5. Value Added Tax Flashcards

1
Q

Two distinct aspects of VAT

A
  1. Output Tax (registered business charges this to their customers)
  2. Input tax (charged to the business by the suppliers)
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2
Q

Current standard rate of VAT

A

20%

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3
Q

What falls into the ‘reduced rate’ category of VAT

A

Domestic Fuel and children’s car seats taxed at 5%

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4
Q

Are legal services ‘exempt supply’?

A

No, they are subject to VAT at the standard rate

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5
Q

Definition of ‘taxable person’

A

A person must register if, broadly, the value of taxable supplies (not profit) in the preceding 12 months exceeded a figure specified in each year’s Budget (£90,000 for 2024/25)

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6
Q

Can a non-taxable person register for VAT voluntarily ?

A

Yes - unless they are making an exempt supply only (ie. healthcare, insurance etc.)

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7
Q

When are tax invoices required? Deadlines?

A

A taxable person making a taxable supply to another taxable person must, within 30 days after the time of supply (or within such longer period as HMRC allows), provide them with a tax invoice, which includes certain prescribed information.

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8
Q

What is a tax invoice

A

Evidence of their (a taxable person’s) right to recover the input tax on a supply made to them, ie without such an invoice they will generally be unable to claim an input credit, irrespective of whether or not they have made payment to the supplier.

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9
Q

General requirement for submitting VAT returns to HMRC?

A

Accounting for VAT will generally be by reference to quarterly accounting periods. Within one month after the end of each quarter, a taxable person must submit a completed return form to HMRC, together with a remittance for the tax due.

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10
Q

Does a firm need to charge VAT on disbursements for their clients?

A

No if:
- firm only acted as agent of client in paying third party
- client used and received goods and services provided
- client was responsible for paying third party (eg. SDLT)
- client authorised you to make payment for them
- client knew services would be provided for by a third party
- your outlay will be separately itemised when you invoice your client; you recover only the exact amount which you paid to the third party; and
- the goods or services, which you paid for, are clearly additional to the supples which you make to your client on your own account

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11
Q

Examples of disbursements where a firm does not charge VAT separately to their clients:

A
  1. Inheritance tax
  2. capital gains tax
  3. SDLT and SD
  4. estate agents’ fees
  5. Statutory charges such as incorporation fees ,land charge and land registry fees, probate fees
  6. charges for professional services of third party, because these are supplied to the client not the solicitor (eg. estate agent and potentially surveyors, witnesses, charges for police etc.)
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12
Q

Which items do not qualify as disbursements for firm VAT purposes:

A

those which are a necessary part of the service supplied to the client, for example, telephone charges, postage and photocopying charges; these are overheads of the business

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13
Q

Is a search fee treated as a disbursement for VAT purposes?

A
  1. If it is passed on to the client without comment or analysis, the fee may be treated as a disbursement – it would be relatively unusual for this to be the case.
  2. More commonly, the firm will use the information to provide advice or a report and here the fee for the search will form part of the charges for its services and will be subject to VAT.
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14
Q

If search fee is not treated as a disbursement for VAT purposes (treated as a charge as a part of solicitors services) - how will a solicitor record this in their accounts?

A

CR Cash Account - Business Section (VAT Exclusive Amount)

CR Cash Account - Business Section (VAT)

DR Searches Account

DR HMRC Account with VAT charged to the firm

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15
Q

Paying search fees - when they are recorded separately from professional charged on bill, how is VAT recorded on the accounts?

A

CR Cash Account (Business Section)

DR Client Ledger Account business section (VAT exclusive amount, with note)

DR HMRC Account with VAT input tax charged to firm

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16
Q

Where a supplier of a non-disbursement does not charge VAT, does the client still pay VAT on this amount?

A

Yes, if the item is not a disbursement, it will be included in the solicitor’s professional charges which are subject to VAT
- meaning the client pays VAT on the non-disbursement which they would not have if they purchased it directly from the supplier

17
Q

If the original supplier of a non-disbursement charges VAT - how does this impact the amount of VAT the client pays?

A
  1. solicitor treats the VAT on the non-disbursement as input tax
  2. the VAT exclusive amount is on the bill and the solicitor charges output tax on this
    - so no effect on the client (same amount of VAT paid)
18
Q

Disbursements which include a VAT element: how does this effect amount of VAT paid by client

A

If it is a disbursement - the payment made by the firm includes a VAT element passed onto the client (no additional VAT charged by the firm)
- if client is registered for VAT and wants to recover this input tax they will need a VAT invoice addressed to them

19
Q

Disbursements with a VAT element: ‘principal’ and ‘agency’ methods

A

when a firm pays this disbursement, the supplier could have addressed the tax invoice to client or firm making payment
- client needs invoice addressed to them if they want to recover the input tax

If invoice is addressed to client: agency

If invoice is addressed to firm: principal

20
Q

What does the ‘agency’ method involve

A

If a tax invoice is addressed to the client, the agency method allows the firm to pass the VAT inclusive amount of the disbursement onto the client

If the invoice is addressed to the client, the supply is treated as made to the client. The firm simply acts as the agent, handing over the money on behalf of the client. If there is sufficient client money standing to the credit of the client, the payment can be made from the client bank account; otherwise, it must be made from the business bank account.

  • Firm does not separate supplier’s fee and VAT in the firm’s accounting records
21
Q

What does the ‘principal’ method involve

A

If the invoice is addressed to the firm, the supply is treated as made to the firm in the first instance. The firm can claim the supply as an input. The firm, therefore, must use business money to pay the supplier’s fees, together with the input tax.

the firm then resupplies the item to the client at the same price

the firm charges the client output tax on the firm’s professional charges and the disbursement (VAT is listed separately from the disbursement on the bill)

If the client is entitled to a tax invoice, the firm will provide one invoice to cover both the disbursement and the firm’s own professional charges.

22
Q

Accounting Entries Principal Method

A

CR: Cash Account Business Action - Disbursement and VAT

DR: VAT to HMRC Ledger
DR: VAT exclusive amount to client ledger account business section
- Make memorandom note in details column of amount of VAT which must be added to the VAT charged to the client when the invoice is issued

When a bill is issued: add VAT on principal method disbursement to VAT on professional charges and make normal entries

DR Client ledger account business section (VAT and costs separate)
CR Profit Costs account with costs
CR HMRC Account with total VAT Charged

23
Q

Counsel’s Fees: Principal or Agency basis?

A

General Rule: Counsel’s fees are generally addressed to the firm, so would need to be treated on the principal basis but HMRC, Law Society and the BAR agreed that:

  • Firm is allowed to alter fee note so that it is addressed to the client (and can be treated on the agency basis)
  • firm must give fee note to client so they can reclaim input tax
  • Firm should keep a copy of this