Chapter 23 VAT

Question 1

When does it become compulsory for a business to register for VAT?

Answer 1

When taxable supplies exceed the VAT registration threshold (£85,000). This is measure according to either the historic test (last 12 months) or the future test (next 30 days)

Question 2

What are the different types of ‘taxable supplies’?

Answer 2

1. Standard rated (20%)
2. Zero rated (0%)
3. Reduced rated (5%)

Note that exempt supplies are not included

Question 3

In what situations is it NOT possible for a VAT registered business to recover input VAT on purchases?

Answer 3

1. When they don’t have the VAT receipt
2. If the purchase is not used in the trade
3. If it is a blocked item (e.g. cars with private use, UK client entertaining)

Question 4

Name some examples of transactions that are ‘Outside the Scope’ of VAT. What is the effect of these transactions on your calculations?

Answer 4

Dividends
Wages/Salaries
Donations to charity

These transactions can be ignored when calculating VAT.

Question 5

If a UK VAT registered business exports GOODs overseas what rate of VAT is charged?

Answer 5

Zero

Exports of goods are zero-rated

Question 6

What happens if GOODs are imported from overseas by a UK VAT registered business?

Answer 6

The VAT will be calculated at the point of entry in to the UK. i.e. the goods will be held until the VAT is paid by the buyer.

Assuming the goods are then used in the business to make taxable supplies, the input VAT will be recoverable, as normal.

Question 7

If a UK VAT registered business supplies SERVICES to a business overseas, will VAT be charged?

Answer 7

VAT is only added if it’s a ‘supply in the UK’

In a B2B sale, the supply is said to take place where the customer is.

Customer is overseas, therefore, not a UK supply, therefore, no VAT added

Question 8

If a UK VAT registered business supplies SERVICES to an individual overseas, will VAT be charged?

Answer 8

VAT is only added if it’s a ‘supply in the UK’

In a B2C sale, the supply is said to take place where the supplier is.

Supplier is in the UK, therefore, a UK supply, therefore, VAT must be added

Question 9

If a UK VAT registered business buys SERVICES from an overseas business how will the VAT work?

Answer 9

This is a B2B transaction and because the customer is in the UK, it is a considered a UK supply and VAT must be paid.

However, the seller won’t know this and so the VAT will have to be dealt with under the REVERSE CHARGE SYSTEM - The VAT owed put down as output VAT and, assuming the service relates to the business, the input VAT can be recovered as normal.

Question 10

How do you know if the partial exemption rules apply in a question?

Answer 10

1. The business will be making BOTH taxable AND exempt supplies
2. The requirement in the question will most likely tell you as they will want you to use ‘the standard method’

Question 11

Is VAT charged on the sale of a residential building?

Answer 11

No.

Zero rated:

• construction of a new residential building
• sale of a new residential building

Exempt

• sale of an existing residential building
• lease of a residential building

So, either way, no.

Question 12

Is VAT charged on the sale of a commercial building?

Answer 12

It depends:
Standard rated:
- sale of new (less than 3 years old) commercial buildings

Exempt with option to tax:

• sale of old (three years or more) commercial building
• lease on any commercial building (premium and rent)

Question 13

What is the threshold for the Capital goods scheme

Answer 13

Land and buildings with VAT EXCLUSIVE COST >£250,000

A single purchase of computer items, aircraft, ships and other vessels > £50,000

Question 14

Annual adjustment for the capital goods scheme

Answer 14

1/N x total original input VAT* x (current business % - Original %)

N = 5 for most asses
10 for land

• input vat including amounts that weren’t recoverable

Question 15

What are the DE-minimis tests

Answer 15

Input vat from exempt supplies is no more than £625 / month

The value of exempt supplies is no more than 50% of the value of all it’s supplies

Question 16

What is the partial exempt formula to calculate amount of recoverable VAT from unattributable input vat

Answer 16

Taxable turnover/total turnover

• rounded UP always
• excluding VAT

Question 17

Sale of asset in the capital good scheme

Answer 17

(P/N) * input vat * (R - original taxable use)

P = time remaining 
N = 5 or 10 
R = 0 or 100% if taxable at time of sale

Question 18

What’s the first step when a asset is sold on the capital goods scheme

Answer 18

1. Annual adjustment… applied for full year

2. Adjustment on sale Using formula

Question 19

When could a trader be considered a limited cost trader?

Answer 19

Amount spend on relevant good (inc vat) is:

• less than 2% of VAT inclusive turnover
• greater than 2% Vat inclusive turnover but less then £1,000

HARDMANS