6. Value Added Tax Flashcards by Lucy Forshaw

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)

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

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)

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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

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.

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

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.

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VAT payable = [equation]

VAT payable = output VAT charged – input VAT reclaimed

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

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

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What is VAT charged on?

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

UNLESS EXEMPT

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WHEN is VAT charged / paid?

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

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WHAT is INPUT VAT?

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

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How VAT works - table example

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What happens if input tax exceeds output tax?

HMRC will issue a rebate

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What is outside the scope of VAT?

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

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

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])

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

…
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)

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

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))

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

Residential property, EXCEPT for newly constructed property.
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)

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

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

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

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

When may a business voluntarily DEregister for VAT?

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

Who is NOT able to voluntarily register for VAT?

Someone who ONLY supplies exempt items or services

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

Historic test
Future prospects test

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

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]

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

Taxable sales in the next 30 days alone.

HMRC must be notified within 30 days.

WHEN must a registered business account for VAT?

1 month AFTER end of each VAT quarter

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

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

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

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

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

Residential

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

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)

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?

**6 months**...*as long as* it HASNT been put into practice

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

20 years

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

The *time of supply* AKA **tax point**

What is the *default* **tax point** for **goods**?

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

What is the *default* **tax point** for **services**?

When service is **performed** AKA **completed**

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

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**

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

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*

# Property VAT WHAT **pre-contract enquiries** rised by buyer's solicitor covers **VAT treatment** for a commercial property?

**CPSE - COMMERCIAL Property *Standard* Enquiries form** covers VAT treatment

# 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?

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*

# 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

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***

# 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**?

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