Introduction to VAT

Question 1

Types of supply (3)

Answer 1

Standard Rated

• most goods and services
• rate of 20%

Zero Rated

• Taxable supplies but 0%
• eg. Food production, public transport, children’s clothes

Exempt

• Not taxable supplies
• eg. education, land

Question 2

Main principles of VAT (3)

Answer 2

• VAT registered traders are required to charge VAT on their sales
  
  • Output VAT
• VAT registered traders can generally reclaim any VAT they have suffered on purchases
  
  • Input VAT
• VAT registered traders pat over the difference to HMRC
  - Output - Input = payable to HMRC

Question 3

Accounting for VAT

• The double entry for a credit sale of 1000 plus VAT?
• The double entry for a purchase on credit of 600 plus VAT?

Answer 3

Dr Receivables 1200
Cr Sales = 1000
Cr VAT = 200 (liability to pay to HMRC)

Dr Purchases = 600
Cr Payables = 600
Cr VAT = 120 (asset as HMRC owe you)

Question 4

VAT and Discounts

Two types of discounts?

• VAT is always calculated…

Answer 4

• Trade discounts
• Early settlement discounts
• VAT is always calculated after all potential discounts and NO adjustment is made even if the discount is not taken up

Question 5

VAT and Non-current Assets

When a VAT registered business buys a non current asset to use in its trade it can recover the VAT it suffers on the purchase. (What is this called?

The non current asset is therefore stated net of VAT in the SoFP and depreciation is then calculated.

VAT however cannot be recovered when a VAT registered business buys a _______ ____. As a result the car is stated including VAT in SoFP and depreciation is then calculated.

Answer 5

When a VAT registered business buys a non current asset to use in its trade it can recover the VAT it suffers on the purchase (Input VAT)

The non current asset is therefore stated net of VAT in the SoFP and depreciation is then calculated.

VAT however cannot be recovered when a VAT registered business buys a motor car. As a result the car is stated including VAT in SoFP and depreciation is then calculated.

Question 6

Key Points

• VAT is a ___ on most goods and services
• VAT is charged by VAT ___________ _________
• The final burden typically falls on the ____ ___________
• Businesses are ___________ of VAT for the ______________
• Every ________ business pays difference between output VAT and input VAT
• Figures in the Income Statement generally ________ VAT
• Figures in the SoFP generally ________ VAT

Answer 6

• VAT is a tax on most goods and services
• VAT is charged by VAT registered businesses
• The final burden typically falls on the final consumer
• Businesses are collectors of VAT for the government
• Every quarter business pays difference between output VAT and input VAT
• Figures in the Income Statement generally exclude VAT
• Figures in the SoFP generally include VAT