Chapter 21: VAT #

Question 1

Exempt supplies

Answer 1

Traders making exclusively exempt supplies cannot register for VAT or recover input VAT

Question 2

VAT registration - Historical test

Answer 2

Compulsory registration if taxable supplies in any period up to the previous 12 months exceed £85,000

Trader has 30 days from the end of the month in which the limit is breached to notify HMRC of need to register

Registration applies from the start of the month, one month after the limit is breached

example: Breach 31/05/2024
Notify HMRC 30/06/2024
Registration effective 01/07/2024

Question 3

VAT registration - Future test

Answer 3

A trader is liable to register if he anticipates turnover exceeding 85,000 in the next 30 days alone

30 days to inform HMRC
Registration from day 1 of the 30 day period

Question 4

Voluntary Registration

Answer 4

Any trader making taxable supplies, whether standard or zero rated, can voluntarily register

Allows recovery of input tax
Disguises size of business
Removes need to check turnover every month
Introduces discipline to the record keeping of the business

Question 5

Recovery of pre-registration input VAT

Answer 5

Goods supplies in the previous 4 years are still in stock at date of registration - inventory

A non-current asset purchased in the previous 4 years is still in use by the business at the date of registration

A service was supplied to a trader within 6 months prior to registration

Question 6

De-registration

Answer 6

Can deregister if taxable supplies in the next 12 months will not exceed £83000

Compulsory if trader is no longer making taxable supplies

Registration cancelled if status changes eg sole trader to/from partnership or business incorporates

Question 7

Misc VAT info

Transfer of a business as a going concern

Answer 7

Outside the scope of VAT

Output VAT must be accounted for on the sale of assets after cessation of trade if input tax was claimed on the purchase of those assets and the VAT on sale is collectively more than £1000

Question 8

VAT payments by which method

Answer 8

Electronically

Question 9

MTD Software for VAT and record keeping

Answer 9

Most VAT registered businesses have to use making tax digital software to directly submit their VAT returns to HMRC.

they must also keep digital records

These requirements do not apply for businesses which turnover the VAT registration threshold which are also voluntarily registered

Question 10

What is a repayment trader

Answer 10

Input VAT > Output VAT

can request monthly repayments (better for cashflow)

Question 11

Tax points

Answer 11

Basic tax point is the date of supply of goods/services

Actual tax point may be earlier of:
-Payment date becomes ATP if it is received before the BTP
-Invoice date becomes ATP if it is issued before the BTP
-If an invoice is issued within 14 days of the BTP, the invoice issue date becomes the ATP

Question 12

Simplified VAT invoices

Answer 12

Any VAT registered business can issue a simplified VAT invoice where the VAT inclusive total is less than £250

Question 13

Valuation of supplies - Prompt payment/early discount

Answer 13

Supplier may not know whether the customer will take the early payment discount, therefore the supplier must charge VAT on the invoice on the full price and either:

-issue a credit note if discount is taken
-show full details of the prompt payment discount and include a statement that the customer can only recover input tax based on the amount paid to the supplier. If the discount is taken the supplier must then adjust his records to account for output tax on the amount received.

Question 14

Irrecoverable input VAT - Cars

Answer 14

VAT on cars is irrecoverable unless used as a taxi, self-drive car hire or in a driving school.
(VAT on post-purchase accessories and invoiced separately is recoverable)

Question 15

Irrecoverable input VAT - entertainement

Answer 15

VAT on business entertaining for UK customers are irrecoverable

VAT on staff and overseas customer entertaining is recoverable. Unlimited samples can be given to customers.

Question 16

Irrecoverable input tax - capital allowances on cars

Answer 16

Costs for income tax, capital allowances etc. include irrecoverable VAT. If a car costs £10,000 plus VAT, capital allowances are on 12,000

Question 17

Accounting for the VAT on private fuel:

A business that provides private fuel for private mileage has two options:

Answer 17

1. Claiming all input tax and calculating output tax according to a scale charge
2. Charging the employee the full cost of private fuel, claiming all input tax and calculating output tax on the charge to the employee.

Question 18

Relief for impairment losses

Answer 18

Relief is available 6 months after the due date provided the trader has w/off the debt

Claims must be made within 4 years and 6 months of payment date being due

Relief is accounted for as an increase to input tax rather than a deduction of output tax

Question 19

Penalties for late filing or payment - when will this not be charged

Answer 19

Reasonable excuse - example: Unexpected hospital stay

Insufficient funds will not normally be accepted by HMRC as a reasonable excuse

Question 20

Late filing (submission) penalties

Answer 20

Under a points based system

Penalty threshold of four points, £200 penalty is charged

Thereafter, subsequent late VAT returns also incur a £200 penalty

Penalty points normally expire after 2 years, provided the penalty threshold has not been reached

If the penalty threshold has been reached, the business must submit VAT returns on time over a period of twelve months (so 4 quarterly returns) for their penalty points to be reset to zero

Question 21

Late payment penalties

Answer 21

In tax tables :)
(Interest is always charged)

15 days late
Penalty: None
Daily penalty: No
Interest: Yes

16-30 days late
Penalty: 2%
Daily penalty: No
Interest: Yes

> 30 days late
Penalty: 4%
Daily penalty: 4%
Interest: Yes

The daily interest is 4% per annum and is assessed daily
Example 54 days late

4%(54-30)/365VAT o/s

Question 22

Errors in VAT returns

-Genuine mistake
-Fails to take reasonable care
-Deliberate
-Concealment

Answer 22

-Genuine mistake - no penalty

-Fails to take reasonable care - up 30%

-Deliberate - up to 70%

-Concealment - up to 100%

Question 23

Default interest on errors

Answer 23

Runs from date the VAT should of been paid to date of payment

Arises where no return was made, or return was made incorrectly

No interest on errors of less than £10,000 (or 1% of turnover if higher for the VAT period)
-These can be corrected on the next VAT return without penalty

If the error exceeds 10,000 or 1% limit, notify HMRC

Question 24

Special schemes - Cash accounting

Answer 24

Taxable supplies excluding VAT under £1,350,000

Once on scheme can go up to £1,600,000

Over £1,600,000 in an accounting period the trader must leave the scheme but the trader can apply cash accounting on o/s VAT for 6 months after leaving

Main adv of cash accounting are cashflow and automatic bad debt relief

Question 25

Special schemes - Annual accounting

Answer 25

12 months taxable supplies not expected to exceed £1,350,000

can join the scheme as soon as registered

The trader normally pays 90% of last years net VAT liability in 9 equal installments from months 4 to 12

Businesses may apply to HMRC to agree quarterly payments on account instead of normal nine monthly payments

Balance of VAT due with a single VAT return, 2 months after year end

Advantages
Less admin
Manage cash flow
Less risk of default surcharge

Question 26

Special schemes - Flat rate scheme

Answer 26

Optional

Advantage include reduced admin and possible tax saving

Trader can pay a flat rate on VAT-inclusive output and ignore inputs

Rate depends on trade, the flat rate will be given in the exam

Input tax on capital expenditure excess of £2000 can still be recovered

Invoices should show VAT at a normal rate , not flat rate

Customers pay normal rate

Available for businesses with taxable turnover excluding VAT up to 150,000, can stay in scheme if total turnover including VAT is under 230,000

Question 27

Flat rate - 16.5%

Answer 27

Little advantage as it is equivalent to VAT rate of 19.8% on the net turnover compared to the normal VAT rate of 20%.

If a business has much input VAT, then the flat rate scheme will not be beneficial

Question 28

Group registration

Answer 28

Two or more companies under common control can apply

A representative member accounts for the VAT for the group

Intra-group transfers are disregarded for VAT purposes

Can exclude companies from the group, eg repayment traders/exempt suppliers

on 1 return

Question 29

Overseas aspects of VAT - Goods

Answer 29

Imports and postponed accounting
The UK trader accounts for output and input VAT on the purchase in the next VAT return, based on the usual VAT rating of that product. If the trader can recover all their input VAT, this is tax neutral.

Exports
The export of goods is zero rated

Question 30

Overseas aspects of VAT - Supplies

Answer 30

Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated.

UK VAT registered business receives international services, the place of supply is the UK

The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK