Chapter 21: VAT # Flashcards
Exempt supplies
Traders making exclusively exempt supplies cannot register for VAT or recover input VAT
VAT registration - Historical test
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
VAT registration - Future test
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
Voluntary Registration
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
Recovery of pre-registration input VAT
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
De-registration
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
Misc VAT info
Transfer of a business as a going concern
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
VAT payments by which method
Electronically
MTD Software for VAT and record keeping
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
What is a repayment trader
Input VAT > Output VAT
can request monthly repayments (better for cashflow)
Tax points
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
Simplified VAT invoices
Any VAT registered business can issue a simplified VAT invoice where the VAT inclusive total is less than £250
Valuation of supplies - Prompt payment/early discount
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.
Irrecoverable input VAT - Cars
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)
Irrecoverable input VAT - entertainement
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.
Irrecoverable input tax - capital allowances on cars
Costs for income tax, capital allowances etc. include irrecoverable VAT. If a car costs £10,000 plus VAT, capital allowances are on 12,000
Accounting for the VAT on private fuel:
A business that provides private fuel for private mileage has two options:
- Claiming all input tax and calculating output tax according to a scale charge
- Charging the employee the full cost of private fuel, claiming all input tax and calculating output tax on the charge to the employee.
Relief for impairment losses
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
Penalties for late filing or payment - when will this not be charged
Reasonable excuse - example: Unexpected hospital stay
Insufficient funds will not normally be accepted by HMRC as a reasonable excuse
Late filing (submission) penalties
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
Late payment penalties
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
Errors in VAT returns
-Genuine mistake
-Fails to take reasonable care
-Deliberate
-Concealment
-Genuine mistake - no penalty
-Fails to take reasonable care - up 30%
-Deliberate - up to 70%
-Concealment - up to 100%
Default interest on errors
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
Special schemes - Cash accounting
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
Special schemes - Annual accounting
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
Special schemes - Flat rate scheme
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
Flat rate - 16.5%
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
Group registration
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
Overseas aspects of VAT - Goods
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
Overseas aspects of VAT - Supplies
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
