Indirect Taxes Flashcards
You are working on secondment in your firm’s indirect tax department. Your manager has asked you to deal with several client queries and has provided the following information. All figures below are shown exclusive of any VAT.
Waxwell Ltd sells standard-rated goods. It has undertaken the following transactions in the quarter ended 31 December 2021:
Sales of goods to:
- UK Customers: £68,500
- Private Individuals in South Africa: £17,450
Purchases of: - Legal services from a company resident in India £2,500 - Standard-rated goods: £25,000 - Zero-rated goods: £8,000
All companies are UK resident and are registered for VAT where possible
- Calculate Waxwell Ltd’s VAT liability for the quarter ended 31 December 2021. Clearly show your treatment of each item.
Output tax:
UK supplies £68,500 x 20% = 13,700
Supplies to South Africa (zero-rated) = 0
Legal services (reverse charge) 2,500 x 20% = 500
Input tax:
Legal services (reverse charge) 2,500 x 20% = (500)
Purchase of standard-rated goods 25,000 x 20% = (5000)
Purchase of zero-rated goods = 0
——–
VAT payable = 8,700
Examiner’s comments
Generally, answers to this part were good, although it was surprising how many students calculated input VAT on the purchase of zero-rated goods. The output element of the reverse charge was, not surprisingly, generally missing.
You are working on secondment in your firm’s indirect tax department. Your manager has asked you to deal with several client queries and has provided the following information. All figures below are shown exclusive of any VAT.
- Shaker Airways operates transatlantic flights (zero-rated supply). Each customer’s ticket includes entitlement to in-flight catering (standard-rated supply). Shaker Airways is not contractually obliged to provide the in-flight catering, and no refund is issued for customers declining the in-flight catering.
All companies are UK resident and are registered for VAT where possible
- Explain how Shaker Airways should calculate the VAT due on the sale of each ticket for a transatlantic flight
Single and multiple supplies
How the VAT should be calculated depends on whether the supply is a single supply with a single VAT rate, or a multiple supply with multiple VAT rates.
Whether a supply is in fact a single or a multiple supply depends on the circumstances. Shaker Airways should treat the sale as a single zero-rated supply because the facts here are similar to the British Airways case in which the Court of Appeal ruled there was a single zero-rated supply being the supply of a flight.
This was for the following reasons:
- The supply was in essence a flight, with an ancillary/incidental supply of food. Where a supply is ancillary there is a single supply.
- The supply was a single economic supply as the customer was not offered a lower price if the meal was not required.
- The fact there was no contractual obligation to supply the food also indicated that this was a single supply.
Examiner’s comments
Most students arrived at the right answer and stated that it would be a zero-rated supply. The most common point made was that the catering was an ancillary supply. Very few students mentioned that there was no contractual obligation to supply the food.
(ancillary = necessary to support primary activities or functions of a business)
You are working on secondment in your firm’s indirect tax department. Your manager has asked you to deal with several client queries and has provided the following information. All figures below are shown exclusive of any VAT.
- Badir Ltd makes wholly standard-rated supplies. Badir Ltd recently purchased a commercial building from an unconnected company, Polly Parrot Ltd, for £450,000. Polly Parrot Ltd had opted to tax the building in January 2004. No VAT was accounted for on the sale of the building and no mention of VAT was made in the sale and purchase agreement
All companies are UK resident and are registered for VAT where possible
- Explain the VAT implications of the sale of the building by Polly Parrot Ltd
VAT on property
As the building is more than three years old, ordinarily it would be exempt from VAT.
However, as an option to tax had been exercised in respect of the property, it should have been a standard-rated supply and VAT is therefore due.
As VAT was not mentioned in the sale and purchase agreement, the price paid will be treated as being the VAT inclusive price.
Therefore, VAT is due of £450,000 × 1/6 = £75,000.
This VAT is due from Polly Parrot Ltd.
Provided Polly Parrot Ltd issues a VAT invoice, Badir Ltd could reclaim this VAT as it makes wholly standard-rated supplies.
Polly Parrot Ltd and Badir Ltd could agree to treat the net proceeds as being the £450,000. In which case Badir Ltd would then need to pay over and subsequently reclaim VAT of £90,000.
Examiner’s comments
Generally, answers to this part were good although a surprising number of students thought that the capital goods scheme was relevant.
You are working on secondment in your firm’s indirect tax department. Your manager has asked you to deal with several client queries and has provided the following information. All figures below are shown exclusive of any VAT.
- Zeeson Bank Ltd was granted a six-year lease of a new office building on 1 December 2021. Zeeson Bank Ltd paid a premium of £88,888. The annual rental is £27,000
All companies are UK resident and are registered for VAT where possible
- Explain, with supporting calculations, the stamp duty land tax implications for Zeeson Bank Ltd in respect of the office building
SDLT is payable on both the lease premium and the net present value of the lease rentals as follows.
On the grant of a non-residential lease for a premium between £0 and £150,000, there is no SDLT on the lease premium element.
On the net present value of the lease rentals (ignoring discounting), where the NPV exceeds £150,000 but is less than £5 million, the SDLT is [(£27,000 × 6) – £150,000] × 1% = £120.
A land transaction form must be submitted to HMRC and the associated SDLT paid by Zeeson Bank Ltd within 14 days of the lease agreement.
Roger operates an unincorporated business, offering boat cruises on the River Thames. He was not initially required to register for VAT but has decided to voluntarily register for VAT from 1 October 2022.
He is concerned that he has suffered significant input VAT on expenses incurred before his VAT registration. He would like to know whether he can recover this.
The costs incurred before registration include the following:
May 2021: Legal advice on employment matters 1,200
June 21: Purch. of computer for 100% business 2,400
July 2022: Entertaining suppliers 500
On his River Thames boat cruises, Roger provides a buffet for all customers at no extra cost.
The customer pays one inclusive price irrespective of whether they eat any of the buffet food.
Roger is not sure how he will treat his cruises for VAT purposes as he is aware that boat cruises in their own right are zero-rated supplies, but the provision of a buffet is a standard-rated supply.
Explain whether Roger can recover the input VAT suffered prior to his registration on the three particular items detailed above. Assume that all amounts are inclusive of VAT.
Input VAT can be recovered on services supplied in the six months before registration.
As the legal services in May 2021 were more than six months before registration then the input tax cannot be recovered.
Input VAT can be reclaimed on goods purchased in the four years before registration, provided they were supplied for business purposes and are still on hand at the date of registration.
It is likely that Roger still uses the computer for business purposes at 1 October 2022, and so VAT of £400 (1/6 × £2,400) will be recoverable.
Input tax on entertaining of suppliers cannot be recovered.
Roger operates an unincorporated business, offering boat cruises on the River Thames. He was not initially required to register for VAT but has decided to voluntarily register for VAT from 1 October 2022.
He is concerned that he has suffered significant input VAT on expenses incurred before his VAT registration. He would like to know whether he can recover this.
The costs incurred before registration include the following:
May 2021: Legal advice on employment matters 1,200
June 21: Purch. of computer for 100% business 2,400
July 2022: Entertaining suppliers 500
On his River Thames boat cruises, Roger provides a buffet for all customers at no extra cost.
The customer pays one inclusive price irrespective of whether they eat any of the buffet food.
Roger is not sure how he will treat his cruises for VAT purposes as he is aware that boat cruises in their own right are zero-rated supplies, but the provision of a buffet is a standard-rated supply.
Explain the two possible VAT treatments of the cruises offered by Roger, and state which treatment is likely to apply
HMRC could treat the supply as a ‘single’ (or composite) supply. This would be the case if one part of the supply is merely incidental, or ancillary to the main element, or a means of better enjoying the main element.
In this case the VAT rate applying to the main supply would apply to the whole supply.
Alternatively, HMRC could treat the supply as a ‘multiple’ (or combined/mixed) supply.
This would be the case if the elements are separate and clearly identifiable but have been invoiced together at an inclusive price for both elements.
In this case each element is considered separately, so Roger would account separately for VAT on the different elements (boat cruise and buffet), by splitting the total in a fair and reasonable manner.
The main methods for apportioning the VAT include splitting the amount based on:
- cost to Roger of each element
- the open market value of each element
HMRC are likely to treat Roger’s business as making ‘multiple supplies.’
Note: This follows the decision in case law Durham River Trips.
On 1 July 2021 Thunder Ltd took out a 15-year lease on new manufacturing premises, paying a lease premium of £29,000 and annual rent of £20,000.
The land transaction form will be submitted, and stamp duty land tax paid by the end of September 2022.
Requirement
Calculate the stamp duty land tax payable by Thunder Ltd on the new manufacturing premises and the maximum penalty for late filing of the land transaction form.
SDLT on the lease premium
There is nil SDLT on the lease premium as this is less than £150,000.
SDLT on NPV of rentals:
Total NPV of rentals = 15 × £20,000 = £300,000
£150,000 × 0% = £0
(£300,000 – £150,000) × 1% = £1,500
SDLT on NPV of rentals = £1,500
As the land transaction form is due to be submitted more than three months late a fixed penalty of £200 is imposed.
There may also be a tax-geared penalty of up 100% of the SDLT due ie, £1,500 as the form will be submitted more than 12 months after the due date.
Towers Ltd is a VAT-registered UK trading company making standard-rated supplies.
In August 2021 Towers Ltd purchased Roscoe House, a newly constructed freehold factory, for use in its trade for £2.6 million. This amount is stated exclusive of VAT.
Towers Ltd lost a large contract recently but continues to manufacture goods that are standard-rated supplies. It no longer needs to utilise all of the factory space in Roscoe House.
The company intends to let 15% of the factory to a third party from 1 April 2023, for a rent of £50,000 pa. Towers Ltd has not opted to tax Roscoe House and has a VAT year to 31 March
- Calculate the stamp duty land tax paid on the purchase of Roscoe House
SDLT on purchase of freehold non-residential property
SDLT is paid on the VAT inclusive price of a property.
A purchase of a new freehold commercial property is standard rated.
So, the VAT inclusive price £2.6m × 120% = £3,120,000
SDLT
£150,000 - 0% = 0
£(250,000 - 150,000) x 2% = 2,000
145,500
Towers Ltd is a VAT-registered UK trading company making standard-rated supplies.
In August 2021 Towers Ltd purchased Roscoe House, a newly constructed freehold factory, for use in its trade for £2.6 million. This amount is stated exclusive of VAT.
Towers Ltd lost a large contract recently but continues to manufacture goods that are standard-rated supplies. It no longer needs to utilise all of the factory space in Roscoe House.
The company intends to let 15% of the factory to a third party from 1 April 2023, for a rent of £50,000 pa. Towers Ltd has not opted to tax Roscoe House and has a VAT year to 31 March
Explain the VAT implications for Towers Ltd of letting out part of the factory, and how these would differ if Towers Ltd had opted to tax the factory
As Towers Ltd has not made an option to tax Roscoe House the rent of £50,000 is VAT exempt.
As the factory was purchased in the last 10 years, for in excess of £250,000, then the capital goods scheme applies.
So annually from y/e 31 March 2024 VAT will be repaid to HMRC
(100 – 85)% × £520,000 ×1/10 = £7,800
If Towers Ltd opts to tax the building then VAT at the standard rate will be charged on the rental income ie, £10,000 (£50,000 × 20%) each year.
Towers Ltd will be able to recover VAT on any costs of letting.
As the building will be used wholly for standard-rated supplies no adjustment for use will be required.
Bactrian Ltd is registered for VAT and produces only standard-rated goods. In order to expand its business, the company has begun to sell its goods outside of the UK.
Figures for the quarter ended 28 February 2022 are as follows:
Sales:
- Supplies in the UK £39,500
- Supplies to non-trading customers overseas 12,900
Purchases:
- Materials purchased in the UK 8,100
- Computer advice from overseas supplier 190
- Car purch in UK and used 80% for business 6,280
- Motor exp incl. fuel at £600 for employee M. 1,750
All of the above figures exclude any VAT.
Half of Mary’s mileage was for work-related travel The relevant VAT-inclusive fuel scale rate for the quarter is £384
Calculate the VAT payable by Bactrian Ltd for the quarter ended 28 February 2022, clearly showing your treatment of each of the above figures.
VAT - quarter ended 28 February 2022
Output tax:
UK supplies £39,500 x 20% 7,900
Supplies to non-registered overseas customers (zero-rated) = 0
Computer advice (reverse charge) 190 x 20% 38
Fuel scale charge £384 x 1/6 64
Input tax: Materials £8,100 x 20% (1,620) Computer advice 190 x 20% (38) Car acquisition - irrecoverable as private use = 0 Motor expenses £1,750 x 20% (350) ------ VAT payable 5,994
On 10 January 2022 Bilal sold land that he had held for investment purposes to his sister Priya for £120,000 when it was worth £185,000.
As the consideration was only £120,000, Bilal and Priya did nothing in respect of stamp duty land tax (SDLT) on the sale in January 2022. However, they have recently been told by a friend that HMRC should have been informed.
Requirement
Explain the consequences for SDLT administration of the land sale in January 2022. You should assume it is currently December 2022.
As the actual consideration was below £150,000 stamp duty land tax was not payable on disposal.
However, Priya should still have submitted a land transaction form to HMRC within 14 days of the sale.
As the form is more than 3 months late a fixed penalty of £200 is imposed
- make sure to address who is responsible for completing the administration ie, the purchaser
In order to raise cash, Granate Ltd has decided to dispose of a freehold factory to an unconnected third party, Marble Ltd, for £2,500,000 on 31 March 2022. Granate Ltd purchased the factory new for £750,000 on 1 April 2013. Marble Ltd will immediately lease the factory back to Granate Ltd on a 25-year lease.
The annual rental will be £325,000 and there will be a
lease premium of £400,000. Granate Ltd might opt to tax the factory before its disposal. Both Granate Ltd and Marble Ltd have a VAT year to 31 March.
All amounts are stated exclusive of VAT where appropriate and Ben is also unsure how to treat
these issues.
Explain, with supporting calculations, the implications of the capital goods scheme on the disposal of the freehold factory by Granate Ltd
As the factory is more than three years old and assuming the option to tax was not exercised, there is no VAT to be charged on the sale.
However, as the building is only nine years old and originally cost more than £250,000, it falls within the capital goods scheme.
Therefore, on an exempt disposal before 1 April 2023 there will be a claw back of some of the initial input VAT recovered:
Original input VAT recovered = £750,000 × 20% = £150,000
The sale adjustment under the capital goods scheme will be:
(£150,000/10) × (0% – 100%) × (10 – 9) intervals = £15,000 repayable to HMRC
Option to tax
Granate Ltd could opt to tax the building before its disposal. This would make the sale a standard-rated supply. There would then be no sale adjustment under the capital goods scheme.
However, this may affect the purchase price payable by Marble Ltd, depending on whether Marble Ltd is prepared to opt to tax the building in order to recover the input tax paid.
As Marble Ltd will be renting out the property it will be an exempt supply and the input tax would be irrecoverable unless Marble Ltd also opted to tax the building.
In order to raise cash, Granate Ltd has decided to dispose of a freehold factory to an unconnected third party, Marble Ltd, for £2,500,000 on 31 March 2022. Granate Ltd purchased the factory new for £750,000 on 1 April 2013. Marble Ltd will immediately lease the factory back to Granate Ltd on a 25-year lease.
The annual rental will be £325,000 and there will be a
lease premium of £400,000. Granate Ltd might opt to tax the factory before its disposal. Both Granate Ltd and Marble Ltd have a VAT year to 31 March.
All amounts are stated exclusive of VAT where appropriate and Ben is also unsure how to treat
these issues.
Calculate the SDLT payable on the acquisition of the lease by Granate Ltd, assuming no option to tax has been exercised
SDLT on acquisition of lease
SDLT on premium: £150,000 x 0% = £0 (£250,000 – £150,000) × 2% = £2,000 (£400,000 – £250,000) × 5% = £7,500 SDLT on premium = £9,500
SDLT on NPV of rentals:
Total NPV of rentals = 25 × £325,000 = £8,125,000
£150,000 × 0% = £0
(£5,000,000 – £150,000) × 1% = £48,500
(£8,125,000 – £5,000,000) × 2% = £62,500
SDLT on NPV of rentals = £111,000
Total SDLT on lease = £9,500 + £111,000 = £120,500
Faizha is a VAT-registered sole trader making only standard-rated supplies.
Her business category for flat rate purposes is financial services which has a flat rate percentage of 13.5%.
For the quarter ended 31 August 2022 Faizha will have sales of £25,000.
So far, Faizha has spent £300 on the purchase of standard-rated goods for the quarter.
Faizha is considering purchasing a further £500 of standard-rated goods for use in her business before 31 August 2022.
All figures are stated exclusive of VAT
Calculate Faizha’s net VAT surplus or deficit for the quarter ended 31 August 2022 assuming her purchases for the quarter:
- remain at £300
- increase to a total of £800
VAT flat rate for a limited cost business:
Limited cost: Input VAT suffered = £300 x 20% (60) Output VAT collected = 25,000 x 20% 5,000 Flat rate VAT paid to HMRC (W) (4,950) ------- Net VAT deficit surplus (10)
Financial services Input VAT suffered = £800 x 20% (160) Output VAT collected = 25,000 x 20% 5,000 Flat rate VAT paid to HMRC (W) (4,050) ----------- Net VAT deficit surplus 790
WORKING
Faizha’s flat rate will depend on whether she is a limited cost trader.
She will be a limited cost trader if her VAT inclusive costs for the quarter are less than either:
- 2% of VAT inclusive turnover for the quarter = £25,000 × 1.2 × 2% = £600; or
- £1,000 / 4 = £250
With purchases of less than £600 she will be a limited cost trader and her VAT liability will be:
£25,000 × 1.2 × 16.5% = £4,950
If Faizha’s purchases exceed £600 then her VAT liability will be calculated using her industry percentage:
£25,000 × 1.2 × 13.5% = £4,050
