14: VAT

Question 1

What is taxable supply and taxable person?

Answer 1

Supply: any supply of goods or services made in the UK other than an exempt supply

Person: sole trader, partnership, limited company, club or association making taxable supplies

Question 2

Define input and output VAT?

Answer 2

VAT collected by the business on sales made to customers is output VAT

VAT paid by a vat taxable person on purchases is input tax. Can be reclaimed

This is self assessed - must be netted off and the different paid to/received from HMRC

Question 3

Why would you want to be VAT registered, if your goods are zero-rated?

Answer 3

Can reclaim input tax still!

Question 4

What are the 5 VAT classifications, and give examples in each?

Answer 4

Outside of scope: dividends, salaries
Exempt: insurance
Zero-rates: food, kids clothes
Reduced rate: domestic utilities
Standard rate: everything else

Question 5

How does an output VAT supplier compensate for an error?

Answer 5

We are assuming he accidentally charged the customer exclusive of VAT

The trader is responsible

The amount the trader receives is therefore actually considered to be inclusive of VAT

Question 6

How does VAT registration work for a sole trader?

Answer 6

They should have one single VAT registration, even if they carry on several businesses

Each limited company should have one registration

For everyone, must register online

Question 7

What are the two turnover tests?

Answer 7

Historic test

Future prospects test

Question 8

How does the historic test work?

Answer 8

Do taxable supplies in the last 12 months exceed reg limit?

Performed at end of each month

Notify HMRC within 30 days of the end of the month in which the turnover limit was exceeded

Effective: from the first day AFTER the end of the month following the relevant month

Trader need not register if will go below deregistration limit in next 12 months, or if the business only makes zero-rated supplies

Question 9

How does the future prospects test work?

Answer 9

Will taxable supplies in next 30 days alone exceed registration limit?

Considered constantly

Notify HMRC within 30 days of realising the threshold will be exceeded

Effective immediately

Trader need not register is business only makes zero rated supplies

Question 10

What are taxable supplies?

Answer 10

All sales excluding:
- VAT
- Exempt supplies
- supplies outside the scope of VAT
- sales of capital assets

Question 11

What are the four responsibilities of being VAT registered?

Answer 11

1. Charge output tax on taxable supplies
2. Quote the VAT registration number on all sales invoices
3. File a VAT return for their allocated ‘tax period’ (normally every three months)
4. Maintain VAT reports so that input tax can be recovered

Question 12

What are the advantages and disadvantages of voluntarily registering for VAT?

Answer 12

Advantages:
- avoids penalties for late registration
- can recover input VAT
- can disguise the small size of a business

Disadvantages:
- burden of compliance with admin
- must charge output VAT, which will make goods more expensive

Question 13

What is the effect of compulsorary de registration?

Answer 13

Deregistration must happen when the business ceases to make taxable supplies

HMRC must be notified within 30 days of when the person becomes aware they will no longer make taxable supplies

Deregistration is effective from the date taxable supplies cease

Question 14

When can a company deregister voluntarily?

Answer 14

If there is evidence that taxable supplies in the next 12 months will not exceed the deregistration limit

12 months starts whenever

Effective from date or request, or agreed later date

Question 15

What is the effect of deregistration?

Answer 15

VAT must be accounted for on any assets or inventory held on which a deduction for input tax has been claimed.

This can be waived if it is less than £1,000

Question 16

What is the tax point?

Answer 16

The date of a transaction for VAT purposes

Important because it identified which quarter the transaction falls in

Question 17

What are the BPT indicators?

Answer 17

Goods - the date removed from inventory or despatched
Services - date performed
Goods on sale or return - earlier of:
- date goods adopted by customer
- 12 months after dispatch date

Question 18

What are the three steps to determining which tax point to use?

Answer 18

1. Identify BTP
2. On or before BPT, can you use one of these?
   - a tax invoice issued
   - a payment been received
3. If no, can you use this?
   - a tax invoice issued within 14 days of BTP?

Question 19

How does a deposit work with tax points?

Answer 19

A deposit has a completely separate tax point to the balancing payment

Question 20

What 6 things make up output tax?

Answer 20

Standard rate sales
Reduced rate sales
Goods taken for own use
Gift of goods
Discounted sales
Private fuel for employees

Question 21

How does goods taken for own use work with output tax?

Answer 21

If a trader withdraws goods for personal use, output VAT must be accounted for on the full replacement cost

Question 22

How does goods taken for own use work with output tax?

Answer 22

Gifts are taxed at replacement value

UNLESS the cost of gifts made to the same person does not exceeds £50 (exc. VAT) in any 12-month period

Neither trade samples or gifts of service are taxable

Question 23

What are the two options with showing discounts?

Answer 23

Charge VAT on undiscounted price, then the supplier issues a credit note

Show both amounts on the invoice. Supplier includes a statement that the customer can only recover input tax on the amount actually paid

Question 24

How do you approach questions on private fuel for output tax?

Answer 24

1. Find out the recoverable input tax
   (Fuel paid / 6)
2. Find the scale rate for the car (you will be given this)
3. Divide this scale rate by 6 to get the output tax

Question 25

What three things go into input VAT?

Answer 25

Standard-rate expenditure
Reduced-rate expenditure
Recovery of output VAT previously paid on bad debts

Question 26

On what conditions can the output VAT on bad debts be reclaimed?

Answer 26

The debt is at least 6 months overdue

The debt has been written off in the seller’s books

Question 27

Under what circumstances can pre-registration input VAT be reclaimed?

Answer 27

Goods
- must be acquired for business purposes and still in inventory
- acquired less than 4 years before registration

Services
- must be supplied for business purposes
- supplied less than 6 months before registration

Question 28

Under what four conditions is input tax irrecoverable? (IMPORTANT)

Answer 28

Cars (unless used for 100% business purposes)

Non-business items

VAT items for which no VAT receipt is held

Business entertaining, unless:
- staff entertaining
- entertaining foreign customers

Question 29

What should be included as the cost for capital allowance purposes?

Answer 29

If the VAT is irrecoverable, like cars, put the full cost on including VAT.

Include accessories too.