24. TC - VAT Flashcards
What is VAT charged on?
The sale of taxable supplies by a taxable person
What is a taxable person?
A sole trader, partnership, limited company, club or association making taxable supplies
What is a taxable supply?
One on which output VAT is chargeable and input VAT can be recovered
Will be zero-rated, reduced-rated or standard
What is the rate for standard VAT?
20%
What is the VAT % for reduce rate?
5%
What is output VAT?
Vat collected by the taxable person on sales
Paid over to HMRC
What is input VAT?
Any VAT paid by a taxable person on purchases
Can be claimed back from HMRC
How is VAT paid/received from HMRC
Every month/quarter input and output VAT is netted off and paid/recovered from HMRC
What is a multiple supply?
Is where there are individual elements within the supply that are treated separately for VAT
E.g. use of football pitch (exempt) and playing in a league (standard)
What is a single supply?
Where there is just 1 supply (single rate of VAT) although it might be made yp of lots of different things (which individually might have diff VAT ratings)
Can an indiv who makes wholly taxable supplies recover input VAT?
Yes, as long as it relates to the taxable supply of goods
Can an indiv making wholly exempt supplies reclaim VAT and why?
No they can’t be a taxable person as they aren’t making a taxable supply
So can’t reclaim inout VAT
What is a partially exempt trader?
A trader who makes both taxable and exempt supplies
What input VAT can be reclaimed for a partially exempt trader?
It depends on the supply to which the input VAT relates
- Input VAT attributable to exempt supplies made by a partially exempt trader is not fully recoverable unless it falls below certain ‘de minimis’ limits
- Input VAT relating to taxable supplies can always be recovered in full, even if the trader doesn’t fall below the ‘de minimise’ limits
What is the simplified test for partial exemption?
If a business passes either Test 1 OR Test 2 below then they can treat itself as de minimise and provisionally recover all VAT
Test 1
Total input tax < £625/month on average
Exempt supplies < 50% of all supplies
Test 2
Total input tax less inout tax directly attributable to taxable supplies < £625/month on average
Exempt supplies < 50% of all supplies
TYU1: Bridie makes the following supplies in Sept QE
Standard-rated taxable supplies (excluding VAT) £50k
Exempt supplies £30k
Total £80k
Bridie’stotal input tax for period is £1,800
Calc the input VAT recoverable by Birdie for the Sept QE
- £1,800/3 = £600
< £625pm on average - £30k/£80k = 37.5%
Exempt supplies < 50% total supplies
Biride passes test 1 therefore her business is de minimise for the period and all input VAT can be recovered (£1,800)
TYU2
Fred makes the following supplies in QE 31 Dec
Standard VAT (Excl VAT) £37k
Exempt supplies £15k
Fred’s input Tax for the period is £4,250 of with £3,725 is attributable to taxable supplies
Calc the inout tax recoverable by Fred for this Q
Fred’s input tax for the period is £4,250, which is clearly more than £625pm so he fails test 1 and considers test 2
Test 2
1. (£4,250 - £3,725)/3 = £175
< £625m on average
- £15k / £52k = 28.8%
Exempt supplies < 50% total supplies
Fred passed the test therefore his business is de minimis for the period and all input VAT can be recovered
How is non-attributable input tax calculated for the standard partial exemption calc?
The input VAT that isn’t directly attributable to either taxable or exempt supplies e.g. relating to OH, needs to be apportioned between the 2 types of supply
Following formula is used to calcL
Total taxable supplies (1)/ total supplies (1) = %(2) x non-directly attributable input VAT
1) Exclude VAT and supply of capital items
2) Round up to nearest whole percentage
The remaining non-attributable input VAT is apportioned to exempt supplies
What is the next step once you have completed the VAT standard partial exemption calc?
The total input VAT relating to the taxable supplies (either directly attributable or apportioned) is fully recoverable
The total input VAT relating to exempt supplies (either directly attributable or apportioned) then needs to be tested against certain standard de minimise limits and if it falls below both of these, it can also be recovered.
Otherwise it is treated as irrecoverable
What are the standard de minimis limits for partial VAT calcs?
Inout tax relating to exempt supplies < £625/month on average
Input tax relating to exempt supplies < 50% of all input tax
What is an annual adjustment for partial exemption VAT ?
At the end of the partial exemption year, the simplified tests are applied to the total figures for the year as a whole
If the partially exempt trader passes test 1 or 2 on the annual figures then
What is an annual adjustment for partial exemption VAT ?
At the end of the partial exemption year, the simplified tests are applied to the total figures for the year as a whole
If the partially exempt trader passes test 1 or 2 on the annual figures then the business can recover all the inout VAT for the year
If both simplified test failed then the trader performs a full partial exemption calc based on the annual figures
If the total VAT recovered based on the annualised figures does not equal the total VAT recovered so far, then an annual adj is made to pay/ reclaim the diff
What is the benefit of the annual partial exemption test?
Gives a partially exempt trader the option of applying the de minimise tests only once a year
When can a business treat itself as deminimis for annual partial exemptions?
Provided the business was de minimise in the previous year, it can treat itself as de minimis in the current year and provisionally recover all inout VAT every VAT period without needing to perform any partial exemptions calc
What happens when a business was deminimis in the prev year but then fails the de minimise test for the current year?
Provided the business was de minimise in the previous year, it can treat itself as de minimis in the current year and provisionally recover all inout VAT every VAT period without needing to perform any partial exemptions calc
So if they fail at the end of the year, the trader must repay the input tax relating to exempt supplies that was provisionally rcovered
When is an individual allowed to use the de minimis test?
The trader must
- have passed the deminimis test in the prev year
- Consistently apply the annual test throughout any given partial exemption year
- Not to expect to incur more than £1m input tax in current year
Who can be part of VAT groups under the old Finance Act?
Finance Act 2019 changed the rules
Under the old rules only corporate entities could participate
What must a trader be to be eligible to be in a VAT return?
One company had to control (>50%) the other
Both companies had to eb under common control (of a company, indiv and partner)
How does the Finance Act 2019 change who is eligible to be in a VAT group?
The changes made by FA 2019 permit a non-corporate entity such as ST/ ship (with a business establishment in UK) to be included within a VAT group comprising companies that it controls (> 50%)
For this rule to apply, the companies concerned must themselves also be established or have a fixed establishment in the UK
What rules do you assume are in place for determining whether an indiv is in a VAT group?
Changes made by FA 2019 still need to be enacted, but you should assume (unless told otherwise) that this new wider definition of a VAT group is already in place
What are the consequences of being in a VAT group?
VAT group appoints a representative member which is responsible for acc for all input and output VAT for the whole group
Representative member submits a single VAT return covering all group members
All VAT group members are jointly and severally liable for the VAT payable by the group as a whole
Intra-group supplies are outside the scope of VAT
If the group is partially exempt the deminimis tests are applied to the whole group
How many VAT returns are submitted for a group return?
a single VAT return is submitted to cover all members of the group
Who is liable for VAT returns for a group?
The VAT group members are jointly and severally liable for the VAT payable by the group as a whole
How are intra-group supplies dealt with?
They are outside of scope
How are de minimis tests applied to companies in a VAT group?
If the group is partially exempt the de minimise tests are applies to the group totals
Do all eligible entities have to be included in a VAT groyp
No, so the following might be left out
- Zero rated entities (to retain the cash flow adv of monthly returns)
- Entities making wholly exempt supplies. Although these can be included, to do so would affect the partial exempt status of the VAT group and may restrict the recovery of input VAT
Do all eligible entities have to be included in a VAT groyp
No, so the following might be left out
- Zero rated entities (to retain the cash flow adv of monthly returns)
- Entities making wholly exempt supplies. Although these can be included, to do so would affect the partial exempt status of the VAT group and may restrict the recovery of input VAT
Should entities making wholly exempt supplies be included in a VAT group?
Although these can be included, to do so would affect the partial exempt status of the VAT group and may restrict the recovery of input VAT
Give some examples of exempt VAT property transactions
Sale of bare land
Lease of any building
Sale of old (> 3 years) commercial buildings
sale of existing residential building
Give some examples of zero-rated VAT property transactions
Construction and sale of new residential building
Sale of new residential accommodation following conversion of a non-residential building by the vendor
Give some examples of standard-rated VAT products
Construction of commercial building
Sale of new (<3 years commercial building)
Is the following an exempt, zero rated or standard rated VAT property transaction?
Sale of bare land
Exempt
Is the following an exempt, zero rated or standard rated VAT property transaction?
Lease of any building
Exempt
Is the following an exempt, zero rated or standard rated VAT property transaction?
Sale of old (> 3yrs) commercial building
Exempt
Is the following an exempt, zero rated or standard rated VAT property transaction?
Sale of existing residential building
Exempt
Is the following an exempt, zero rated or standard rated VAT property transaction?
Construction and sale of new residential building
Zero
Is the following an exempt, zero rated or standard rated VAT property transaction?
Sale of new residential accommodation following conversion of a non-residential building by the vendor
Zero
Is the following an exempt, zero rated or standard rated VAT property transaction?
Construction of commercial building
Standard
Is the following an exempt, zero rated or standard rated VAT property transaction?
Sale of new (<3 years) commercial building
Standard
How does the option to tax work?
The owner of commercial land or building can opt to waive the exemption from VAT so that the input tax relating to the supply can be recovered
Why is the option to tax known as option to tax?
As the standard rated VAT must be charged on any subsequent
- Lease of the building (both rents and lease premiums)
- Sale of the building within 20 years of the OTT (sine the OTT is irrevocable for 20 years, after a 6 month cooling off period)
How is the option to tax election made?
Made on individual buildings (but applies to the whole building) by an idiv party and is not transferrable
TYU5a: Fred has just bought a new warehouse for use in his clothing business.
Will the purchaser be charged VAT?
If so, can the input VAT be recovered by the purchaser?
as the warehouse is new, VAT is chargeable
VAT is recoverable by Fred as he uses the business for taxable supplies
TYU5b: John has just bought a second had factory to use for manufacturing radios.
Will the purchaser be charged VAT?
If so, can the input VAT be recovered by the purchaser?
If the building is less than 3 years old, or the seller has opted to tax, VAT will be charged
John can revere any VAT charged as he will be using the building for taxable supplies
TYU5c: Natwest bank has just bought a new building to add to its existing banking network. Banking is an exempt supply
Will the purchaser be charged VAT?
If so, can the input VAT be recovered by the purchaser?
As the building is new, VAT will be charged on the purchase
Batwest can’t recover the VAT as it is using the building for banking, which is an exempt supply
Which assets are covered by the capital goods scheme?
- land and buildings that cost over £250k
Aircraft, ships, boats and other vessels costing over £50k
Single computer items costing over £50k
What does the initial input VAT recovery amount depend on for the capital goods scheme?
The initial proportion of input VAT recoverable will be based on the initial use of the asset
- Wholly taxable use- can recover all input VAT
- Wholly exempt use - can’t recover any of the input VAT
- Partly taxable use - can recover proportion o
What does the initial input VAT recovery amount depend on for the capital goods scheme?
The initial proportion of input VAT recoverable will be based on the initial use of the asset
- Wholly taxable use- can recover all input VAT
- Wholly exempt use - can’t recover any of the input VAT
- Partly taxable use - can recover proportion of input VAT based on proportion of taxable use in quarter of purchase
What does the initial input VAT recovery amount depend on for the capital goods scheme?
The initial proportion of input VAT recoverable will be based on the initial use of the asset
- Wholly taxable use- can recover all input VAT
- Wholly exempt use - can’t recover any of the input VAT
- Partly taxable use - can recover proportion of input VAT based on proportion of taxable use in quarter of purchase
What is done during the adjustment period for partial VAT?
The annual adjustment is calculated by comparing the proportion of taxable use on the initial recovery to the proportion of taxable use for the current VAT year q
What are the different adjustment periods for partial VAT?
L&B - 10 years
Aircraft, ships, boats and other vessels - 5 years
Computer & comp equip - 5 years
When do the first and subsequent intervals run for the adjustment periods for partial VAT?
First interval runs from the date of acquisition to the end of that VAT return year (not time apportionment net)
subsequent intervals coincide with the VAT year
When does the initial input VAT have to be repaid for partial VAT?
If the taxable use has decreased, some initial input VAT recovered must be repaid
When can more initial input VAT be recovered for partial VAT?
When calculating the adjustment period acids, if the taxable use has increased, then more VAT can be recovered
What is the calculation for the annual adjustment for partial VAT?
(Total input VAT / adjustment period ) x (% now - % on initial recovery)
What is the process when an asset subject to the capital goods scheme is sold during the adjustment period for partial VAT?
- The annual adjustment is made as normal in the year of disposal (as if the asset has been used for the whole of that year)
Also an ‘adjustment for sale’ must be made to cover the remaining intervals within its capital goods scheme life
How does the ‘adjustment for sale’ work if asset subject to the capital goods scheme is sold during the adjustment period for partial VAT?
- If the disposal was exempt (e.g. sale of a commercial building over 3 yrs where there is no OTT), we assume 0% taxable use for each of the remaining periods
- if the disposal was taxable (e.g. sale of a commercial building over 3 yrs where there has been OTT) we assume 100% taxable use for each of the remaining periods
How is VAT calculated under the flat rate scheme?
The output VAT due to HMRC is calculated by applying a flat rate percentage to the gross (VAT incl) total turnover figure
This includes zero rates and exempt supplies
No input VAT is separately recovered
VAT invoices are issued as normal
Do you need to keep input VAT records when on the VAT scheme?
No, as no input VAT is claimed separately
What does the flat rate % depend on for the flat rate scheme?
Depends on the category of business
And there is a 1% deduction if it joins the scheme in the first year of registration
What needs to change if an indiv/company registers for flat rate scheme in their first year of registering?
They get a 1% deduction
What is the annual taxable turnover limit to join the flat rate scheme?
£150,000
But this excludes VAT and exempt supplies
What is the limit for when a comp/indiv has to leave the flat rate scheme?
If annual TOTAL income (including VAT and exempt supplies) exceeds £230,000
What are the limits for joining and leaving the flat rate scheme?
Joining: £150,000
But this excludes VAT and exempt supplies
Leaving: If annual TOTAL income (including VAT and exempt supplies) exceeds £230,000
What are the advantages of the flat rate scheme?
- Lower admin burden as don’t need to record input VAT amounts
- There is the possibility of paying less VAT than would’ve under normal rules
What happens if a business in the flat rate scheme qualifies as a Limited Cost Business?
Then the VAT rate used is 16.5% rather than the % based on the business
Is it beneficial to be a Limited cost business under the flat rate scheme?
Not necessarily, as you pay at 16.5% compared to average for industry
This may remove one of the main advantages and increases the possibility of paying more VAT than would’ve under the normal method
What is a limited cost business (Flat rate scheme(?
One with a VAT inclusive cost of relevant goods of:
- Less than 2% of its VAT inclusive turnover
OR
- Greater than 2% of VAT inclusive turnover but less than £1,000/yr (£250/qtr)
What are relevant goods? (i.e. for a limited cost business for Flat rate scheme)
Those that are used exclusively for the purposes of the business (other than capital items), with some exclusions
Examples found in Hardmans
How often must a calculation be done to determine whether a business in the flat rate scheme is a limited cost trader
Must be done each time a VAT return is completed
So if the proportion of relevant costs fluctuates, a business could move from applying to limited cost % of 16.5% in one quarter and not in the next
How does trade with the EU affect VAT?
VAT applies throughout the EU must the rate may vary
How is VAT dealt with with the dispatch of goods within the EU if the cutomer is not vat registered?
Supplier charges VAT as normal (i.e. the origins system)
How is VAT dealt for the supplier with in the EU if the customer is VAT registered
Supply is zero rated provided
- The supplier quotes customer’s VAT number on the invoice
- Supplier has evidence that they delivered to EU member state
How is VAT dealt for the customer with in the EU if the customer is VAT registered
Accounts for output VAT at their local rate (known as destination system)
Can reclaim input VAT subject to normal rules
What does the VAT treatment of overseas transactions depend on?
Depends on
- Whether the supply is of goods or services
- Whether the parties involved are based insider or outside the EU
What does the VAT treatment of overseas transactions depend on?
Depends on
- Whether the supply is of goods or services
- Whether the parties involved are based insider or outside the EU
How does VAT work on exports to outside the EU?
Supply is zero rates provided the seller holds evidence on how and where the export
Customer accounts for output and input sales tax in own country
How does VAT work on imports to outside the EU?
Importer accounts for VAT as they bring goods into their country (EU)
If importer is VAT registered can recover this input VAT subject to normal recovery rules
How does the supply of VAT to non-business customers outside UK?
i.e. going to the consumer
Place of supply is where SUPPLIERS business is situated
Therefore, UK supplier will account for UK output VAT, regardless of where the customer is situated
How is the supply to business customers dealt with?
- place of supply of services is where customers business is situated
- Therefore a UK VAT registered customer will account for UK output VAT on supply under reverse charge system
- UK VAT reg supplier won’t charge VAT as it is outside scope of UK Vat, and the customer will account for sales tax in their own country
What is the difference between supplies to non-business customers and business customers outside the UK?
- Supplies to non-bus customers: place of supply of services is where supplier’s business is situated
- Supplies to business customers: place of supply of services is where customers business is situated
How is VAT outside EU dealt with on land related services?
For land services, the place of supply is where the land is situated
Therefore, if the VAT is situated in the UK the supplier must charge output VAT using UK rates
