6. Value Added Tax

Question 1

Interaction

Interaction with OTHER taxes?
- How do SDLT/LTT and VAT interact
- SDLT/LTT - what SPECIFIC situation MAY a buyer have to pay VAT in (difference between residential vs commercial purchases)

Answer 1

IF VAT is deemed chargeable pre-completion, SDLT/LTT is payable on the VAT-inclusive sum of chargeable consideration.

1. When buyer of commercial property (eg. office block) purchases =
   a. MUST pay SDLT/LTT

MAIN DIFFERENCE between residential vs commercial property perchases = commercial purchase = MAY have to pay VAT
- vs sale of residential property by a private individual will NEVER give rise to VAT (exempt/zero rated)

Question 2

SDLT and VAT interation (seen in 2 other flashcard sets)

Example:
Yesterday a landlord granted a lease of office premises in England to a tenant for a term of 10 years. The consideration for the lease s the payment of a commercial, open- market rent with a premium of £100,000. The landlord opted to tax the property for VAT purposes before lease was granted.
- Describe the taxation position for this transaction

Answer 2

Tenant MAY need to pay SDLT on the VAT-inclusive amount of the rent
- WON’T need to pay SDLT for the premium

WHY?
- On the grant of a lease, SDLT is potentially payable BOTH on any premium charged by the landlord and rent reserved by the lease (NPV).
- LL opted in t VAT, SO SDLT is charged on the VAT- inclusive amounts:

OG premium = £100,000
SO VAT- inclusive premium = £120,000
- = SO SDLT will NOT be charged on VAT-inclusive premium (applicable rate for consideration NOT exceeding £150,000 = 0%).

BUT MAY have to pay VAT-inclusive amount for the rent NPV.

Question 3

Define value of supply
- EXAMPLE: WHAT is the value of supply of furniture advertised as costing £400 plut VAT?

Answer 3

Value added tax is charged on the value of the supply of goods or services
AKA what they would cost IF VAT were NOT charged
EXAMPLE:
value of the supply = £400.

Question 4

VAT payable = [equation]

Answer 4

VAT payable = output VAT charged – input VAT reclaimed

Question 5

Quick way to calculate the VAT from a VAT-inclusive figure at
(1) the standard rate
(2) the reduced rate
- WHY important?

Answer 5

Standard rate: VAT payable = 20%
- Divide VAT-inclusive product by 6 (20% / 120% = 1 / 6)

Reduced rate: VAT payable = 5%
- Divide VAT-inclusive product by 21 (5% / 105% = 1 / 21)

n.b. Prices quoted on goods / services are deemed VAT INCLUSIVE UNLESS stated otherwise

Question 6

What is VAT charged on?

Answer 6

Added to price of supply of goods or services …
- …made in the UK…
- …by a taxable person whilst carrying on business

UNLESS EXEMPT

Question 7

WHEN is VAT charged / paid?

Answer 7

Charged / paid at EACH STAGE of sales and distribution chain
[Output VAT is charged as goods pass through each stage of production]
- NOT paid at the end of the chain

Question 8

WHAT is INPUT VAT?

Answer 8

IF business is VAT-registered, it can claim a credit for any VAT paid
[The CREDIT = INPUT VAT]
- USUALLY, businesses have to pay MORE OUTPUT VAT than they can claim back INPUT VAT as a credit

IF OUTPUT is taxable (OR IF zero-rated - NEVER IF exempt!), seller CAN recover its INPUT tax from HMRC

Question 9

How VAT works - table example

Answer 9

Question 10

What happens if input tax exceeds output tax?

Answer 10

HMRC will issue a rebate

Question 11

What is outside the scope of VAT?

Answer 11

Some supplies eg. wages and payment of dividends
- = NO VAT is charged / paid on these supplies

Question 12

The supply of what is taxed at a standard VAT rate of 20%?
(= NOT relevant for property)

Answer 12

Newly constructed commercial property (less than 3 years old) is standard rated.
Older commercial property is standard rated IF seller has opted to tax
…
AND
(MOST goods and services OTHER THAN those that are… [reduced rate, exempt and zero-rated])

Question 13

The supply of what 5 things is taxed at a reduced VAT rate of 5%?
(= NOT relevant for property)

Answer 13

…
AND
(1. Energy-saving building materials)
(2. Domestic fuel (electricity ad heating))
(3. Child car seats)
(4. Consumer medical products - eg. mobility aids)
(5. Nicotie gum + patches)

Question 14

The supply of what 6 things is zero-rated from a VAT perspective?
(= NOT relevant for property)

Answer 14

Newly constructed residential property
- = Buyer DOES NOT pay VAT
- BUT because the output is taxable, seller CAN recover its input tax from HMRC

…
AND
(1. Installation of energy saving materials in residential accomodation)
(2. Water/sewer services)
(3. Books/newspapers)
(4. Transport)
(5. Baby clothes)
(6. Bike helmets)
(7. Food (other than in catering context))

Question 15

The supply of what 10 things is exempt from VAT?
(= NOT relevant for property)

Answer 15

1. Residential property, EXCEPT for newly constructed property.
2. Commercial property over 3 years old IF owner has NOT opted to tax.
   …
   AND
   (1. Land)
   (2. Insurance)
   (3. Savings accounts)
   (4. Lottery tickets)
   (5. Museum enterance fees)
   (6. charity events)
   (7. Financial services)
   (8. Education)
   (9. Health services)
   (10. Postal services)

Question 16

What is the difference between exempt and zero-rated supplies?

Answer 16

IF a product is ZERO-RATED
- Can STILL reclaim OUTPUT VAT
- EVEN IF I have paid NO input VAT

BUT IF a product is EXEMPT
- VAT is NOT DUE
- AND VAT CANNOT be reclaimed

Question 17

When MUST a business (incl. self-employed people) compulsorily register for VAT?

Answer 17

IF
1. its TAXABLE TURNOVER [AKA GROSS income EXCLUDING exempt goods] …
2. …will in any 12-month period …
3. …EXCEED the £85,000 threshold for COMPULSORY VAT registration AKA registration limit

Question 18

When may a business voluntarily DEregister for VAT?

Answer 18

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

Question 19

Who is NOT able to voluntarily register for VAT?

Answer 19

Someone who ONLY supplies exempt items or services

Question 20

What are the 2 ways to test IF COMPULSORY VAT registration is required
- [AKA whether GROSS income will exceed the VAT threshold?]

Answer 20

1. Historic test
2. Future prospects test

Question 21

What does the historic test look at?
How soon must registration occur AFTER passing the threshold with this method?

Answer 21

WHETHER, at the end of any month Taxable sales in the preceding 12 months OR since business started trading (shorter) on a rolling basis.

HMRC must be notified within 30 days of end of the revelant month [AKA month the threshold was EXCEEDED]

Question 22

What does the future test look at?
How soon must registration occur AFTER passing the threshold with this method?

Answer 22

Taxable sales in the next 30 days alone.

HMRC must be notified within 30 days.

Question 23

WHEN must a registered business account for VAT?

Answer 23

1 month AFTER end of each VAT quarter

Question 24

Who MAY opt to charge VAT EVEN THOUGH it would normally be exempt?

Answer 24

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

Question 25

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

Answer 25

Tenants who wholly / partially make exempt supplies
- NOT able to recover input tax on their lease

Question 26

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

Answer 26

Residential

Question 27

What 2 things must be distinguished from exempt land which an owner may opt to charge VAT?

Answer 27

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

Question 28

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 28

6 months…as long as it HASNT been put into practice

Question 29

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 29

20 years

Question 30

SAME ANSWER:
1. WHEN is VAT due?
2. WHAT determines the accounting period within which a supply of goods or services will fall?

Answer 30

The time of supply AKA tax point

Question 31

What is the default tax point for goods?

Answer 31

EITHER
1. The time the goods are removed / transferred
2. OR the time they are made available to the customer / person to whom they are supplied

Question 32

What is the default tax point for services?

Answer 32

When service is performed AKA completed

Question 33

What are 2 situations in which the tax point will be altered?

Answer 33

1. Where supplier issues VAT invoice / receives payment BEFORE the goods are delivered / made available
   a. = tax point becomes the invoice / payment date
2. Where supplied issues VAT invoice WITHIN 14 days AFTER the default tax point
   a. = tax point becomes the invoice date

Question 34

Property VAT

IS VAT a condition of a contract in commercial property transactions?
- What about in commercial FRI (full repairing and insuring) leases?

Answer 34

YES - in commercial trasactions
BUT Commercial FRI (full repairing and insuring) lease sets out:
1. HOW rent is to be paid (usually by standing order)
2. WHETHER VAT is payable on it

Question 35

Property VAT

WHAT pre-contract enquiries rised by buyer’s solicitor covers VAT treatment for a commercial property?

Answer 35

CPSE - COMMERCIAL Property Standard Enquiries form covers VAT treatment

Question 36

Property VAT - Standard conditions in a property contract:

In BOTH SCS - Standard Conditions of Sale (residential) AND SCPC - Standard Commercial Property Conditions (commercial),
- HOW is VAT rated?
- Does purchase price INCLUDE VAT or not?

Answer 36

SCS - Residential property
- USUALLY an exempt / zero rated supply = NO VAT payable by buyer.
- = under SCS = purchase price is INCLUSIVE of VAT

SCPC - Commercial property - ALWAYS consider VAT
…per default standard condition 2….
1. Seller warrants that the property is a standard-rated supply (20% VAT)
2. AND buyer agrees to pay the VAT ON TOP OF purchase price in exchange for a VAT invoice from seller

Question 37

Property VAT - Special conditions in a property contract:

Special conditions in a commercial property contract (SCPCs - Standard Commercial Property Conditions)
- WHAT tickbox conditions (special conditions A1 and A2) OVERRIDE SCPC Condition 2 (AKA standard VAT rate paid ON TOP OF purchase price) ?

n.b. Conditions = amended, excluded or supplemented w special conditions

Answer 37

Special conditions…

Tickbox A1 conditions [EXEMPT SUPPLY] override -
- relevant for properties that are [VAT EXEMPT]

Under Part 2, A1 conditions:
1. seller warrants that property is NOT subject to VAT
2. seller agrees NOT to exercise option to tax

ALSO

Tickbox A2 conditions [TOGC] override -
- relevant for transactions treated as a [‘Transfer Of a Going Concern’]

Under Part 2, A2 conditions:
1. seller warrants it is using property for the business of LETTING to produce rental income

Question 38

Property VAT - Leaseholds

Landlord’s remedies:
CRAR (Commercial rent arrears recovery) MAY be used in certain scenarios.
- WHAT does / does it NOT allow to be recovered?

Answer 38

CRAR allows
- VAT and interest to be recovered
- BUT insurance OR service charge CANT be recovered