Chapter 3

Question 1

Output VAT and input VAT - the calculation

Answer 1

The VAT amount due to HMRC from a VAT registered business is calculated in the VAT return as: output tax less input tax.

The tax point of input tax is usually the point the invoice is issued for supply of the goods or services.

Question 2

Zero rated supplies

Answer 2

Zero rated g/s eg food and children’s clothes are chargeable to output VAT but at zero percent. A supplier of zero rated goods and services is able to reclaim input VAT spent on business purchases and expenses.

Question 3

Exempt supplies

Answer 3

Businesses that only supply exempt goods and services are not able to register for VAT. So they will never be able to reclaim any input VAT, meaning that the input VAT becomes part of their expenses.

Question 4

Taxable and exempt supplies - Partial exemption

Answer 4

If a business is registered for VAT and makes some supplies that are VAT exempt and supplies that are taxable it is referred to as partially exempt. However HMRC states that if the amount of VAT incurred relating to exempt supplies is below a certain amount (de minimis limit), input vat can be recovered in full.

Question 5

Partial exemption - how to work out the input tax

Answer 5

Unless the business qualifies under the de minimis rule, it will have to calculate how much of its input tax is recoverable. VAT charged on purchases of standard rated supplies is recoverable. VAT charged on purchases of exempt supplies cannot be reclaimed. However, the problem is that some purchases cannot be directly allocated to either a exempt or standard rated supply. For example telephone bills or administration costs. This input tax is known as ‘residual input tax’. Some of the tax may be recovered according to the proportion that taxable supplies make up its total supplies.

Question 6

De minimis limit

Answer 6

Exempt supplies must be:

No more than £625 per month

Less than 50% of total input VAT in the period

Question 7

Blocked input VAT

Answer 7

Blocked expenses are those expenses on which a business cannot reclaim input VAT.

HMRC states that a business cannot recover input tax that relates to business entertainment. E.g provision of food and drinks, cinema tickets. Exception to this is where input VAT relates to overseas customers.

However, with employee entertainment, input VAT can be reclaimed if a business provides entertainment to reward employees.

Question 8

Car and Van purchase

Answer 8

Businesses are not normally permitted to reclaim the input VAT when they buy a car. However they can if the car is used wholly for business purposes, the business is a taxi business or the business is car dealer and the car will be part of its inventory.

A business can reclaim all the VAT on vehicle repairs and maintenance as long as:
The business pays for the work and there is some business use of the vehicle.

Input VAT can be reclaimed on the purchase of commercial vehicles such as vans, Lorries, or tractors in the normal way.

Question 9

Leasing a car

Answer 9

Usually claim 50% of the VAT on the leasing payments.

Question 10

Car and van sale

Answer 10

If a business was not able to reclaim the input VAT on the original purchase of a car, it cannot charge any VAT when the car is sold.

However, if the business was able to reclaim VAT, they will have to charge VAT on the full selling price and also issue a VAT invoice if the customer asks for one.

Question 11

Reclaiming VAT on road fuel.

Answer 11

Company cars that are bought or leased by the business are allowed to be used by the employee for private travel as well as business use.

If a business pays for road fuel used by employees, these are the ways it can deal with the VAT charged on fuel.

If all fuel is used for business purposes, the business can reclaim all of the input VAT charged.

If fuel is used for both private and business purposes, the business can reclaim only the VAT that relates to fuel used for business mileage

If the fuel is used for both, they can instead claim all of the VAT and then pay a separate fuel scale charge.

Question 12

Fuel scale charge

Answer 12

Charge on CO2 emissions of a vehicle.

The process to calculate the fuel scale charge is:

Select the period the business wants to calculate the fuel scale charge for

Decide the length of the accounting period for which the fuel scale charge is being calculated

Use the vehicles co2 emissions figure to decide which band it falls into

Finally use the fuel charge table to decide the amount

Note: Where the CO2 emissions figure is not a multiple of 5, the figure is rounded down to the next multiple of 5 to determine the level of fuel scale charge.

Question 13

Assets with private use

Answer 13

If a business buys an asset that is solely for business use, it can claim all of the VAT that it pays on the purchase as input tax. However, if the assets is used for private and business this is known as a mixed use asset. Only the apportioned amount of input vat relating to business use can be claimed by the business.

Question 14

Imports of goods

Answer 14

Overseas supplies needs to be charged with VAT to avoid giving overseas suppliers an advantage over UK suppliers.

VAT is paid by the importer and is treated as an input tax.

Most businesses account for import VAT on their VAT return by using postponed VAT accounting. This allows the business to declare import VAT and reclaim it as input tax on the same VAT return. This can provide significant cash flow benefits, as they can delay payment by declaring and recovering import VAT on the same VAT return.

Alternatively, import VAT can be paid when the goods enter the country and reclaim as normal input tax.

If a UK business is not registered for UK VAT, it will have to pay the import VAT when the imports enter the UK, but it will not be able to reclaim any of the VAT.

Question 15

Exports of goods

Answer 15

Because VAT is a tax goods used in the UK, businesses do not charge VAT on goods that are exported outside of the UK.

Goods that are exported can normally be zero rated. A business must not zero rate the goods if the overseas customer asks for them to be delivered to a UK address.

Question 16

Place of supply

Answer 16

For VAT purposes this is the place where VAT will be charged and paid.

For goods, this is the country where goods come from.

For services, this is the place where the customer is located if the supply is being made to a business customer. For a non business customer it is the place where the supplier is located.

Question 17

Export of services

Answer 17

Where a Uk business supplies a service to a business located overseas, this is outside the scope of UK VAT. However, the UK business must include the net sales in the VAT return with its other net sales.

If a Uk business provides a service to a non-business customer, the supplier charges UK VAT on the services as if the customer is located in the UK.

Question 18

Import of services - reverse charge

Answer 18

If a business in the UK buys services from a supplier in another country, depending on the circumstances, the business will have to account for the VAT itself. This is called the ‘reverse charge’. The business acts as if it’s both the supplier and the customer.

It charges itself the VAT and then claims this back as input tax subject to the normal rules. In most cases the two amounts will cancel each other out.

Question 19

Reverse charge step by step

Answer 19

Treat the supply as if the business is supplying itself

Treat the supply of the service as a sale and a purchase

On the VAT return include the VAT in output VAT and in input VAT

Include the net cost with other net sales and purchases

Question 20

Annual accounting scheme for VAT

Answer 20

This scheme enables businesses to make one annual VAT return.

The main features of the scheme:

A VAT registered business can join the scheme if its maximum estimated taxable turnover for the next 12 months is no more than £1.35 million

If taxable turnover excluding the sale of any capital assets goes over £1.35 million, the trader can continue on this scheme until its estimated turnover for the next annual accounting year reaches £1.6 million at which point the business must leave this scheme.

The trader must either pay 90% of its estimated annual VAT payment based on its previous years VAT return, by nine equal monthly payments starting in the fourth month of the VAT year.

Or pay three interim payments equal to 25% of the previous years VAT liability. This is payable in months 4,7 and 10 of the annual accounting period.

Trader must submit its annual VAT return electronically within two months of the end of the VAT year and pay the balance due or claim a repayment

A business can voluntarily withdraw from the scheme at any time by writing to HMRC

This scheme can be operated in conjunction with the flare rate scheme for VAT, or the cash accounting scheme for VAT but not both

Question 21

Advantages of annual accounting scheme

Answer 21

The scheme helps the business smooth out its cash flow by paying a set amount each month or quarter

The business only needs to submit one VAT return each year instead of four

The business is allowed two months instead of one to compete and submit its online annual VAT return

Question 22

Disadvantages of annual accounting scheme

Answer 22

If the business regularly reclaims VAT it will only get one repayment of VAT each year (bad for zero rated businesses)

If the businesses turnover decreases, the VAT payments may be higher than they would under the standard VAT accounting

Question 23

Flat rate scheme for VAT

Answer 23

A business using the flats rate scheme does not have to identify and record every single VAT transaction in order to calculate the net amount of VAT due. Instead it applies a flat percentage rate to its total turnover (including VAT and exempt supplies) for the VAT period to calculate the amount of VAT due.

The business must still issue VAT invoices to its customers, including the appropriate rate of VAT

The business cannot claim input VAT (taken into account in the flat rate percentage)

Flare rate varies depending on the sector

A business can join the flat rate scheme if its taxable turnover for the next 12 months is forecast to be less than £150,000

If its turnover in the previous or expected 12 months including VAT and exempt supplies exceeds £230,000 a year the business must leave the scheme.

This scheme can be used in conjunction with the annual accounting scheme.

A business can voluntarily withdraw from the scheme by writing to HMRC. It must wait 12 months if it wishes to re join the scheme.

Question 24

Benefits of the flat rate scheme

Answer 24

A business in its first year of VAT registration gets a 1% reduction on its flat rate percentage for the first 12 months.

The flat rate scheme can be operated with the annual accounting scheme which makes dealing with VAT much simpler for small businesses.

Question 25

Drawback of flat rate scheme

Answer 25

If most of supplies are zero rated, the business should not use the flat rate scheme as input vat is not reclaimable.

Question 26

Limited cost business

Answer 26

A flat rate of 16.5% must be used by businesses that provide services but only incur minimal costs. E.g self employed ‘labour only’ businesses.

A business is classed as a limited cost business if its expenditure on goods, including VAT, is less than either:

2% of its VAT inclusive turnover or £1,000 a year (if costs are more than 2%)

Question 27

Capital expenditure under the flat rate scheme

Answer 27

If a business purchases a large capital asset, with an invoice value of £2,000 or more, it can claim the actual input VAT paid on this asset. If the business later sells the asset, it will have to charge VAT at the full rate and pay back the VAT it receives to HMRC. This extra VAT on purchases and sales will be recorded on the VAT return, which is due quarterly.

Question 28

VAT records for the flat rate scheme

Answer 28

A business will need to keep the following records if it operates the flat rate scheme:

The flat rate turnover for the VAT accounting period

Flare rate percentage

The VAT calculated as due

A VAT account for recording VAT paid under the sale of a capital asset

Question 29

Cash accounting scheme for VAT

Answer 29

Allows businesses to account for VAT on the basis of the date payments are received and made, rather than on the tax point for invoices issued and received.

A business can voluntarily withdraw from the scheme at any time

When operating the cash accounting scheme, a business will continue to issue VAT invoices but will need to keep accounting records in a specific way:

The tax point for payments in cash, by cheque, credit card, or bank transfer is always the transaction date

Invoices issued or received for any payments made in cash must be receipts and dated

Most beneficial for businesses that pay suppliers in cash but allow customers to pay in a long credit period

The cash accounting scheme cannot be operated in conjunction with the flat rate scheme, but can be operated with the annual accounting scheme.

Question 30

Cash accounting scheme - Bad debt relief

Answer 30

This scheme provides automatic relief for VAT on bad debts: if the buyer does not every pay, no output VAT is declarable

Question 31

Qualification for cash accounting scheme

Answer 31

To qualify a business must:

Anticipate annual taxable turnover of £1.35 million or less - which excludes VAT itself and exempt supplies.

Have a clean VAT record - Ie have made all VAT returns on time