8 - VAT and Corporation Tax (A)

Question 1

VAT is added to supplies of taxable goods made/imported where?

Answer 1

Made in UK
Imported in UK

Question 2

What are the 3 main rates of VAT?

Answer 2

1. Zero
2. 20%
3. 5% reduced

Question 3

What is an exempt supply?

Answer 3

One that VAT does not apply on, such as banking and insurance

Question 4

What is input and output VAT?

Answer 4

Input VAT = the VAT the trader must pay on his own supplies (water machinery and equipment)

Output VAT = the VAT the trader charges to his customers (window cleaning services)

Question 5

In what circumstances would a trader make a VAT return?

Answer 5

When input VAT is higher than output VAT, they can be offset and a VAT return can be claimed

Question 6

Some input VAT cannot be claimed, such as…

Answer 6

Business entertainment
Purchase of car (unless 100% for business)

Question 7

Traders must register for VAT if they make taxable supplies above the set limit, if in n the previous twelve months, is more than how much?

Answer 7

£85,000

Question 8

How soon after the annual registration threshold is reached, should a trader notify HMRC?

And when do they then become officially registered?

Answer 8

Within 30 days of the end of the month in which is was exceeded.

Registered the first of the second month after the limit was exceeded.

For example, if the limit is exceeded during April 2023, then notification must be made
by 30 May 2023 and the trader will be registered from 1 June 2023.

Question 9

If you think your taxable supplies may exceed £85,000 in the next 30 days, how soon should you notify HMRC?

Answer 9

By the end of that 30 day period.

Question 10

At what point can a business de-register for VAT?

Answer 10

When their taxable turnover falls below £83,000

Question 11

Chantal started trading on 1 January 2023. At 31 August 2023, her sales since commencement exceed £85,000 for the first time.

How soon should she notify HMRC and at what point will she become registered?

Answer 11

Chantal must notify HMRC about this by 30 September 2023 and she will need to be
registered for VAT from 1 October 2023.

Question 12

What is the rate for standard-rated supplies?

Answer 12

20%

Question 13

What is the difference between a zero-rated supply and an exempt supply?

Answer 13

With zero-rated, output VAT is not charged to the customer but the trader may still have to pay for it in their supplies and materials. Exempt has no VAT either way.

Question 14

Name 4 zero-rated VAT supplies (11)

Answer 14

• most food and some drinks
• the installation of energy-saving materials up to 31 March 2027;
• domestic supplies of water and sewerage;
• books and most other publications, such as newspapers, whether published in hard copy
  or electronically;
• sales of new residential buildings, buildings for use by charities and renovated houses
  that have been empty for ten years or more;
• supplies of services by contractors when constructing new residential buildings or
  buildings for charities;
• public transport of passengers;
• drugs, medicines and aids for people with disabilities;
• clothing and footwear for children;
• women’s sanitary products; and
• exports of goods and certain services.

Question 15

Name 3 reduced rate supplies (6)

Answer 15

• fuel for domestic use or non-business use by a charity;
• contraceptive products;
• children’s car seats;
• mobility aids for the elderly;
• smoking cessation products; and
• certain property renovations and conversions.

Question 16

Name 2 exempt supplies (5)

Answer 16

Insurance, finance, health, education and burial and cremation
services.

Question 17

How old do leases and sales of commercial land and buildings have to be for them to be zero-rated?

Answer 17

3 years or more

Question 18

What is the ‘option to tax’ and why might a landlord opt to do it and when?

Answer 18

When landlords make an election to charge VAT on specified land and buildings, that would otherwise be exempt.

They would do it in order to turn it into a taxable supply in the hopes they can recover VAT on related costs.

For example, they buy a new commercial property for £650,000 with the intention of renting it out. Because it is a new commercial property you are automatically charged VAT on the purchase price - £130,000. If you simply rent it out without doing anything you will not be able to claim this VAT back because of the exempt rental income.

However, if you decide to opt to tax the property you would have to charge VAT on the rents to the tenant. In return you could reclaim all the VAT on the purchase, the associated professional costs and any ongoing expenses.

Question 19

What is a partially exempt business?

Answer 19

One which makes some taxable and some exempt supplies

Question 20

In which circumstances can a partially exempt business recover its input VAT on exempt supplies it’s produced/purchased?

Answer 20

When the total value of the exempt input VAT on exempt supplies is not more than:
1. £625 pm on avg. or;
2. half of its total input VAT in the relevant period

Question 21

When can a trader who makes taxable supplies, elect for annual accounting?

Answer 21

When they make less than £1.35m taxable supplies a year

Question 22

If a trader elects for annual accounting, what payment options do they have with regards to paying the VAT?

Answer 22

Either:

• 9 monthly payments on account; or
• 3 quarterly payments on account

Then finally an adjustment on the year end return

Question 23

What is the benefit of a trader accounting annually?

Answer 23

1. Potentially reduced costs
2. Less administrative burden

Question 24

When can a trader join the cash accounting scheme and why would they?

Answer 24

When they make less than £1.35m taxable supplies a year. It means they don’t have to pay output VAT until the customer actually pays the bill, instead of when invoiced, so if the customer defaults, the the trader isn’t out of pocket.

Question 25

When do you need to tell HMRC that you want to start using the cash accounting scheme?

Answer 25

You don’t have to tell them at all

Question 26

How many pounds worth of taxable supplies must you make before you’re not able to use the cash accounting scheme anymore?

Answer 26

£1.6m

Question 27

Which VAT scheme allows to pay a fixed rate of VAT?

Answer 27

Flat rate scheme

Question 28

What must your annual taxable turnover be for you to joint the flat rate scheme?

Answer 28

Less than £150,000

Question 29

When is a business a limited cost business?

Answer 29

A limited cost business is one that spends either

1. less than 2% of its turnover on relevant goods or;
2. more than 2% of turnover, but less than £1,000 a year, in a VAT quarter.

Question 30

Which type of business does the 16.5% VAT rate apply to when using the flat rate scheme?

Answer 30

Limited cost business

Question 31

If you are not a limited cost business, how is your fixed rate of VAT on the flat rate scheme arrived at?

Answer 31

Set depending on the trade sector you are working in

Question 32

When can a business no longer operate in the flat rate scheme?

Answer 32

When total business income is over £230,000

Question 33

On the flat rate scheme, there are generally, there are no VAT reclaims on any VAT purchases. Unless?

Answer 33

VAT on capital purchases worth more than £2,000 may be eligible for reclaim.

Question 34

You bill a customer for £1,000, adding VAT at 20% to make £1,200 in total.

You’re a photographer, so the VAT flat rate for your business is 11%.

Calculate the input VAT on this transaction using the flat rate scheme.

Answer 34

Your flat rate payment will be 11% of £1,200, or £132.

Question 35

There are several schemes that enable retailers to simplify their calculation of VAT by not having to account for VAT on each individual sale. What are these schemes known as?

Answer 35

Retail schemes

Question 36

Who can use the margin scheme?

Answer 36

Second hand dealers who trade in items such as art, antiques and collectibles

Question 37

How does the margin scheme account for VAT?

Answer 37

Different between cost price of item and sale price, rather than full selling price.

Question 38

What is the rate of VAT on the margin scheme?

Answer 38

16.675 (or one-sixth)

Question 39

Which 4 salable items can you not use the margin scheme for?

Answer 39

any item you bought for which you were charged VAT
precious metals
investment gold
precious stones

Question 40

How often do traders usually have to submit VAT returns and pay VAT?

Answer 40

Quarterly

Question 41

For a VAT period ending on 30 April, when should the VAT return be submitted by?

Answer 41

7 June

Question 42

For a VAT period ending on 31 December, when should the VAT return be submitted by?

Answer 42

7 January

Question 43

How does bad debt relief work?

Answer 43

If a customer fails to pay VAT and is at least 6 months overdue, the trader can claim a refund on it (excs. cash accounting as with this, the trader doesn’t pay the VAT unless the customer does).

Question 44

How is import VAT declared on a VAT return?

Answer 44

As output VAT and can be claimed as input VAT

Question 45

In which circumstances must traders register for VAT?

Answer 45

If they make taxable supplies in the previous twelve months of more than £85,000, or are likely to exceed this limit in the
next 30 days.

Question 46

The value of input VAT can be offset against output VAT. If either is in excess, who pays and recovers/claims what?

Answer 46

Excess output VAT is paid over to HMRC, while excess input VAT is recovered.

Question 47

The annual accounting scheme and the cash accounting scheme are designed to do what?

Answer 47

Reduce administrative burden

Question 48

How should VAT-registered businesses must keep their accounting records digitally?

Answer 48

Software compatible with HMRC’s Making Tax Digital (MTD) programme

Question 49

A company has unused losses that it has carried forward. If it makes a profit of £9m, what is usually the maximum loss relief it can claim?

Answer 49

Chapter reference: 8B2B.

Losses can be carried forward and relieved against total taxable profits of a subsequent accounting period. However, if the profits exceed £5m, then the loss relief is restricted to £5m plus 50% of the profit in excess of £5m. In this case, profits exceed £5m by £4m [£9m - £5m]. 50% of the excess [£4m] is £2m. This means the 50% of excess, added to £5m, means a maximum loss relief of £7m.

The correct answer is: £7m