6. Value Added Tax

Question 1

What is VAT charged on?

Answer 1

Any supply of goods or services made in the UK, unless exempt, which is made by a taxable person whilst carrying on business

Question 2

The supply of what six things is exempt from VAT?

Answer 2

1. Land
2. Insurance
3. Financial services
4. Education
5. Health services
6. Postal services

Question 3

The supply of what five things is zero-rated from a VAT perspective?

Answer 3

1. Food (other than in catering context)
2. Books/newspapers
3. Water/sewer services
4. Transport
5. Residential construction

Question 4

The supply of what three things is taxed at a reduced VAT rate of 5%?

Answer 4

1. Domestic fuel
2. Installation of energy-saving materials
3. Child car seats

Question 5

When must a business compulsorily register for VAT?

Answer 5

If its gross income excluding exempt goods will in any 12-month period exceed the VAT threshold which is currently £85,000

Question 6

What are the two ways to test if gross income will exceed the VAT threshold?

Answer 6

1. Historic test
2. Future test

Question 7

What does the historic test look at and how soon must registration occur after passing the threshold with this method?

Answer 7

Taxable sales in the preceding 12 months, on a rolling basis.

HMRC must be notified with 30 days.

Question 8

What does the future test look at and how soon must registration occur after passing the threshold with this method?

Answer 8

Taxable sales in the next 30 days alone.

HMRC must be notified before the relevant 30-day period expires.

Question 9

Who is not able to voluntarily register for VAT?

Answer 9

Someone who only supplies exempt items or services

Question 10

When may a business voluntarily deregister for VAT?

Answer 10

If taxable turnover falls below £83,000 for a 12-month period

Question 11

Who may opt to charge VAT even though it would normally be exempt?

Answer 11

Owners of interests in commercial land and building who are leasing out the premises

Question 12

Where tax on an interest in commercial land or buildings is opted for, who might this be a problem for?

Answer 12

Tenants who wholly or partially make exempt supplies, as they will not be able to recover input tax on their lease

Question 13

What type of property does the option to tax not apply to?

Answer 13

Residential

Question 14

What two things must be distinguished from exempt land which an owner may opt to charge VAT?

Answer 14

1. Supply (i.e. construction) of new commercial building (taxed at 20%, not exempt)
2. Sale of a commercial building less than three years old (taxed at 20%, not exempt)

Question 15

Within what time limit can someone who opts to charge VAT change their mind, such that HMRC will revoke the option as if it had never been exercised?

Answer 15

Six months, as long as it hasn’t been put into practice

Question 16

If the option to tax has been put into practice, after what amount of time can it be revoked with the consent of HMRC?

Answer 16

20 years

Question 17

When must a registered business account for VAT?

Answer 17

One month after the end of each VAT quarter

Question 18

What determines the accounting period within which a supply of goods or services will fall?

Answer 18

The tax point (time of supply)

Question 19

What is the default tax point for goods?

Answer 19

The time the goods are removed, or the time they are made available to the person to whom they are supplied

Question 20

What is the default tax point for services?

Answer 20

When the service is performed

Question 21

What are two situations in which the tax point will be altered?

Answer 21

1. If supplier issues VAT invoice or receives payment before the goods are delivered or made available, the tax point becomes that invoice or payment date
2. If a VAT invoice is issued within 14 days after the default tax point, the invoice date becomes the new tax point

Question 22

What happens if input tax exceeds output tax?

Answer 22

HMRC will issue a rebate

Question 23

What are two things on which the VAT cannot be reclaimed?

Answer 23

1. Cars
2. Business entertaining

Question 24

What is a quick way to calculate the VAT from a VAT-inclusive figure at (1) the standard rate, and (2) the reduced rate, and why is this the case?

Answer 24

Standard rate: Divide the VAT-inclusive amount by 6 (x + 20% VAT = 6/5x)
Reduced rate: Divide the VAT-inclusive amount by 21 (x + 5% VAT = 21/20x)