Chapter 1: Introduction to VAT

Question 1

Fill in the gaps to the sentences regarding Tax legislation.

1. Tax strategies are set out by the _______.
2. Tax legislation is ___ and therefore ______ is _______.
3. Tax legislation is ____ each _____ by the _______.

Answer 1

1. Tax strategies are set out by the government.
2. Tax legislation is law and therefore adherence is mandatory.
3. Tax legislation is updated each year by the annual Finance Act.

Question 2

What are the two rights a taxpayer has to dispute with HMRC?

Answer 2

• ask for the case to be reviewed
• appeal to the tax tribunal

Question 3

What are the definitions of direct and indirect tax?

Answer 3

Direct tax is tax paid directly to HMRC and is charged on income or profits.

Indirect tax is tax paid with respect to the purchase of goods and services, it is collected by the supplier of the goods and paid to HMRC by them.

Question 4

Who is said to suffer from VAT and why?

Answer 4

The final consumer is said to suffer from VAT as they are not VAT registered so cannot claim back VAT from HMRC.

Question 5

What is the difference between input and output tax?

Answer 5

Input tax is charged on purchases (think goods coming in = input)

Output tax is charged on sales (think goods going out = output)

Question 6

What are the three different VAT rates?

Answer 6

1. Standard rated 20%
2. Zero rated 0%
3. Reduced rated 5%

Question 7

What are the three major differences to a business if they make zero-rated supplies compared to making exempt supplies?

Answer 7

If a company sells zero-rated supplies they can:

1. Register for VAT
2. Charge VAT to customers (at 0%)
3. Recover input tax

Question 8

What are the calculations to find VAT amounts from gross and net figures for standard and reduced rates of VAT?

Answer 8

Standard 20%
Gross / 6 = VAT
Net / 5 = VAT

Reduced 5%
Gross / 21 = VAT
Net / 20 = VAT

Question 9

Define a tax point.

Answer 9

A tax point is the date that VAT becomes chargeable on a transaction

Question 10

Why is it important to determine the correct tax point?

Answer 10

• If rates of VAT were to change, the correct rate would need to be applied
• Transactions need to be included in the correct VAT return to avoid penalties

Question 11

When does the actual tax point override the basic tax point?

Answer 11

• If an invoice is issued before delivering goods or completing a service (tax point becomes invoice date)
• If payment is received before delivering goods or competing a service (tax point becomes payment date)
• If an invoice is issued within 14 days of delivering goods or completing a service (tax point becomes invoice date)