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

However, instead of all the tax being collected at the final point of consumption, VAT is collected
as value is added to the goods or services.

VAT is collected at each stage of the distribution chain.

Question 3

Define output VAT.

Answer 3

As the goods or services go through the production and distribution process, each
VAT-registered business charges VAT on the value of the goods or services it supplies. This is
called output VAT.

Question 4

Define input VAT

Answer 4

Each VAT-registered business receives credit for any VAT that it has paid. This is called input VAT.

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

Who bornes the total tax?

Answer 6

The total tax is ultimately borne by the final consumer of the goods or services at the end of the
distribution chain.

Question 7

VAT is charged on what?

Answer 7

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 8

Define taxable supply

Answer 8

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

Question 9

Define taxable person

Answer 9

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 10

Who should and should not charge output VAT?

Answer 10

A taxable person is required to charge output VAT on any taxable supplies made, and may also
recover input VAT on supplies paid for. A person who is not a taxable person cannot charge
output VAT on supplies or recover input VAT.

Question 11

How can supplies be classified?

Answer 11

Supplies may be outside the scope of VAT, exempt or taxable.

Question 12

When does a supply of goods take place?

Answer 12

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

Question 13

Do supplies outside the scope of VAT have any effect on VAT?

Answer 13

Supplies outside the scope of VAT do not have any effect for VAT.

Question 14

Give two examples of supplies outside the scope of VAT.

Answer 14

Examples include the payment of wages and dividends.

Question 15

Define exempt supply

Answer 15

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

Question 16

Can input VAT be recovered from exempt supplies?

Answer 16

In general, input VAT cannot

be recovered by a trader making exempt supplies.

Question 17

Give three examples of exempt supplies.

Answer 17

Examples include some supplies of land, insurance and postal services.

Question 18

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

Answer 18

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 19

In which three categories do taxable supplies fall in?

Answer 19

Taxable supplies fall into one of three categories:

Zero rated (0%)
Reduced rate (5%)
Standard rated (20%)

Question 20

Define taxable supply

Answer 20

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

Question 21

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

Answer 21

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

Question 22

Give five examples of zero rated supplies.

Answer 22

Examples of zero-rated supplies include certain human and animal food, printed books and
newspapers and dispensing of drugs and medicines on prescription.

Question 23

Give two examples of reduced rate supplies

Answer 23

Examples of reduced rate supplies include domestic fuel and children’s car seats.

Question 24

Define standard rate supplies

Answer 24

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

Question 25

Who is required to register for VAT?

Answer 25

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 £85000.

Question 26

What do taxable supplies include and exclude?

Answer 26

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

Question 27

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

Answer 27

A person’s registration covers all of his business activities as it is the person who is registered,
not his business. VAT registration can be completed online.

Question 28

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

Answer 28

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 29

Define the future prospects test.

Answer 29

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.

If a person is liable to register under the future prospects 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 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.

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 following the relevant
month.

Question 31

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

Answer 31

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.

Question 32

What is voluntary registration?

Answer 32

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 33

What is the main advantage of voluntary registration?

Answer 33

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

Question 34

When can a person be exempt from VAT registration?

Answer 34

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 35

When is deregistration compulsory?

Answer 35

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. Deregistration will take
effect on the date taxable supplies ceased.

Question 36

When is a person eligible for voluntary deregistration?

Answer 36

A person is eligible for voluntary deregistration if his estimated taxable turnover for the next
12 months will not exceed the statutory deregistration threshold.

Question 37

What is the deregistration threshold?

Answer 37

Since 1 April 2017, the deregistration threshold has been £83,000.

Question 38

When does voluntary deregistration take effect?

Answer 38

Voluntary deregistration takes effect from the date on which the request is made or from an agreed
later date.

Question 39

What is the VAT charge to be paid on deregistration?

Answer 39

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 40

How is VAT charged on taxable supplies?

Answer 40

VAT charged on taxable supplies is based on the VAT-exclusive value of the supply. For
standard rated items, the rate of VAT is 20%.

Question 41

What is the VAT fraction?

Answer 41

If the VAT-inclusive price is given, the VAT
component of the consideration is:

20/120 or 1/6

This is called the VAT fraction.

Question 42

What is the tax point?

Answer 42

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

Question 43

Define the basic tax point.

Answer 43

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 44

Define the actual tax point.

Answer 44

However, the actual tax point may occur before or after the basic tax point as follows:

• Payment received before the basic tax point: actual tax point is the date of payment
• Invoice issued before the basic tax point: actual tax point is the date of invoice
• Invoice issued within 14 days after basic tax point: actual tax point is the date of invoice (can
  be extended by agreement with HMRC, eg, for month-end invoicing)

Question 45

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

Answer 45

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 46

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

Answer 46

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 47

Can the basic tax point be overridden by the actual tax point?

Answer 47

The basic tax point may be overridden by an actual tax point as described above.

Question 48

Define the value of supply.

Answer 48

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

Question 49

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

Answer 49

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 50

What is the value of discounted supplies?

Answer 50

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

Question 51

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

Answer 51

The supplier can therefore 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 52

How is fuel provided for motoring accounted for?

Answer 52

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 53

When is bad debt relief available?

Answer 53

Where an invoice has not been paid for more than six months after the due date of payment and
the debt has been written off in the supplier’s accounts, bad debt relief is available.

Question 54

When should bad debt claims be made?

Answer 54

Bad debt claims must be made within four years of the time the debt became eligible for relief.
The supplier must have a copy of the VAT invoice and records to show that the output VAT has
been paid. The VAT is reclaimed in the supplier’s VAT return together with input tax on
purchases.

Question 55

Who can recover input VAT?

Answer 55

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 56

What is the treatment when goods are bought partly for business use?

Answer 56

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 57

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

Answer 57

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 58

On which supplies are VAT normally irrecoverable?

Answer 58

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. Input VAT is however usually recoverable in respect of staff entertainment as well as entertainment of foreign customers (but not other
foreign business contacts)

Non-business items

Items for which no VAT receipt is held

Question 59

When is pre-registration of VAT possible?

Answer 59

Input VAT can be recovered on goods supplied in the four years before registration. The goods
must have been supplied to the taxable person for business purposes and must still be on hand
at the time of registration. They must not have been supplied onwards or consumed.

Input VAT can be recovered on services supplied in the six months before registration. The
services must have been supplied to the taxable person for business purposes.