Chapter 4

Question 1

VAT and VAT records

Answer 1

The accounting system of a VAT registered business should record:

Input tax on purchases and expenses and output tax on sales

The basic records that a business must maintain relating to VAT:

Copes of sales invoices, purchase invoices, credit notes and debit notes received relating to adjustments made to sales and purchase invoices, cash and party cash transaction receipts, information about deposits, advance payments and delayed payments, and a VAT control account.

Question 2

Records for output tax

Answer 2

Sales day book, sales returns day book - any credit given may involve VAT and deduction should be made from output, cash book - receipts side

Question 3

Records for input tax

Answer 3

Purchases daybook, purchases returns daybook - any credit received may involve VAT which should be deducted from input Tax, cash book - payments side

Question 4

VAT control account

Answer 4

The balance of the VAT control accoint represents the amount owing to or due from the HMRC.

The VAT control account is not a double entry account. For example, items such as credit notes are deducted on each side rather than being entered on he opposite side.

Question 5

VAT due calculation

Answer 5

VAT due is calculated by deducting the total of the input VAT side from the total of the output side.

If input VAT is greater than output then the calculation will be shown on the left hand side of the VAT account. This usually be for a business that sells zero rated goods as output tax is zero.

Question 6

Treatment of VAT paid and reclaimed

Answer 6

VAT actually paid or reclaimed for the previous VAT period is not included in the VAT account.

At the beginning of each VAT period the VAT account will have an opening balance which is either:

VAT owed to HMRC - credit balance brought forward

Or VAT reclaimable from HMRC - a debit balance brought forward

When the VAT liability is paid, this will cancel out this opening balance and the net effect of the two entries in the VAT account will be nil.

Question 7

NET errors up to the error correction reporting threshold

Answer 7

In a previous VAT return a business may be able to adjust for errors if the current VAT return if the errors are below the reporting threshold, not deliberate, related to an accounting period that ended less than four years before.

The error reporting threshold is the greater of:

£10,000 or less and 1% of the total value of sales and all other outputs excluding VAT, up to a maximum of £50,000.

Providing the net value of all errors is less than the error reporting threshold, the net errors can be corrected as an adjustment on the current VAT return.

Net error is the difference between the total errors in output tax and the total error in input tax.

Question 8

The VAT return - online submission

Answer 8

The figures from the VAT account will be transferred to the VAT return.

The boxes of VAT returns are completed as follows:

1 - VAT due in the period on sales and other outputs

2 - VAT due in the period on acquisitions of goods made in Northern Ireland from EU member states

3 - Total VAT due (sum of 1 and 2)

4 - VAT reclaimed on purchases and other inputs

5 - Net VAT to pay to or claim from HMRC

6 - Total value of sales and all other outputs excluding any VAT

7 - The total value of purchases and all other inputs excluding any VAT

8 - The total of supplies of goods and services excluding VAT to EU member states

9 - The total value of all acquisitions of goods and related services, excluding VAT from EU member states

Question 9

Bad debt relief

Answer 9

A business can include bad debt relief in Box 4 of its VAT return.

Bad debt relief is the VAT scheme in which HMRC allows a business to claim back VAT which it has charged to a customer on a credit sale and already paid over to HMRC and which it has no chance of recovering.

Conditions for bad debt relief:

Available for debts which are more than six months overdue and less than four years and six months overdue

Debt must have been written off in the businesses VAT account and transferred to a separate bad debt account

Debt must not have been sold or handed to a factoring company

If the business satisfies all the criteria for claiming bad debt relief, the amount of VAT being claimed for the bad debt should be added to Box 4.

Question 10

Making TAX Digital for VAT

Answer 10

HMRCs initiative to encourage businesses to keep theirs accounts in a digital format. Its aim is to help make administration of tax easier and more efficient for businesses.

A business that is required to comply with MTD must use compatible accounting software that is capable of:

Keeping and maintaining its accounting records

Preparing its VAT returns

Communicating with HMRC digitally via HMRCs Application Programming Interface Platform

Question 11

Registration for MTD

Answer 11

If a business is required to register for MTD because its taxable turnover is above the registration threshold, it must keep digital records even if turnover later falls below the VAT threshold. However if the business deregisters from VAT, it is no longer required to keep digital records.

Question 12

Electronic submission of VAT return to HMRC

Answer 12

The deadline for filing a VAT return is one month and seven days after the end of the VAT period. (Doesn’t apply for annual accounting scheme)

So a business that uses the standard quarterly VAT scheme that has quarter end of 30 April must submit its VAT return by 7 June.

Question 13

Electronic payments to HMRC

Answer 13

Once the VAT Return has been submitted, any VAT due to HMRC must be paid electronically.

If the business pays by direct debit, HMRC automatically collects payment from the businesses bank account three bank working days after the VAT return submission date.

Question 14

Electronic payments by HMRC

Answer 14

If the net VAT in box 5 of the VAT return is a repayment due to the business, HMRC will schedule electronic repayment into the businesses bank account. This will normally be within 10 working days but may take up to 21 days if HMRC has a query.

Question 15

Differences between the VAT account and the accounting records

Answer 15

The balance of the VAT control account should always agree with the VAT return.

If the VAT return does not reconcile with the accounting records, this must be investigated. There are a number of reasons why this could happen including mis-posting to the VAT control account and errors or omissions on the VAT return.

Question 16

Reasons why the VAT return might not reconcile with the accounting records

Answer 16

Data has been transferred incorrectly to the VAT return

Question 17

Reasons why the VAT return might not reconcile with the accounting records

Answer 17

Data has been transferred incorrectly to the computerised accounting system

Accounting software has been set up incorrectly

Question 18

Late submission penalties

Answer 18

A VAT registered business must submit its VAT return by the HMRC deadline - one month and seven days after the end of the VAT period for quarterly or monthly VAT returns, and two months after the end of the VAT period for a business that submits annual VAT returns.

Question 19

How late submission penalties work

Answer 19

Late submission penalties work on a points based system.

The business will receive a penalty point for each return this submitted late until it reaches the penalty point threshold at which point it will have to pay a £200 penalty. It will then receive a further £200 penalty for every subsequent later submission while at the points threshold.

A Newley registered business will not be penalised if its first return is late.

Question 20

Penalty point thresholds

Answer 20

The penalty point threshold for a business will depend on its accounting period. The threshold is the maximum points a business can receive.

Annuallly - 2 points

Quarterly - 4 points

Monthly - 5 points

Question 21

Removal of penalty points - threshold not reached

Answer 21

If a business has not reached the late submission penalty threshold, individual penalty points will expire automatically, two years from the first day of the month after the month when the late submission occurred.

Question 22

Removal of penalty points - threshold reached

Answer 22

Once the business has reached the late submission penalty threshold, the points can only be reset to zero if it meets the following two conditions:

Complete a period of compliance

Submit all outstanding returns for the previous 24 months

Question 23

Period of compliance

Answer 23

Is a period when a business submits all its returns on time. The earliest date a business can start a period of compliance is the first day of the month following the missed deadline. However if the business submits annual VAT returns and the date is 30 June the period of compliance would start on 1st of August.

The length of the period of compliance depends on how frequently a business submits its VAT returns.

Annually - 24 months

Quarterly - 12 months

Monthly - 6 months

Question 24

Submit all outstanding returns

Answer 24

The second condition is that outstanding VAT returns for the previous 24 months must have been submitted, even if they were not on time. This 24 months will include the period of compliance.

Question 25

Late payment penalties

Answer 25

Business that owe VAT to HMRC must pay the amount due by the payment deadline. For quarterly accounting where a business pays by direct debit, this is one month and seven days after the end of the VAT quarter, plus three working days. If business does not pay by direct debit , the deadline is one month and seven days after the end of the VAT quarter. If the payment is late there is a series of late payment penalties. These can apply to payments due:

On a VAT return, following an amendment to a return or correction, from a VAT assessment issued when a business did not submit its return

However penalties do not apply to VAT payments on account and instalments for the VAT annual accounting scheme.

Question 26

First and second late payment penalties

Answer 26

A business will get a first late payment penalty if its payment is 16 or more days overdue

Once the payment becomes 31 or more days overdue, the first late payment penalty increases and the business gets a second late payment penalty.

Question 27

Interest charged on VAT

Answer 27

In addition to late payment penalties, HMRC charges late payment interest on overdue payments

Late payment interest will be charged from the first day that the payment is overdue until the day it is paid in full. It is calculated as the Bank of England base rate plus 2.5%.

Question 28

Claiming interest on VAT

Answer 28

A business may be able to claim interest if HMRC makes a mistake that means:

The business pays too much VAT

The business reclaims too little VAT

If HMRC owes repayment interest, this is calculated at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

Normally HMRC will not repay interest if a business has paid too much VAT because of a mistake the business made.

Question 29

Assessment of VAT

Answer 29

A business that fails to submit its VAT return on time will be issued with a VAT notice of assessment of tax. This will show how much VAT HMRC thinks that the business owes.

If this assessment turns out to be too low and the business does not tell HMRC that the assessment is incorrect within 30 days, then HMRC can then charge a penalty that is 30% of the assesment amount.

Also if a business submits paper VAT return and does not tell HMRC that it is exempt form submitting its return online the business may be charged a £400 penalty.

Failure to pay VAT due or penalties that are imposed is a criminal offence and can result in prosecution.