C1 - section 9. VAT Flashcards
VAT definition
VAT (sales tax) is a consumption tax added to a product’s selling price. It represents a tax on the ‘value added’ to the product at each stage of the production process.
Define ‘output tax’.
Define ‘input tax’.
VAT is charged on ‘taxable supply of goods and services’ in the U.K. by a ‘taxable person’ in the course of a business carried on by him.
Output tax: is the tax charged on the sale of goods or service (paid by the customer).
Input tax: is the tax paid on purchases of goods and services (paid by the business).
VAT overview
- VAT is tax levied on consumer expenditure.
- Tax is collected at each stage of the production chain.
- Most businesses (a taxable person) avoid having to treat VAT as an expense as they may deduct the VAT they have paid on purchases (input tax) from the VAT they charge to customers on their sales (output tax) and only pay the net output tax to the tax authorities. (HMRC)
what is meant by ‘taxable supply of goods or service’?
Taxable supply is the supply of all items except those which are exempt.
Examples of exempt items:
- Certain land and buildings, where sold leased or hired.
- Insurance.
- Post office/postal service.
- Admission charges to museums, art galliers etc.
- Betting, Gambling and lotteries.
in the UK, how many rates of VAT are there?
There are 3 rates of VAT in the UK:
- Zero rated VAT
- special 5% VAT (such as domestic fuel and power)
- Standard (20%)
Examples of zero rated VAT
- Water and most types of food stuffs (i.e, not hot and not eating in as a service is also provided which is taxable)
- Books and newspapers
- Drugs and medicines
- Children’s clothing and footwear
Why have ‘zero tax’ rate and ‘tax exempt’ products?
Zero tax rate offers a technicality where the government can change the rate of tax charged on the product easily.
With tax exempt products there is more hurdles for the government to get through to change the item from tax exempt to taxable.
What is ‘non-deductible VAT’
VAT on some items that is non-deductible. That means that any VAT on any purchases of these items can never be deducted from the amount of tax payable to HMRC. The business has to bear the VAT as an expanse.
Non-deductible items include:
- Motor cars
- Business entertaining
What is a taxable person?
A taxable person is any individual, partnership, company, etc who intends to make taxable supplies and is liable to register.
A person is liable to register if the value of his taxable supplies exceeds a specified amount in a 12 month rolling period. Most companies and partnerships and many sole traders are liable to register.
define ‘Net of VAT’
Net of VAT is the amount to be paid, minus the VAT.
Define ‘gross VAT’
Gross VAT is the price to be paid, including VAT.
How to we round VAT prices?
VAT prices are always rounded down to the nearest penny.
Example, if £30.546 was calculated to be paid, then it would be rounded down to £30.54
How do you calculate the tax paid on an item when gross VAT figure is stated?
gross figure/6 gives VAT amount to be paid. (only works with 20%)
Example:
£3000 including VAT
3000/6= 500
so:
£2500 product cost
£500 VAT.
