Chapter 12 - Value added tax - further aspects

Question 1

What is the VAT period?

Answer 1

The period covered by a VAT return is called a VAT period or tax period

Question 2

What are the three types of VAT periods? When are each used (i.e. by what size or type of business)

Answer 2

• Quarterly (most businesses)
• Monthly (businesses where input tax regularly exceeds output tax)
• Annually (very small businesses)

Question 3

What must the VAT return show and when must it be submitted and payment made?

Answer 3

The VAT return must show the amount of VAT payable or recoverable and be submitted to HMRC not later than 7 calendar days after the last day of the month following the end of the return period.

This is also usually the due date for any VAT payment.
If payment is made by direct debit, it is automatically collected a further three working days after the due date.

Question 4

Define substantial traders.

Answer 4

‘Substantial’ traders are taxable persons with an annual VAT liability in excess of £2.3 million.

Question 5

What are the additional requirements for substantial traders when processing quarterly VAT returns?

Answer 5

A substantial trader must make electronic payments on account of VAT for each quarter.

Payments are due at the end of the second and third months of the quarter. The amount of each payment is 1/24 of the total VAT liability for the previous year.

The final payment is due on the usual due date, i.e. the end of the month following the end of the quarter. This final payment will be a balancing payment to cover the liability for that VAT quarter (i.e. top up payments on account)

Question 6

What is the annual accounting scheme? When must the annual VAT return be submitted by?

Answer 6

Where traders can submit one VAT return every 12 months.

The VAT return is due within two months of the end of the year.

Question 7

What are Who can join the annual accounting scheme?

Answer 7

A business may join the annual accounting scheme if the value of taxable supplies (excluding
VAT and supplies of capital items) in the following year is not expected to exceed £1.35 million.

Question 8

What are the conditions to join the annual accounting scheme?

Answer 8

The value of taxable supplies (excluding VAT and supplies of capital items) in the following year is not expected to exceed £1.35m.

Once a business has joined the scheme it can remain until taxable supplies in the previous 12 months exceed £1.6m.

Question 9

Under the annual accounting scheme, when must payments be made?

Answer 9

The annual accounting scheme requires the trader to make payments on account either as:

• Nine equal interim payments at monthly intervals beginning from the fourth month of the year, 1/10 of the previous years VAT liability (or current year’s estimated liability if registered for less than 12 months) followed by a balancing payment when the VAT return is due (2 months after the tear end)
• Three quarterly interim payments beginning from the fourth month of the year, 1/4 of the previous years VAT liability (or current year’s estimated liability if registered for less than 12 months) followed by a balancing payment when the VAT return is due (2 months after the tear end)

Question 10

What are the main advantages of the annual accounting scheme?

Answer 10

The main advantages of the annual accounting scheme are therefore:

• The reduction in the number of VAT returns required
• Two months to complete the annual return and make the balancing payment

The annual accounting scheme can be used in conjunction with either the cash accounting scheme or the flat rate scheme.

Question 11

What is the cash accounting scheme?

Answer 11

The cash accounting scheme allows businesses to account for VAT on the basis of cash paid and received, rather than on invoices received and issued

Question 12

Who may join the cash accounting scheme?

Answer 12

Small businesses may join the cash accounting scheme if:
* the value of taxable supplies (excluding VAT and supplies of capital items) in the following year is not expected to exceed £1.35 million.
* the business must have submitted all VAT returns to date and paid all outstanding VAT.
* the business has not been convicted of a VAT offence or penalty in the previous 12 months.

(in tax table)

Question 13

Who may continue to use the cash accounting scheme?

Answer 13

Businesses already in the cash accounting scheme may continue to use it until the value of taxable supplies in the previous 12 months exceeds £1.6 million.

(in tax table)

Question 14

What are the main advantages of the cash accounting scheme?

Answer 14

The main advantages of the scheme are:

• output VAT does not have to be accounted for until payment is received
• automatic bad debt relief since no output VAT is payable if payment is not received

However, note that input VAT cannot be recovered until the business has actually paid the supplier for purchases.

Question 15

What is the flat rate scheme?

Answer 15

The flat rate scheme allows businesses to calculate net VAT due to HMRC by applying a flat rate percentage to their VAT-inclusive turnover rather than accounting for VAT on individual sales
and purchases.

Question 16

What are the rates for the flat rate scheme?

Answer 16

The flat rate percentage is set by the type of business carried on. It ranges from 4% (food retailers) to 14.5% (for example, building or construction services where labour only is supplied and accountancy services). There is a fixed percentage of 16.5% for limited cost traders.

For examination purposes, the question will state which percentage to apply

Question 17

When is there a deduction in the flat rate scheme?

Answer 17

There is a 1% reduction during the first year of VAT registration.

For examination purposes, the percentage given in the question will include this 1% reduction where appropriate.

Question 18

What is the VAT payable to HMRC under the flat rate scheme?

Answer 18

The VAT payable to HMRC at the end of the VAT period is the flat rate percentage multiplied by the VAT-inclusive turnover for the period. There is no deduction for input VAT. The VAT-inclusive turnover includes taxable supplies, exempt supplies and supplies of capital assets.

Question 19

Who may join the flat rate scheme?

Answer 19

A business may join the flat rate scheme if the value of its annual taxable supplies (excluding VAT) does not exceed £150,000.

(in tax table)

Question 20

What are the main advantages of the flat rate scheme?

Answer 20

The main advantages of the scheme are:

• Reduction in the burden of administration of preparing the VAT return as no records of
  input VAT need be kept
• Frequently less VAT payable to HMRC than under the normal rules

Question 21

Who must leave the flat rate scheme?

Answer 21

If a business has total annual income (inclusive of VAT) in excess of £230,000 it must leave the flat rate scheme. This condition includes exempt income.

(in tax table)

Question 22

What are the main records that should be kept for VAT purposes?

Answer 22

HMRC requires a taxable person to keep ‘adequate’ records and accounts of all transactions to support both output VAT charged and the claim for recoverable input VAT.

The main records to be kept should include:

• Sales invoices
• Order and delivery notes
• Purchase invoices, copy sales invoices and credit notes
• Purchase and sales day books
• Records of daily takings (eg, till rolls)
• Cashbook
• Bank statements and paying-in slips
• Annual accounts (profit and loss account and balance sheet)

Question 23

What details must a VAT invoice cover?

Answer 23

The VAT invoice is the key record to support a claim to recover input VAT and must therefore be issued when a taxable person makes a taxable supply to another taxable person.

A full VAT invoice must show the word ‘invoice’ and must contain a number of details:
* A unique identification number
* The business name, address and contact information
* The name and address of the customer
* A clear description of the goods or service
* The date of the invoice and the tax point if different
* The price, quantity and VAT rate for each item
* Any discount offered
* The amount charged excluding VAT
* The total VAT charged

Question 24

What are the rules when issuing VAT invoices?

Answer 24

In general, a trader must issue a full VAT invoice for every transaction.

This rule is relaxed in some circumstances, such as sales for smaller amounts.

A ‘simplified’ invoice can be issued for supplies under £250.

A ‘modified’ invoice can be issued for retail supplies over £250.

It is not compulsory to issue VAT invoices to non-VAT registered customers unless requested.

Question 25

For how long must records be kept?

Answer 25

Records must be kept for at least six years.

Question 26

What are the implications of MTDfB?

Answer 26

From 1 April 2019, the Making Tax Digital for Business (MTDfB) requirements apply to businesses which have annual taxable turnover above £85,000 (the VAT registration threshold).

Initially, the requirements apply for VAT purposes only, although businesses, including those beneath the registration threshold, may use MTDfB on a voluntary basis for both VAT and income tax.

Businesses using MTDfB must:
* keep their records digitally for up to six years; and
* provide their VAT return information to HMRC through MTDfB compatible software which
* pulls the data directly from the business’s digital records.