and power
• installation of mobility aids for the
  elderly
• smoking cessation products
• children’s car seats

Question 24

when is a supply zero rated?

Answer 24

for public policy reasons:
- food (certain categories)
- sewerage and water
- books/newspapers
- talking books for the blind
- new houses and the construction of new houses
- public transport
- children’s clothing

Question 25

why are zero rated supplies a very favourable supply for a business to make?

Answer 25

Zero rated supplies still fall into the category of taxable supplies. This means that when a VAT registered business makes zero rated supplies it charges VAT at the rate of 0% on its outputs and can recover any VAT suffered on its inputs. This is, therefore, a very favourable supply for a business to make.

Question 26

when is a supply exempt from VAT?

Answer 26

• insurance
• finance
• education
• health
• sale of land and buildings (unless it comprises a new commercial building, or the supplier of a commercial building has chosen to make the supply standard rated by waiving the exemption)

Question 27

why do exempt supplies represent a cost to a business?

Answer 27

When a business makes exempt supplies it does not charge VAT on its supplies but equally it is not able to recover any VAT suffered on its inputs. This input tax is a cost to the business.

Question 28

who must and may keep VAT
records and make their VAT return online?

Answer 28

must: Businesses with turnover above the VAT registration threshold
may: smaller businesses may choose to do so

Question 29

VAT invoice requirements for a taxable business making a standard or reduced rate supply to another taxable business

Answer 29

A taxable business making a standard (or reduced) rate supply of goods or services to another taxable business must supply the customer/client with a VAT invoice within 30 days of the supply and keep a copy.

HMRC carries out regular inspections of businesses to ensure that input and copy output invoices have been kept.

Question 30

VAT return requirements on taxable businesses

Answer 30

• Taxable businesses must submit a VAT Return online to HMRC every 3 months.
• The due date for payment is usually within one month and seven days after the end of the VAT period.
• The VAT return must show the total output tax charged on the making of taxable supplies during that VAT period less the total input tax attributable to the making of taxable supplies.
• At the same time the business must pay to HMRC the excess of the output tax charged over the input tax suffered.
• Businesses that normally pay more than £2.3 million a year to HMRC in VAT must make monthly payments on account and then pay the balance when submitting the quarterly VAT return.

Question 31

special schemes designed to simplify accounting for VAT or to reduce VAT liability

Answer 31

• retail schemes
• cash accounting
• annual accounting
• flat rate scheme

Question 32

how do retail schemes help with VAT?

Answer 32

There are special schemes for use by retailers who find it difficult to issue VAT invoices for the large number of supplies that they make direct to the public

Question 33

how does cash accounting help with VAT?

Answer 33

Businesses whose annual turnover is less than £1,350,000 (excluding VAT and excluding exempt supplies) may opt to use a cash accounting scheme if they comply with certain conditions, ie output tax is accounted for when the invoice is paid rather than issued. However, input tax can only be recovered when the business pays the supplier.

Question 34

how does annual accounting help with VAT?

Answer 34

Businesses with an annual turnover not exceeding £1,350,000 (excluding VAT and excluding exempt supplies) may be permitted by HMRC to make an annual VAT return. The VAT is paid by instalments during the year (based on the previous year’s VAT liability) with the balance being paid when the VAT return is submitted.

Question 35

how do flat rate schemes help with VAT?