Ch 23: VAT

Question 1

What is TEST 1 of the de-minimus tests?

Answer 1

• Total input tax is no more than £625 per month on average AND
• The value of exempt supplies is no more than 50% of the value of all of its supplies

Question 2

What is TEST 2 of the de-minimus tests?

Answer 2

Only do if you FAIL test 1:

• Total input tax less directly attributable input tax is no more than £625 per month AND
• The value of exempt supplies is no more than 50% of the value of all of its supplies

Question 3

What is TEST 3 (standard test) of the de-minimus tests?

Answer 3

Only do if you FAIL test 1 and 2:
- First split the unattributable input VAT
Then apply the standard test:
- input tax relating to exempt supplies is no more than £625 per month AND
- no more than 50% of total input tax

Question 4

How do you split the unattributable VAT?

Answer 4

taxable turnover excl. VAT/ total turnover excl. VAT x 100%

*Round UP to nearest whole %

Question 5

When does the annual test apply?

Answer 5

They were de-minimis in the prior VAT year

They expect input VAT for the current year to

Question 6

How is a new residential building VAT rated?

Answer 6

it is zero rated

Question 7

How many years is a new commercial building classed as new for?

Answer 7

3 years

Question 8

How is a new commercial building VAT rated?

Answer 8

standard rated

Question 9

Other transactions in land are exempt unless?

Answer 9

Unless there has been the option to tax

Question 10

What are the advantages of opting to tax?

Answer 10

1. allows the owner to potentially increase recovery of input tax suffered on the building (through the capital goods scheme)
2. allows the owner to recover input tax on other building related expenses

Question 11

What are the disadvantages of opting to tax?

Answer 11

1. Tenants/ buyers may not be able to recover the VAT that they will now be charged - are they VAT registered?
2. Stamp duty land tax will be higher for any purchaser

Question 12

What does the capital goods scheme apply to?

Answer 12

It applies to the VAT exclusive cost of:

• land & buildings costing over £250k
• single computer items, aircraft, ships over £50k
• ‘new’ commercial buildings

Question 13

What is the period covered for input VAT recovered?

Answer 13

• 10 years for land & buildings

- 5 years for other assets

Question 14

How do you calculate the annual adjustment?

Answer 14

(1/N) x input VAT x (current % taxable use - original % taxable use)
*N = 10 years for land and buildings or 5 years other assets

Question 15

If the asset is sold, two adjustments are needed - the normal adjustment and the adjustment on sale. How do you calculate the sale adjustment?

Answer 15

(P/N) x input VAT x (R - original % taxable use)

• P = number of VAT periods remaining out of original 5 or 10
• N = 10 yrs or 5 yrs
• R = 0% if sale was exempt or 100% if sale was taxable (if OTT or < 3 yrs old)

Question 16

How does VAT work for supplies to business customers?

Answer 16

• The place of supply is where the customer is located
• No VAT is charged by the supplier
• The customer can account for both input and output VAT under the reverse charge on their VAT return

Question 17

How does VAT work for supplies to non-business customers?

Answer 17

• The place of supply is where the supplier’s business is located
• The supplier charges VAT at their normal local rate

Question 18

What are the conditions for forming a VAT group?

Answer 18

Companies under common control (> 50%) can apply for group registration if they are either established in the UK or have a PE in the UK

Question 19

What are the advantages of being part of a VAT group?

Answer 19

• a VAT group is treated as a single VAT entity which submits one VAT return
• No VAT is charged on intra-group supplies
• You can pick and choose which companies to include in the group

Question 20

What is the limit for taxable supplies to be compulsory for VAT registration?

Answer 20

£85,000

Question 21

How long does the trader have to register/ deregister from VAT?

Answer 21

30 days from the end of the month the limit was breached/ trade ceased

Question 22

What are the benefits of voluntary registration?

Answer 22

• allows recovery of input tax
• disguises size of business
• removes the need to check turnover every month
• introduces discipline to the record keeping of the business
• able to recover pre-registration input VAT

Question 23

When is recovery of pre-registration input VAT possible?

Answer 23

It’s possible if:

• Goods supplied in the previous 4 years are still in stock at the date of registration
• A NCA purchased in the previous 4 years is still in use by the business at the date of registration, or
• a service was supplied to a trader within 6 months prior to the date of registration

Question 24

What is the threshold for compulsory deregistration?

Answer 24

If taxable supplies don’t exceed £83,000

Question 25

What is the condition for transfers of a business as a going concern to be outside the scope of VAT?

Answer 25

If sold to a registered trader, with no change in trade and no significant break in trading
*except if commercials buildings which must have VAT charged UNLESS they have been opted to tax

Question 26

What is the minimum threshold for VAT to be charged on capital assets and inventory?

Answer 26

anything above £1,000

Question 27

When is VAT payable online?

Answer 27

One months and 7 days after the end of the return period

Question 28

What is the penalty of paying VAT late?

Answer 28

• default surcharge; a surcharge liability notice is issued the 1st time the trader is late, lasts 12 months, no penalty arises for first default. If a further default arises in the SLN period then a % of the VAT outstanding is due 2% > 5 > 10 > 15
• default interest from the date VAT should have been paid ( no interest on errors of < £10k or 1% of VAT charge, instead they can be corrected in the next return)

Question 29

What is the main advantage of the cash accounting scheme?

Answer 29

Automatic bad debt relief and also better for cash flow

Question 30

Who is the cash accounting scheme available to?

Answer 30

Available to those traders whose taxable supplies (sales), excluding VAT do not exceed £1.35m provided all returns and VAT payments are up to date

Question 31

What is the monetary limit for the cash accounting scheme?

Answer 31

Once in the scheme taxable supplies can rise to £1.6m, if they do then they must leave the scheme (the trader has 6 months after leaving the scheme to use this scheme on any outstanding VAT)

Question 32

Who is the annual accounting scheme available to and when can they join the scheme?

Answer 32

• Eligible if taxable supplies for the next 12 months are not expected to exceed £1.35m
• Cab join the scheme as soon as registered?

Question 33

What are the main advantages of the annual accounting scheme?

Answer 33

• Easier admin (only 1 return)
• better cashflow for growing businesses
• less risk of default surcharge

Question 34

When is VAT due under the annual accounting scheme?

Answer 34

• The trader normally pays 90% of last years VAT in 9 equal instalments from months 4 to 12
• Business can apply for quarterly payments on account instead of nine month payments
• The balance of any VAT due with a single VAT return, 2 months after year-end

Question 35

When is the flat rate scheme available?

Answer 35

Available for businesses with taxable turnover (ex. VAT) ip to £150,000

Question 36

What is the monetary limit for the flat rate scheme?

Answer 36

Can stay in the scheme provided total turnover, including VAT, < £230k

Question 37

What is the main advantage of the flat rate scheme?

Answer 37

• reduced admin

- a possible tax saving

Question 38

How does the flat rate scheme work?

Answer 38

• It is optional
• The trader can pay HMRC a flat rate on VAT inclusive outputs and ignore inputs
• The rate depends on the trade (the rate will be given)
• Customers pay the normal rate