Chapter 11 - Value added tax

Question 1

What is Value added tax (VAT)

Answer 1

Value added tax (VAT) is a tax payable on the consumption of goods and services by the final consumer.

Question 2

When is VAT collected?

Answer 2

VAT is collected at each stage of the distribution chain.

Question 3

Define output VAT.

Answer 3

Output VAT is the VAT charged on the sale of taxable goods or the provision of taxable services

Question 4

Define input VAT

Answer 4

Input VAT is the VAT incurred on the purchases of taxable goods or services

Question 5

What is the treatment of output and input VAT?

Answer 5

The business sets off input VAT against output VAT. Usually this results in a net excess of output VAT which the business pays over to HMRC.

Question 6

VAT is charged on what and by who?

Answer 6

VAT is charged on the taxable supply of goods and services in the United Kingdom (UK) by a taxable person in the course of a business carried on by them.

Question 7

Define taxable supply

Answer 7

Any supply of goods or services made in the UK other than an exempt supply or a supply outside the scope of VAT.

Question 8

Define taxable person

Answer 8

A person making taxable supplies who is, or who is required to be, registered for VAT. Person includes a sole trader, a partnership (not the individual partners) and a company.

Question 9

How can supplies of goods and services be classified with regards to VAT?

Answer 9

Supplies may be outside the scope of VAT, exempt supplies or taxable supplies. Taxable supplies can be further broken down into, standard rated (20%), reduced rate (5%) and zero rated (0%)

Question 10

Define supplies outside the scope of VAT

Answer 10

Supplies outside the scope of VAT, sometimes called No VAT supplies, are supplies that have no VAT consequences as they do no fall within the scope of VAT

Question 11

Give two examples of supplies outside the scope of VAT.

Answer 11

Examples include the payment of wages and dividends.

Question 12

Define exempt supply

Answer 12

An exempt supply is one on which output VAT cannot be charged.

Question 13

Is VAT registration allowed for a person who makes only VAT exempt supplies?

Answer 13

If a person only makes exempt supplies, VAT registration is not allowed. The person cannot be a taxable person, but is treated as the final consumer of the goods or services.

Question 14

Can input VAT be recovered from exempt supplies?

Answer 14

In general, input VAT cannot be recovered by a trader making only exempt supplies as they cannot VAT register.

Question 15

Give three examples of exempt supplies.

Answer 15

• Land
• Insurance
• Postal services.

Question 16

Define taxable supply

Answer 16

A taxable supply is one on which output VAT is chargeable and input VAT can be recovered.

Question 17

In which three categories do taxable supplies fall in?

Answer 17

Taxable supplies fall into one of three categories:
* Zero rated (0%)
* Reduced rate (5%)
* Standard rated (20%)

Question 18

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

Answer 18

Note the difference between exempt supplies (no input VAT recoverable) and zero-rated supplies (input VAT can be recovered).

Question 19

Give five examples of zero rated supplies.

Answer 19

• Certain human and animal food
• Printed books
• Newspapers
• Dispensing of drugs and medicines on prescription.

Question 20

Give two examples of reduced rate supplies

Answer 20

• Domestic fuel
• Children’s car seats.

Question 21

Define standard rate supplies

Answer 21

Any taxable supply not classified as zero rated or reduced rate is a standard-rated supply.

Question 22

When does a supply of goods take place? Give some of the main examples

Answer 22

A supply of goods takes place when ownership of the goods passes from one person to another

This includes:
* Sales of goods for consideration
* Gifts of business assets except where total gifts made to the same person do not exceed £50 in any 12-month period or the gift is a sample (but if two or more identical samples are given to the same person, only one is deemed not to be a supply)
* Goods permanently taken out of a business for private use by the owner or an employee
* Sales of goods on hire purchase

Question 23

When does a supply of services take place? Give some of the main examples

Answer 23

A supply of services is any supply for a consideration which is not a supply of goods:
* Sales of services for consideration
* Hiring of goods to a customer
* Goods owned by a business temporarily taken for private use by the owner or an employee
* Private use, by the owner or an employee, of business services supplied to the business
* Private use of fuel for motoring by the owner or an employee (but not the private use of a business motor car itself)

Question 24

What is meant by consideration?

Answer 24

Consideration is any form of payment in money or in kind

Question 25

What is the clear difference between the supply of goods as a gift compared to the supply of services as a gift?

Answer 25

A supply of services is any supply for a consideration which is not a supply of goods. Therefore, a gift of services is not a taxable supply as no consideration has changed hands

Question 26

Who is required to register for VAT?

Answer 26

A person making taxable supplies is required to register for VAT if the total value of taxable supplies (taxable turnover) exceeds the statutory threshold of £85,000.

Question 27

What do taxable supplies include and exclude?

Answer 27

Taxable supplies include zero-rated, reduced-rate and standard-rated supplies. It does not include supplies of capital assets of the business.

Question 28

Does a person’s registration cover all his business activities?

Answer 28

A person’s registration covers all of his business activities as it is the person who is registered, not his business

Question 29

What are the two scenarios when it becomes compulsory for a person to register for VAT?

Answer 29

There are two situations where compulsory registration is required: the future prospects test and the historic test. A taxable person must register once they exceed the threshold under either of the tests.

Question 30

Define the historic test.

Answer 30

Under the historic test, a person must register for VAT if, at the end of any month, the taxable turnover in the prior period exceeds the threshold. The prior period is the previous 12 months or the period from the commencement of the business, whichever is the shorter.

Question 31

When is registration not compulsary if a company meets the criteria under the historic test?

Answer 31

Registration is not required if the taxable turnover during the next twelve months will not exceed the deregistration threshold and this can be evidenced

Question 32

If a person must register due to meeting the criteria of the historic test, by what date must they notify HMRC and from what date are they registered from

Answer 32

If a person is liable to register under the historic test, they must notify HMRC within 30 days of the end of the month in which the threshold was exceeded (the relevant month).

Registration takes effect from the first day after the end of the month in which you notified HMRC (the relevant month).

For example, if at the end of September you passed the historic test, you must notify HMRC by the 30th October and registration would take effect from the 1st November

Question 33

Define the future prospects test.

Answer 33

Under the future prospects test, the person must register for VAT if, at any time, there are reasonable grounds for believing that the taxable turnover in the next 30 days alone will exceed the threshold.

Question 34

If a person must register due to meeting the criteria of the future prospects test, by what date must they notify HMRC and from what date are they registered from

Answer 34

If a person is liable to register under the historic test, they must notify HMRC by the end of the 30-day period in which the threshold is expected to be exceeded. This 30-day period includes the date the trader becomes aware that the threshold is likely to be exceeded.

Registration takes effect from the beginning of the same 30-day period.

Question 35

What happens if a person fails to apply for VAT registration?

Answer 35

For both the historic and the future prospects tests, a person failing to apply for registration is still liable to account for output VAT on taxable turnover from the compulsory registration date, as if registration had taken place at the correct time.

If a taxpayer fails to notify HMRC of the liability to register on time, a penalty will be payable

Question 36

What is voluntary registration?

Answer 36

A person making taxable supplies below the registration threshold may apply for voluntary registration. HMRC will register that person for VAT from a mutually agreed date.

Question 37

What is the main advantage of voluntary registration?

Answer 37

The main advantage of voluntary registration is the ability to recover input VAT.

Question 38

When can a person be exempt from VAT registration?

Answer 38

Where a person is making only zero-rated supplies, they may request exemption from registration.
HMRC may also allow exemption from registration if only a small proportion of supplies are standard rated and the person would normally have a net recovery of input VAT.

Question 39

When is deregistration compulsory? By what date must they notify HMRC and from what date are they registered from

Answer 39

Deregistration is compulsory if a person ceases to make taxable supplies and has no intention of making taxable supplies.

The person must notify HMRC within 30 days of ceasing to make taxable supplies.

Deregistration will take effect on the date taxable supplies ceased.

Question 40

When is a person eligible for voluntary deregistration?

Answer 40

A person is eligible for voluntary deregistration if his estimated taxable turnover for the next 12 months will not exceed the statutory deregistration threshold (£83,000.).

Question 41

What is the deregistration threshold?

Answer 41

The deregistration threshold has been £83,000.

Question 42

What is the VAT charge to be paid on deregistration?

Answer 42

On deregistration, a VAT charge is made on a deemed supply of trading stock and capital assets on which input VAT has been recovered. Output tax is then paid on the deemed supply. If the
amount of output VAT is £1,000 or less, it does not have to be paid.

Question 43

Outline how to convert between a VAT inclusive price and a VAT exclusive price for standard rated items

Answer 43

Converting from VAT-exclusive to VAT-inclusive multiply by 1.2

Converting from VAT-inclusive to VAT-exclusive divide by 1.2

Question 44

Outline how to calculate VAT on items given in VAT inclusive prices and VAT exclusive prices for standard rate supplies

Answer 44

Calculating VAT given the VAT-inclusive price, divide by 6

Calculating VAT given the VAT-exclusive price, divide by 5

Question 45

Outline how to convert between a VAT inclusive price and a VAT exclusive price for reduce-rate supplies

Answer 45

Converting from VAT-exclusive to VAT-inclusive multiply by 1.05

Converting from VAT-inclusive to VAT-exclusive divide by 1.05

Question 46

Outline how to calculate VAT on items given in VAT inclusive prices and VAT exclusive prices for reduce-rate supplies

Answer 46

Calculating VAT given the VAT-inclusive price, divide by 21

Calculating VAT given the VAT-exclusive price, divide by 20

Question 47

What is meant by the tax point with regards to VAT?

Answer 47

VAT becomes due on a supply of goods or services at the time of supply. This is called the tax point.

Question 48

What are the two types of tax points?

Answer 48

• Basic tax point
• Actual tax point

Question 49

Define the basic tax point.

Answer 49

The basic tax point is the date on which goods are removed or made available to the customer or the date on which services are completed.

Question 50

Define the actual tax point.

Answer 50

The actual tax point is said to be the earlier of :
* The date the goods are supplied. (Although, if the invoice is issued within 14 days after basic tax point, the actual tax point is the date of invoice.)
* The date payment is received
* The date the invoice is issued

Question 51

Outline how to determine the actual tax point of a supply

Answer 51

1) Determine the basic tax point, this will be date on which goods are removed or made available to the customer or the date on which services are completed
2) Determine when the payment for the goods or services was received
3) Determine when the invoice was issued
4) Determine which of these dates was the earliest - this will be the actual tax point. However, if the basic tax point is the earliest but an invoice was issued within 14 of this then the invoice is the actual tax point

Question 52

What is the treatment regarding tax point when a deposit is made?

Answer 52

If a deposit is paid, this creates its own tax point and there will be separate tax points for the deposit and the balancing payment.

Question 53

What is the treatment for goods supplied on a sale or return basis?

Answer 53

Goods supplied on a sale or return basis (ie, if the customer does not sell the goods, they may
be returned to the supplier) are treated as having a basic tax point which is the earlier of the
adoption of the goods by the customer or 12 months after the date of dispatch.

Question 54

Define the value of supply.

Answer 54

Usually the value of the supply is the amount charged by the supplier, exclusive of any VAT.

Question 55

What is the value of supply regarding gifts of business assets?

Answer 55

Where the supply is a gift of business assets, the value of the supply is the VAT-exclusive amount that would be payable by the person making the supply at that time to purchase goods identical to the goods concerned (ie, replacement cost).

Question 56

What is the value of discounted supplies?

Answer 56

Supplies offered at a discount (eg, for prompt payment, or a trade discount) are generally valued net of the maximum discount.

Question 57

What two approaches can a supplier take to account for discounted supplies with regard to VAT?

Answer 57

Suppliers can choose one of two approaches:

1. The supplier can charge the full amount of VAT on the undiscounted amount, and then later issue a credit note if the prompt payment discount is taken up; or alternatively,
2. If the supplier does not wish to issue a credit note, the invoice must contain the terms of the discount and a statement that the customer can only recover as input tax the VAT actually paid to the supplier. In the case of no credit note, invoices may also show the discounted
   price, VAT on this and the total amount due if the discount is taken up.

Question 58

How is fuel provided for motoring accounted for?

Answer 58

Fuel provided for private motoring by the owner or an employee is charged at a scale rate. The fuel scale charge is based solely on the CO2 rating of a car and represents the VAT inclusive deemed value of the fuel supplied. There are no adjustments for fuel type.

Question 59

When is bad debt relief available?

Answer 59

Bad debt relief is available if:
* the invoice is more than six months overdue
* the debt has been written off in the supplier’s accounts
* the claim is made within four years of the time the debt became eligible for relief
* the supplier has a copy of the VAT invoice and records to show that the output VAT has been paid.

Question 60

Who can recover input VAT?

Answer 60

Normally, a taxable person making wholly taxable supplies (zero rated, reduced rate or standard rated) can recover input VAT on purchases and expenses relating to the taxable supply of goods.

Question 61

What is the treatment when goods are bought partly for business use with regards to input VAT?

Answer 61

Where goods are bought partly for business use, the taxable person may either:
- Deduct all the input tax and account for the output tax in respect of private use; or
- Deduct only the business proportion of input tax

Where services are bought partly for private use, only the second method can be used.

Input VAT is also recoverable on fuel supplied for private use where the VAT scale charge for output tax applies.

Question 62

What is the treatment for input tax on assets purchased for employee use?

Answer 62

Input tax on assets purchased for the use of employees (as opposed to directors or sole traders or partners) which have an element of private use is allowable in full. Such benefits are a legitimate business expense and are provided for the purposes of the business – mainly to reward or motivate staff.

Question 63

On which supplies is VAT charged but not normally irrecoverable?

Answer 63

Input VAT is not usually recoverable in respect of the following:

• Motor cars (including optional extras acquired with the car) unless the car is used exclusively for business purposes
• Goods or services used for the purposes of business entertaining which is not allowable when computing taxable trading profits. VAT in respect of staff entertainment and foreign business customers is allowable.
• Non-business items
• Items for which no VAT receipt is held

Question 64

Can you claim input VAT back on purchases prior to registering? What are the conditions?

Answer 64

Input VAT can be recovered on goods and services supplied before registration as follows:

Goods
* Supplied within 4 years before registration, for business purposes and are on hand at the time of registration.

Services
* Supplied in the six months before registration for business purposes