Chapter 13 VAT Flashcards
1.1 VAT groups
A group of companies can form a VAT group. If a group is formed all members are treated as a single taxable person for the purpose of VAT.
A company can form a VAT group is one company controls the others or the companies are under common control. The companies or non-corporate entites must be established or have a fixed establishment in the UK to form a VAT group.
A VAT group is treated as a single taxable person. The representative member submits a single VAT return covering the group. Partial exemption regarding VAT recovery is calculated using the group totals. A company can choose to leave out:
* Zero rated companies, may be excluded to retain the cash flow advantage of submitting monthly returns
* Companies making wholly exempt supplies as this will impact the partial exemption status of the VAT group and restrict the recovery of input VAT
2.1 VAT on property
- Exempt sales are the sale of bare land, lease of any building, sale of old commercial buildings and sale of existing building.
- Zero rated transactions include construction and sale of new residential buildings.
- Standard-rated transactions include construction of commercial building, sale of new commercial building (less than 3 years) and work on existing residential or commercial buildings.
2.2 Option to tax
The owner of commercial land and buildings can opt to tax. This makes the exempt land supply a taxable supply. This only applies to land transactions (sale or lease of a building). If the building is used to make exempt supplies, the VAT status does not change.
The implications are standard VAT is charged on the lease of the building and the sale of the building within 20 years of the OTT. Input VAT relating to the land supply can be recovered. If the trader uses a proportion of the building for exempt supplies, that proportion of input VAT will be irrecoverable.
The election is made on individual buildings by an individual party and is non-transferable and is irrecoverable for 20 years, after a six-month cooling off period.
Tenants who are fully taxable lenders will be able to recover any VAT charged to them. If tenants are exempt/partially exempt, they will be disadvantaged by the landlord’s election and may not be able to recover all of the VAT.
3.1 Transfer of going concern
Normally on a sale of VAT registered unincorporated business, output VAT is charged on the assets. The transfer can be treated as a TOGC if:
- They transfer the whole business as a going concern.
- No change in the trade and no significant break in trade
- Transferee is or becomes VAT registered immediately after the transfer.
This takes the transfer outside the scope of VAT and no output VAT is charged.
Complications arise if a TOGC includes new commercial buildings and buildings with an OTT which are taxable before the transfer. These will still be taxable even though part of a TOGC, unless the transferee opts to tax such buildings.
4.1 Capital goods scheme
This applies to businesses that spend large sums on certain types of assets over a period of time. The initial recovery of input VAT is made in the ordinary way and then reviewed over a set adjustment period. This stops businesses manipulating their proportion of taxable and exempt supplies in the period of purchase in order to recover more input VAT. The assets covered by the scheme are:
- Land and buildings costing more than £250,000 (all figures are net of VAT)
- Aircraft, ships, boats and other vessels costing more than £50,000.
- Single computer items each costing more than £50,000.
4.2 Initial recovery
This is the input VAT recoverable when the asset is purchased. The initial proportion of input VAT recoverable will be based on the initial use of the asset. For wholly taxable use, you can recover all input VAT and vice versa. For partly taxable use, you can recover proportion of input VAT based on proportion of taxable use in quarter of purchase.
4.3 Adjustments for use
If the taxable supplies percentage changes after acquisition, then an adjustment for use is required each year until the end of the adjustment period. The adjustment periods are:
- 10 years for land and buildings
- 5 years for aircraft, ships, boats and other vessels
- 5 years for computers and computer equipment
First interval runs from the date of acquisition to the end of that VAT return year. Subsequent intervals coincide with the VAT year. The calculation compares the proportion of taxable use on initial recovery and the new taxable use. If this has decreased, then some input VAT must be repaid. The annual adjustment is:
(Total input VAT / 10 or 5 years) x (% now - % on initial recovery). The annual adjustment is not pro-rated.
4.4 Adjustments for sale
On disposal of an asset under the capital goods scheme during the adjustment period. The annual adjustment is made as normal in the year of disposal. A further adjustment is made to cover the remaining intervals (the adjustment for sale). If the disposal is taxable, we assume 100% taxable use, otherwise 0% use.
5.1 Sale of a business and the capital goods scheme
If a sale of business includes taxable property under CGS then it can only be transferred as a TOGC if buyer opts to tax and the new owner takes on the remaining period of CGS adjustments and seller has no adjustments for sale.
If sale of business includes taxable property under CGS and the buyer does not opt to tax, then the property does not form part of the TOGC, and the seller has an adjustment on sale and buyer stars CGS scheme adjustments from beginning.
If sale of business includes exempt property under CGS then the property falls under the TOGC rules and new owner takes on the remaining period of CGS adjustments and seller has no adjustments for sale.
6.1 Overseas aspects of VAT
When goods are transferred between the UK and any overseas country or from Northern Ireland to any non-EU country, the supplier treats this as an export and the customer treats as an import.
When dealing with an export of goods, a UK supplier treats the sale as zero-rated, irrespective of goods being sold. The supplier must obtain evidence that the goods have actually been exported.
A UK VAT registered business can choose to apply postponed VAT accounting or pay VAT at the point of entry. Postponed VAT accounting is usually recommended as it has a cash flow benefit. Any other customer purchasing goods from overseas must pay VAT at the point of entry.
6.2 Supplies of services
If the customer is not a business, then the place of supply is where the supplier’s business is situated. Therefore, a UK supplier will account for UK output VAT regardless of where the customer is situated.
If a customer is a business, then the place of supply is where the customer’s business is situated. Therefore, a UK business customer will account for UK output VAT, as it is treated as making the supply itself. This will also be the input tax or the supply which can be recovered under the reverse charge system.
For services involving land the place of supply is always where the land is situated.
