Chapter 11 - Value added tax Flashcards
What is Value added tax (VAT)
Value added tax (VAT) is a tax payable on the consumption of goods and services by the final
consumer.
When is VAT collected?
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.
Define output VAT.
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.
Define input VAT
Each VAT-registered business receives credit for any VAT that it has paid. This is called input VAT.
What is the treatment of output and input VAT?
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.
Who bornes the total tax?
The total tax is ultimately borne by the final consumer of the goods or services at the end of the
distribution chain.
VAT is charged on what?
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.
Define taxable supply
any supply of goods or services made in the UK other than an exempt supply or
a supply outside the scope of VAT.
Define taxable person
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.
Who should and should not charge output VAT?
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.
How can supplies be classified?
Supplies may be outside the scope of VAT, exempt or taxable.
When does a supply of goods take place?
A supply of goods takes place when ownership of the goods passes from one person to
another
Do supplies outside the scope of VAT have any effect on VAT?
Supplies outside the scope of VAT do not have any effect for VAT.
Give two examples of supplies outside the scope of VAT.
Examples include the payment of wages and dividends.
Define exempt supply
An exempt supply is one on which output VAT cannot be charged.
Can input VAT be recovered from exempt supplies?
In general, input VAT cannot
be recovered by a trader making exempt supplies.
Give three examples of exempt supplies.
Examples include some supplies of land, insurance and postal services.
Is VAT registration allowed for a person who makes only VAT exempt supplies?
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.
In which three categories do taxable supplies fall in?
Taxable supplies fall into one of three categories:
Zero rated (0%) Reduced rate (5%) Standard rated (20%)
Define taxable supply
A taxable supply is one on which output VAT is chargeable and input VAT can be recovered.
What is the difference between exempt supplies and zero-rated supplies?
Note the difference between exempt supplies (no input VAT recoverable) and zero-rated
supplies (input VAT can be recovered).
Give five examples of zero rated supplies.
Examples of zero-rated supplies include certain human and animal food, printed books and
newspapers and dispensing of drugs and medicines on prescription.
Give two examples of reduced rate supplies
Examples of reduced rate supplies include domestic fuel and children’s car seats.