lecture 7 - VAT

Question 1

what does it mean for VAT to be a top line tax?

Answer 1

paid on sales revenue rather than profit. indirect, no consideration of taxpayer circumstances

Question 2

when was VAT introduced/what are the principles?

Answer 2

introduced in 73 because UK joined EU (then the EEC). replaced purchase tax.

despite being simple tax in theory, is complex to apply in practice

legal basis is VATA 94 and finance acts, administered by HMRC

significant policy tool and revenue raiser for UK gov (one of top 3 revenue generators).

indirect, primary consumption/expenditure tax in UK. borne by final consumer.

charged whenever taxable person makes a taxable supply of goods or services in course of business at each stage in a supply chain for any taxable supply.

tax on turnover, not income or profit

Question 3

what is a taxable supply?

Answer 3

all forms of supply made for consideration (excl those not taxable by legislation) - all goods and services exchanged for remuneration. assume VATable unless specified not.

Question 4

what goods fall under ‘taxable supply’?

Answer 4

goods used for private purposes

goods lent to someone outside the business or hired to someone

business gifts unless: costs less than £50, or is made in course of furtherance of business. OR a gift to an actual or potential customer of the business of an industrial sample which is not ordinarily available for sale to the public.

Question 5

when has a taxable supply occured?

Answer 5

taxable supply considered to have occurred once ownership of asset being supplied transfers from one person to another. actual physical transfer may happen after supply has been made. supplies of services have occurred for VAT purposes once service has been carried out.

Question 6

what costs to the trader do VAT introduce?

Answer 6

as long as all input tax is recoverable, only impact is admin cost and any impact on cashflow between when they pay input tax and receive output tax. some types of input tax are not recoverable, however, and this will be cost borne by trader

Question 7

how is the value of a taxable supply decided?

Answer 7

if supply is for a consideration in money, VAT should be added to price charged. for payments in kind, money value of the consideration = the VAT inclusive price.

market value of a supply of goods/services = amount which would be payable by a person in an arms length transaction.

if business makes a taxable supply to a connected person the VAT will be due on the price that would have been charged on the supply had this transaction been with an unconnected recipient.

Question 8

what is a taxable person?

Answer 8

anyone who is, or should be, registered for VAT. if you should be but aren’t, you’re still liable. Can be individual, partnership, company, club, association or charity.

Question 9

when are you liable to register for VAT?

Answer 9

at the end of any month the value of the goods he supplies to date in a twelve month period exceeds the registration threshold (£85,000)

at any time if there are reasonable grounds for believing taxable supplies in the next 30 days will exceed the threshold level. (future prospects rule)

Registration will be effective from the end of the month following the exceeding of the registration limit. If the limit is exceeded in January, registration will be effective from the end of February

Question 10

what is a registered trader and when should they start charging VAT?

Answer 10

registered trader = sole trader, partnership or company who is registered for VAT. failure to register carries severe penalities as well as liability to pay VAT that should’ve been accounted for.

should start charging VAT as soon as turnover exceeds registration limit, but should not issue VAT invoices until receives formal registration.

Question 11

what happens if you fail to register at the correct time?

Answer 11

if fail to register at correct time, will still be liable to account for the VAT
if can’t recover VAT from his customers he will have to pay himself and his sales value will be assumed to be gross of VAT.
e.g. sales of £120 where profit is £20. if failed to register, must pay £20 to HMRC. this eliminates profit, also liable to interest and penalties.

Question 12

what VAT can be recovered on initial registration?

Answer 12

recover VAT on assets used in business for resale that were bought in previous 4 yrs and on services received in 6 months before registration. can recover in first tax return, or any time within first 4 yrs of reg

Question 13

what are the requirements for VAT?

Answer 13

charge output tax on his taxable supplies - standard rate = 20%
can recover input tax he’s charged on his inputs (supply of any business goods or services).

Question 14

what is input tax? what is it paid on?

Answer 14

VAT a taxable person has to pay on:

supply to them of any goods/services

acquisition by them of any goods from another EU member state

the importation of any goods from a place outside the EU provided that the goods or services are, or will be, used for the purposes of a business carried on by the taxable person.

Question 15

what is output tax?

Answer 15

VAT charged on taxable supplies made. difference between input and output is the amount they pay to HMRC.

Question 16

what are the advantages of voluntary registration?

Answer 16

input tax can be reclaimed

status of VAT registered company (appear bigger)

VAT registered customers can reclaim output tax charged to them

Question 17

what are the disadvantages of voluntary registration?

Answer 17

non-VAT registered customers will have to bear VAT cost (only matter if customer is not registered, because if registered they won’t pay the VAT on the inputs).

may lose competitive edge with non-registered customers (as they have to suffer output tax). admin burden of registration also important.

tax status of customers is important factor when deciding whether voluntary reg likely to be beneficial.

Question 18

when is de-registration voluntary vs compulsory?

Answer 18

will be compulsorily de-registered if cease to make taxable supplies

can voluntarily de-register if can demonstrate level of supplied in next month won’t exceed deregistration limit of 83,000.

cannot voluntarily de-register if not already registered
cannot claim to be voluntarily deregistered if intend to cease to trade (will be compulsory when trade ceases), or if there will be a suspension of taxable supplies for a continuous period of 30 days or more in next 12 months. registration cannot be suspended by trading inactivity alone.
date of voluntary dereg = later of date on which request is made, or an agreed date between HMRC and trader.

Question 19

how does seeking VAT exemption work?

Answer 19

if expect turnover to exceed the limit for only a short period can seek exemption at HMRC’s discretion
have to demonstrate that over the next twelve months turnover is not expected to exceed dereg threshold.
if fail to gain exemption then liable to VAT from end of month in which reg threshold exceeded

Question 20

Mark Mills-Henning v Revenue & Customs Commissioners (2012)

Answer 20

contractor whose turnover exceeded VAT threshold, argued he didn’t need to register as believed it was temporary. HMRC won on basis that they have to be satisfied turnover won’t exceed threshold, and mere possibility of it not exceeding wasn’t sufficient

Question 21

what is disaggregation?

Answer 21

legislation exists to prevent avoidance of reg by having >1 business (disaggregation) using a combined turnover rule – i.e. you can’t separate your businesses to keep them under the VAT threshold.

closely bound? financial, economic, organisation links.

Question 22

tax planning points relating to VAT?

Answer 22

monitor monthly turnover
register early
consider disaggregation - with care

Question 23

what are the VAT rates?

Answer 23

standard 20%
zero 0%
lower 5%

calculating VAT
VAT = gross of VAT amount/6
net of VAT= 5/6*gross amount.

Question 24

what are zero rated supplies?

Answer 24

charge VAT on output at 0%

zero rated supplies:
Group 1 = food (except catering services, ice cream, beer & pet food - all standard rated)
Group 2 = Sewerage services and water supplies
Group 3 = Books
Group 5 = Construction of Buildings
Group 12 = Drugs & medicines
Group 15 = Charities
Group 16 = Children’s Clothing & footwear
plus more

classification or excl of supplies into/from groups gives rise to lots of disputes for HMRC.

businesses making zero rated supplies can still register and reclaim input tax as taxable person. business therefore prefer to make zero rated than exempt supplies.

Question 25

what are lower rated supplies?

Answer 25

some items that normally would be standard rated get a special concession rate applied to them
taxed at 5%

Domestic/charity fuel or power
Installation of energy saving materials in the home/charity (e.g. loft insulation)
Children’s car seats
Some conversions of non-residential property to residential

VAT fration on reduced rate items = 1/21.

Question 26

what are exempt supplies?

Answer 26

schedule 9 of VATA

Group 1 = Land
Group 2 = Insurance
Group 3 = Postal services
Group 4 = Betting, gaming and lotteries
Group 5 = Finance
Group 6 = Education
Group 7 Health and welfare
plus lots more

business making any exempt supplies cannot charge VAT on supply to a customer. if they only make them, they cannot register for VAT and cannot reclaim any input tax paid. essentially become final consumer in supply chain and bear full VAT costs.

Question 27

how does VAT work for cash discounts and self-supply?

Answer 27

cash discounts
VAT payable on full consideration paid.

self-supply
self-supply = trader produces marketable output and instead of selling it, uses it during course of business. output tax must be charged as if supplying to third party, input tax charged only reclaimable up to output tax they charged themselves on the supply.

Question 28

what is partial exemption?

Answer 28

if output consists of taxable and exempt supplies, only input tax relating to taxable outputs is recoverable. trader cannot reclaim input tax on goods or services purchased that went into making exempt output supplies, this type of trader = partially exempt.

Question 29

how is VAT on cars calculated?

Answer 29

Generally, input tax on cars cannot be claimed - deemed to be an element of private usage
No output tax on car when sold, unless sold at profit when VAT due on profit
exceptions where VAT can be claimed: acquired new and intended to be sold, intended to be leased to or used in taxi business/self drive hire business/driving school. accessories must suffer the same treatment, unless acquired and fitted after car acquired, in which case input VAT can be reclaimed provided expenditure is for business use.

Question 30

how is VAT on travelling/car maintenance costs calculated?

Answer 30

provided car owned by a business and used for some business purposes, VAT on full cost of repair and maintenance costs is reclaimable, even if car also partly used for private purposes. VAT for fuel reclaimable even if fuel paid for by an employee who is then reimbursed. if fuel provided and employee doesn’t fully reimburse, business has made taxable supply of fuel to employee. if business chooses not to try to reclaim input tax they do not have to account.

Question 31

how is VAT on bad debts calculated?

Answer 31

if customer doesn’t pay, trader can obtain a refund of amount of tax chargeable on debt. when trader has supplied and has accounted for and paid tax on supply, if either whole or part of debt subsequently written off in accounts as an impairment loss and a period of 6 months from the date on which payment was due has elapsed, trader entitled to a refund of output tax paid.
traders must also repay input VAT reclaimed on supplies which they didn’t actually pay for and on which bad debt relief is then claimed.

Question 32

how is VAT on capital expenditure calculated?

Answer 32

not differentiated from revenue expenditure for VAT purposes
input tax therefore fully recoverable when money spent - capital items not spread over several years. when capital asset disposed of, VAT charged on disposal price just as any other taxable supply
exception = cars where input tax rarely reclaimable
Great for tax planning – further reducing the net cost of investment. Can also trigger capital allowances

Question 33

how is VAT on imports calculated?

Answer 33

goods - charged and payable as if customs duty. VAT due and any associated customs duty on imports often paid at same time. a registered trader can reclaim duty paid as input tax in the normal way. anti-avoidance rules encourage online marketplaces to police tax compliance behaviour of those they allow to trade using their services.
services - reverse charge system. the recipient trader treats the supply received as if they were also the supplier. account for notional output tax, which becomes actual input tax on supply.

Question 34

how is VAT on exports calculated?

Answer 34

Supply of goods zero rated if HMRC satisfied that the person supplying the goods has:

Exported them to a place outside the UK or
 
Shipped them for use as stores on a voyage or flight to an eventual destination outside the UK, or as merchandise for sale by retail to persons carried on such a voyage or flight

Question 35

what is specifically disallowed for input tax?

Answer 35

Business entertainment, unless expense allowable for income tax or corp tax purposes
Living accommodation
Non business items

Question 36

how do VAT returns work?

Answer 36

registered traders will pay and collect VAT over a tax period. they must submit vat return, together with vat payable, within 1 month and 7 days of end of a tax period.

tax period = length of time covered by VAT return. normally 3 months, and ends on last day of month. can shorten to 1 month, good for those whose input tax>output tax regularly - but pushes up admin costs.

transaction must be accounted for in tax period in which tax point occurs. subject to relevant rate of VAT prevailing on date of tax point.

if input>output, repayable to business. if output>input, send diff to HMRC.