LO1 Flashcards
When must a business register for VAT?
When it reaches the HMRC turnover limit of £85,000.
What must VAT-registered businesses do regarding sales?
Charge VAT on sales at the relevant percentage.
What can VAT-registered businesses reclaim?
VAT on business-related purchases and expenses.
What are Zero-Rated VAT items?
Items with a VAT rate of 0%, still recorded on VAT returns.
Give examples of Zero-Rated goods.
Basic foods (e.g., bread, milk), children’s clothing, passenger transport, books, magazines, and newspapers.
What is a VAT Return?
A form submitted to HMRC showing the VAT charged on sales and reclaimed on purchases.
What are VAT Rates?
Different percentages of VAT applied depending on the type of goods or services.
What are VAT Exemptions?
Items or services not subject to VAT, still recorded in VAT returns if the business is VAT-registered.
What are Zero-Rated items?
Items taxed at 0% VAT but included in VAT returns.
Give examples of Zero-Rated items.
Basic foods (e.g., bread, milk), children’s clothing, passenger transport, books, magazines, and newspapers.
What is the Reduced Rate VAT?
A VAT rate of 5% applied to certain items.
Give examples of Reduced Rate items.
Domestic heating (e.g., oil, gas, electricity), children’s car seats, mobility aids for the elderly.
What is the Standard Rate VAT?
The most common VAT rate, set at 20%.
Give examples of Standard Rate items.
Alcoholic drinks, catering, soft drinks, stationery, adult clothing, business utilities.
What are Exempt items?
Items with no VAT but recorded in VAT returns if the business is VAT-registered.
Give examples of Exempt items.
Insurance, health services, education, lottery ticket sales.
What are Out of Scope items?
Items not subject to VAT and not recorded in VAT returns.
Give examples of Out of Scope items.
Wages, bank transfers, payments to suppliers, and customer payments.
What does VAT Exclusive mean?
The amount before VAT is added; also known as the net amount.
What does VAT Inclusive mean?
The total amount after VAT has been added; also known as the gross amount.
What is the VAT Fraction for 20% VAT?
1/6.
How do you calculate VAT for a 20% rate?
Divide the gross amount by 6.
Provide an example of VAT calculation for a 20% rate.
Net amount £100, VAT £20, Gross amount £120.
What is the VAT Fraction for 5% VAT?
What is the VAT Fraction for 5% VAT?
Provide an example of VAT calculation for a 5% rate.
Net amount £200, VAT £10, Gross amount £210.
How do you check VAT calculations?
Multiply the net amount by 105% or 120% to check gross amount accuracy.
What is the VAT Exclusive amount?
The amount of a sale or purchase before VAT is added; also known as the net amount.
What is the VAT Inclusive amount?
The total amount after VAT has been added; also known as the gross amount.
What is the Net Amount?
The original amount before VAT is applied.
What is the Gross Amount?
The final amount after VAT has been included.
How do you calculate Gross from Net?
Add VAT to the net amount. For example, Net £100 + 20% VAT = £120 Gross.
How do you calculate Net from Gross?
Use the appropriate VAT fraction to extract VAT. For example, for 20% VAT, divide the gross amount by 120% to get the net.
Why is understanding VAT Exclusive and Inclusive amounts important?
It helps businesses determine VAT liability and accurately report VAT in returns.
How does VAT affect pricing?
Businesses decide whether to quote prices inclusive or exclusive of VAT, affecting final pricing for customers.
