Introduction To VAT - Week 1 Flashcards
What products/services have to be taxed by a registered business?
All taxable supplies
How often are VAT returns generally completed?
Every 3 months
What does the government do with the money they collect from VAT?
The money is used to pay for public services
What are some of the rights that HMRC has?
Inspection of records and visits to registered businesses
Making Tax Digital requires all VAT-registered businesses to …
Keep records digitally and file their VAT returns using HMRC compatible software
What is Making Tax Digital
It is an initiative from HMRC to make our tax system more efficient and effective. All VAT-registered businesses:
need to keep digital records
Submit VAT returns online
Use HMRC compatible software
Records you must keep
- everything you buy and sell(including zero-rated, reduced and VAT exempt items)
- copies of all invoices you issue
- all invoices you receive(originals or electronic copies)
- self-billing agreements(where the customer prepares the invoice)
- the name, address and VAT number of any self-billing suppliers
- debit or credit notes
- any goods you give away or take from stock for your own private use
- import/export documents
- VAT control account
Keep general business records such as:
- bank statements
- cash books
- cheque stubs
- paying in slips
- till rolls
Records you must keep digitally(unless exempt from MTD For VAT rules
- The VAT on goods and services you supply(supplies made)
- The VAT on goods and services you receive(supplies received)
- The ‘time of supply’ and ‘value of supply’(value excluding VAT) for everything you buy and sell
- any adjustments you make to a return
- reverse charge transactions - where you record the VAT oN both the sale price and the purchase price of goods and services you buy
- any VAT accounting schemes you use
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
Taxable supplies
Goods and services on which VAT is chargeable. There are 3 different rates which you need to be aware of
Standard rated supplies
20%
This rate applies to all taxable goods not classified as reduced, zero-rated or exempt
Reduced-rated supplies
5%
Applies to a small selection of goods including domestics fuels(gas and electricity) and children’s car seats
Zero-rated supplies
0%
Classified as taxable supplies. Rate could be increased in the future but that is unlikely because this would increase the financial burden on the less well off.
Books, public transport, children’s clothing
Exempt & outside the scope of VAT
VAT does not apply to exempt supplies, e.g. insurances, financial services and sports activities. Businesses that make solely exempt supplies cannot register for VAT purposes.
Outside the scope of VAT: Wages and dividends are taxed in other ways and are ignored when accounting for VAT
When is the cost to the business the net cost/gross cost
VAT-registered businesses suffer the net cost.
Non-registered businesses suffer the gross cost.
The taxable turnover
VAT exclusive amount of all zero, reduced and standard rate supplies
If either the historic or future turnover tests are met…
VAT registration is compulsory
Historic test
If turnover for previous 12 months exceeded the registration limit of £90,000 in the past 30 days, the business must notify HMRC within 30 days of the test.
Future test
If turnover for the next 30 days exceed the registration limit alone HMRC must be notified immediately.
Registration can be exempt if:
- a business can demonstrate that the taxable turnover for the following 12 months will be below the de-registration threshold limit of £88,000
- if the business makes only(or mainly) zero rated supplies
Why might voluntary registration be a good idea?
The business can reclaim input VAT. It can also make a small business look more established.
E.g.
1. A business’s supplies are zero-rated and the related purchases are standard-rated. Registration would result in a VAT refund
2. A business has paid for a major project, e.g. a refurbishment, and has paid a lot of VAT in the process. Registration would mean that the VAT incurred could be claimed back
3. When a business is first set up it may initially incur a lot of costs and little(if any) sales. Registration would mean that any VAT incurred on the costs could be claimed back
When a business registers for VAT…
HMRC will issue a 9 digit VAT registration number which is unique to the business and should be shown on all VAT documentation.
From this point:
- output tax should be charged on all taxable supplies
- VAT records should be kept and retained for 6 years
- VAT returns should be submitted to HMRC
- they are able to reclaim relevant input tax on purchases
To sign up for making tax digital, you need:
- your business email address
- a Government Gateway user ID and password
- your VAT registration number and latest VAT return
You are exempt from Making Tax Digital if:
- You’re already exempt from filing VAT returns online
- you or your business are subject to an insolvency procedure
- It is not reasonably practical for the business to use digital tools, for example due to age, disability or remoteness
Before you sign up to MTD for VAT, you’ll need either;
- a compatible software package that allows you to keep digital records and submit VAT returns
- bridging software to connect non-compatible software(like spreadsheets) to HMRC systems
Accounting schemes
- Standard VAT scheme
- Annual accounting scheme
- Cash accounting scheme
- Flat rate scheme
Standard VAT scheme
Quarterly electronic VAT return with payment due 1 month and 7 days after the end of the tax quarter.
Additional 3 days if payment by direct debit, but submission deadline for return is unchanged.
Annual accounting scheme
Who it is for
- Aimed at small businesses
Joining conditions
- To join this scheme, businesses must be up to date with their VAT returns and cannot register as a group of companies
Exiting the scheme
- Any business can leave the scheme voluntarily at any time by writing to HMRC.
Advantages:
- Submitting only one VAT return reduces the administrative burden of VAT
- The business has an extra month between the end of the VAT period and the return submission date.
- Paying a fixed amount on each instalment makes cash flow management easier - Emphasis this when talking about this scheme
Disadvantages:
- If turnover decreases, the interim payments may be higher than they need to be
- The business will have to wait until the end of the year when it submits its return for a refund
Payments
For the 9 instalments, payment is due at the end of the relevant month and must be made by direct debit.
The remaining balance is settled 2 months after the year end and submitted with the VAT return form.
Cash accounting scheme
How it works
- VAT accounted for when money changes hands
- Businesses only pay output tax when payment has been received from the customer
- Only reclaim input VAT once the supplier has been paid
Joining conditions
- Businesses will only be eligible if they are not a member of the flat rate scheme
- no outstanding VAT returns
- you have not been convicted of a VAT offence in the last year
- you have not accepted an offer to compound proceedings(to settle the matter out of court) in connection with a VAT offence in the last year
- you have not been assessed to a penalty for VAT evasion involving dishonest conduct in the last year
- you do not owe HMRC any money or if you do, you have made arrangements with them to clear the total amount of your outstanding VAT payments(including subcharges and penalties)
Advantages
- Improves cash flow
- Automatic bad debt relief
Disadvantages
- VAT liability can vary according to amounts received and paid. This makes cash flow management harder.
Compulsory exit
- If VAT-exclusive taxable supplies exceed £1.6m in the previous 12 months or next 12 months(estimated), notice must be given to HMRC within 30 days and the business must exit the cash accounting scheme(they may be able to use the scheme for a further 6 months)
Flat rate scheme
- Fixed %, industry specific, VAT inclusive turnover, 1% discount
- Can’t reclaim input VAT except on capital >£2000
- Can’t join if in cash scheme
- Compulsory exit
- 12 months rejoin
- ## Advantages-
-
- - A fixed rate of VAT is paid to HMRC, with the business keeping the difference. This will be a percentage applied to the VAT-inclusive turnover(including zero-rated and exempt supplies). The percentage applied will generally be industry-specific
- 1st year discount 1%, e.g. rate is 9% but will be 8% for first year
- VAT on purchases cannot be reclaimed(except on certain capital assets over £2000)
- You cannot join if you are a member of the cash accounting scheme
- Compulsory exit: tell HMRC within 30 days
- no input VAT reclaimable
- If a business wishes to rejoin the scheme they must wait 12 months to do so
Advantages of the scheme:
- VAT payable is normally less than the amount payable under the standard accounting scheme
- There will be simplified administration as VAT does not have to be accounted for on each individual sales or purchase invoice.
- Cash flow can be managed as the VAT is a percentage of turnover
If a business fails to register for vat
A penalty is charged. It is a percentage applied to the VAT which should have been paid.
The minimum penalty is £50
Late or non-submissions/payments of VAT
- HMRC can make an assessment of the VAT which they believe is due. They then charge interest on the amount and record a default.
- If an assessment of VAT due is made by HMRC, which the business knows is too low, the business must report this to HMRC within 30 days of the assessment being made. A 30% penalty can be charged for not telling them it is incorrect within 30 days.
- For late submissions penalty points are awarded, with initial and subsequent penalty charges.
Adjustments can be made to correct previous VAT return errors if they are
- under £10,000 or less or up to 1%(maximum 50,000) of total value of sales and all other outputs excluding any VAT
- not deliberate
- for an accounting period that ended less than 4 years ago
Failing to correct VAT return errors properly:
can lead to a misdeclaration penalty and if errors are made repeatedly then that can lead to a repeated misdeclaration penalty. The penalty is 15% of the misdeclared amount
Any VAT calculation should normally be rounded…
Down, to the nearest penny (this concession is not available to retailers)
Input tax: business entertaining
Is not recoverable from HMRC. Does not include:
- Staff entertaining
- Entertaining of non UK-customers
- Expenses that relate to travel and subsistence
The recovery of input tax, where there is a mixed group of staff and non-staff being entertained, would be apportioned appropriately.
Input tax: Cars and vans
Car that isn’t exclusively used for business purposes: non-recoverable input tax. This includes the VAT on car accessories purchased at the same time.
Exceptions for cars used:
- exclusively for business purposes
- within a taxi business
- for driving instruction
- within a self-drive hire business
In the assessment, you will need to assume that the car has had some private use unless told otherwise.
When purchasing a van, as long as the van is used at least partly to make taxable supplies, then the input tax will be recoverable. For this reason, when the van is sold, output tax would need to be charged on disposal.
If a business is able to reclaim the input VAT on the purchase of a car, then VAT must be charged when the vehicle is sold
Fuel scale charge
An output tax charge to offset against the input tax reclaimed on fuel purchased for private use
Input tax: All road fuel purchased by the business and used for business purposes
Can be reclaimed
When a taxable person purchases fuel and it is used for private motoring by an employee or soletrader/partner, then this has an impact on the recoverability of the input tax. What are the options?
A. Ensure that the individual keeps sufficient mileage records so that the input tax on just the business miles can be recovered
B. Reclaim all the input VAT suffered on fuel but then account for some output tax using a set fuel scale charge per quarter. This scale charge is based on the CO2 emissions of the vehicle, and will be given to you in the exam if needed
C. Agree not to reclaim any input tax on fuel purchased for any(including commercial) vehicles
Partially exempt traders
When a business makes a mixture of taxable and exempt supplies, input tax attributable to exempt supplies may only be reclaimed subject to satisfying de minimis tests
Partially exempt traders can:
- Only charge output tax on their taxable supplies
- Reclaim the input tax on all purchases directly related to taxable supplies
- Can reclaim a proportion of input tax which is not directly attributable to taxable or exempt supplies, based on the following calculation:
Input tax not directly attributable to taxable or exempt supplies * value of taxable supplies made / total supplies made
The rest of the input tax is only recoverable if it is below the de minimis limit
De minimis
Input tax attributable to exempt supplies can be reclaimed if it is below the de minimis limit:
£625 per month on average and it is <=50% of the total input tax for the period
How are transactions between the UK and overseas suppliers treated differently depending on whether they are in or outside the EU
Following the UK’s exit from the EU, transactions between UK businesses and overseas customers and suppliers are all treated in the same way for VAT purposes.
Goods supplied to overseas customers are referred to as … and the VAT rate is always…
Exports
zero-rated(provided the trader obtains evidence of their export within 3 months)
Goods which are purchased from overseas countries are known as …
The VAT:
Imports
No VAT is charged by the supplier. When the goods enter the UK, the purchaser needs to pay the applicable rate of UK VAT.
Postponed accounting
- When a UK business imports goods into the UK, it works out the UK VAT that would be payable if they had bought them from a UK supplier. This is the Import VAT.
- The import VAT is then included on the UK trader’s next VAT return as both output tax and input tax, which makes the import VAT neutral for a taxable supplier.
It’s possible the old way of paying the Import VAT before customs would release the goods can still be possible, you should assume that postponed accounting is being used as a default
Reverse charge
The UK business that is purchasing adds the input tax they would’ve paid to the supplier, to their own output tax.
Repayment traders(e.g. zero-rated suppliers) VAT return:
May opt to complete a VAT return each month
Paper submission VAT return
You can only send your return by post or through your VAT online account if you have an exemption from MTD for VAT. For example if you:
- object to using computers on religious grounds
- do not have access to the internet
Time limit: One month from the end of the VAT period if it is a paper submission.
What can’t VAT be reclaimed on?
- Goods and services that are for non-business or personal use
- UK business client entertaining
- The purchase of a car(with a few exceptions)
- goods and services that relate to exempt supplies
How to claim bad debt relief
Add the amount of VAT to be reclaimed to the amount of VAT bring reclaimed on purchases(input tax) and put the total figure in Box 4 of the VAT return (VAT reclaimed in the period on purchases and other inputs)
“The past 12 months” means:
Up to the end of a calendar month, e.g. the 12 months ended 31st May 2024
Recoverability of input tax when cars are hired or leased…
50%
