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. Normally the VAT
period is a quarter (a three-month period). The end date of the first VAT period is specified in
the certificate of registration and dictates what the quarter dates will be going forward.

HMRC will allow taxable persons to have a one-month VAT period where input tax regularly
exceeds output tax, ie, where the taxable person is in a net VAT repayment position.

Question 2

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

Answer 2

The VAT return must show the amount of VAT payable or recoverable and be submitted to HMRC not later than seven 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 3

Define substantial traders.

Answer 3

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

Question 4

When must substantial traders make payments of accounts?

Answer 4

A substantial trader must make payments on account of VAT for each quarter. This must be done
electronically.

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 balancing payment for the quarter is due with the VAT return at the end of the month
following the end of the quarter.

Question 5

What is the annual accounting scheme?

Answer 5

The annual accounting scheme is helpful to small businesses as it cuts down on the
administrative burden of VAT by allowing the business to submit one VAT return every
12 months. The VAT return is due within two months of the end of the year.

Question 6

Who can join the annual accounting scheme?

Answer 6

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 7

Who can continue to use the annual accounting scheme?

Answer 7

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

Question 8

Under the annual accounting scheme, when must a trader make payments of account?

Answer 8

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

Nine interim payments at monthly intervals throughout the year, or

Three quarterly interim payments throughout the year

Question 9

How many payments will the trader make under the annual accounting scheme?

Answer 9

The trader then must either pay any outstanding VAT or receive a refund if they have overpaid
VAT, after the end of the year. In total the trader will therefore either make 10
payments or 4.

Question 10

Under the annual accounting scheme, if the trader has opted to make nine equal monthly payments, how much will each payment be and when will they be due?

Answer 10

If the trader has opted to make nine equal monthly payments, each payment must be electronic
and will be 10% of the total VAT liability for the previous year, or 10% of the estimated VAT
liability for the current year if the trader has been registered for VAT for less than 12 months. The
first payment is due at the end of the fourth month, with no seven day extension, and then every
month after that.

Question 11

Under the annual accounting scheme, if the trader has opted to make three quarterly instalments, how much will each payment be and when will they be due?

Answer 11

If the trader has opted to make three quarterly instalments, each payment must be electronic
and will be 25% of the previous year’s VAT liability, or 25% of the estimated VAT liability for the
current year if the trader has been registered for VAT for less than 12 months. The payments are
due by the end of months 4, 7 and 10 of the annual accounting year.

Question 12

Under the annual accounting scheme, when are any balancing payment due?

Answer 12

Any balancing payment is due when the VAT return is made, ie, by the last day of the second
month after the end of the year. If paid by direct debit, HMRC will collect it three working days
after the due date for the return.

Question 13

What are the main advantages of the annual accounting scheme?

Answer 13

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 14

What is the cash accounting scheme?

Answer 14

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 15

Who may join the cash accounting scheme?

Answer 15

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 its VAT returns to date and paid all
outstanding VAT. It must not have been convicted of a VAT offence or penalty in the previous
12 months.

Question 16

Who may continue to use the cash accounting scheme?

Answer 16

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.

Question 17

What are the main advantages of the cash accounting scheme?

Answer 17

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 18

What is the flat rate scheme?

Answer 18

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 19

What are the rates for the flat rate scheme?

Answer 19

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 20

When is there a deduction in the flat rate scheme?

Answer 20

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. The business
will issue tax invoices using the normal rules and applying the appropriate rate of VAT, eg,
standard rate, zero rate. It does not have to keep records of the input VAT on individual purchases.

Question 21

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

Answer 21

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 22

Who may join the flat rate scheme?

Answer 22

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

Question 23

What are the main advantages of the flat rate scheme?

Answer 23

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 24

Who must leave the flat rate scheme?

Answer 24

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.

Question 25

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

Answer 25

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 26

What details must a VAT invoice cover?

Answer 26

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 27

What are the rules when issuing VAT invoices?

Answer 27

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 28

For how long must records be kept?

Answer 28

Records must be kept for at least six years.

Question 29

What are the implications of MTDfB?

Answer 29

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.