M12: VAT & Stamp Taxes

Question 1

What is VAT and how is it applied?

Answer 1

VAT is an indirect tax on most business transactions aka Sales tax.

It is applied by businesses charging it on goods/services they sell

Question 2

What are the different rates of VAT?

Answer 2

1. Standard-rated - VAT at 20%
2. Reduced-rated - VAT at 5%
3. Zero-rated - VAT at 0%

Question 3

What is output VAT and how is it charged?

Answer 3

Output VAT is the VAT that businesses charge on the goods and services they sell.

Question 4

What is input VAT?

Answer 4

Input VAT is the VAT paid by businesses on their purchases.

Question 5

What are the requirements to recover input VAT?

Answer 5

1. A supply of goods or services
2. To a taxable person (i.e. the person must be registered for VAT)
3. For a business purpose
4. The claimant must have evidence of their purchase (i.e. a VAT invoice)
5. Input VAT on the supply must have been correctly charged, and
6. The goods and services being purchased must have a direct and immediate link with a taxable
   transaction.

Question 6

How does a business file a VAT return?

Answer 6

Submitting VAT returns every quarter through the Making Tax Digital service.

Question 7

How does a business calculate its VAT liability?

Answer 7

1. Calculate the output tax on sales for the return period.
2. Calculate recoverable input tax on purchases in the return period.
3. Net the two amounts off.

Question 8

When does a business have to register for VAT?

Answer 8

VAT registration is compulsory where a taxable person has made ‘taxable supplies’ in excess of the registration threshold (currently £85,000) under two registration tests.

VAT registration is only possible for businesses who make taxable supplies (i.e. standard, reduced, or zero-rated supplies). Business who only make exempt supplies cannot register for VAT.

Question 9

What are the two VAT registration tests?

Answer 9

Two tests determine whether registration for VAT is compulsory:

1. The historic test compares the cumulative taxable supplies (VAT-exclusive) over the last 12 months at the end of each month. If they exceed the £85,000 registration threshold, the business must notify HMRC of the liability to register within 30 days of that month-end.
2. The future test considers whether, at any time, taxable supplies (VAT-exclusive) within the next 30 days alone will exceed the £85,000 threshold. If this is the case, the business must notify HMRC of the liability to register within 30 days of that time and charge VAT from the beginning of that period.

Question 10

What are the advantages and disadvantages of voluntarily registering for VAT?

Answer 10

The advantages of voluntary registration include:
* Immediate entitlement to recovery of input tax
* Avoiding the possibility of a late registration penalty
* It may give an impression of ‘size and respectability’ to customers

The disadvantages of voluntary registration include:
* It puts prices up by 20%, which may be a problem where customers cannot recover input tax
* Extra administration costs and exposure to penalties for making mistakes.

Question 11

When a business becomes registered, what can they then claim for the prior years, for goods and services?

Answer 11

Businesses can reclaim input tax on goods purchased within the 4 years
before registration and still owned at the registration date. V

VAT on services purchased in the 6 months before registration can also be reclaimed when registered.

Question 12

When must a business deregister for VAT?

Answer 12

where taxable supplies in the next 12 months are predicted to fall below the de-registration threshold of £83,000.

Question 13

When do we recognise a sale or a purchase for VAT?

(Basic and actual)

Answer 13

We work out the basic tax point first and then apply the earlier test of payment/invoice. If not applicable, apply later test.

Basic tax point - when the goods are made available to the customer or when the services are performed.

Actual tax point - Invoice or payment date

For services that are continual its the earlier of payment and invoice.

Question 14

Explain how the earliest test work on working out when to include VAT in a VAT return

Answer 14

If payment and invoice occur before the basic tax point ((when it’s performed) then we use the earliest of the payment/invoice date as the time of supply.

If invoice is issued within 14 days of the date performed, then we can use the earliest of the invoice/payment instead of the basic tax point where it is later.

i.e. Performed 25 Nov, Invoice on 1st dec = Within 14 days and settles invoice 10th Dec. We can move date of supply to 1st Dec. If the invoice was not within 14 days. we would have used the performed date of 25 Nov.

Question 15

How does a VAT-registered trader deal with bad debts, and what are the rules?

Answer 15

The business can reclaim the output tax paid to HMRC on bad debts as input tax on the next VAT return as the tax may be payable to HMRC before the money is received.

BUT:
- Must be 6 months overdue payment
- Must be written off in the traders books

Question 16

What are stamp taxes?

Answer 16

Stamp taxes are charged on transactions involving shares and land and property. As the tax attaches to the transaction, both individuals and companies are subject to these taxes and follow the same rules.

Question 17

What is stamp duty?

Answer 17

Stamp duty on shares is paid by the purchaser and applies when a physical written document is part of the contract.

It is charged at a rate of 0.5% and is rounded up to the nearest £5.

Stamp duty is not chargeable where the value of a transfer is less than £1,000.

Question 18

What is stamp duty reserve tax?

Answer 18

SDRT applies to online share transactions processed electronically and is charged at a rate of 0.5% without rounding. It is automatically calculated and reported to HMRC when transactions are processed electronically.

Question 19

When does stamp duty not apply?

Answer 19

No stamp duty is payable on:
1. A transfer of shares to a trust
2. A lifetime gift of shares
3. A transfer of shares on marriage or civil partnership
4. A transfer of shares in relation to a divorce or dissolution of a civil partnership agreement
5. A transfer of shares left in a will

Question 20

How do we determine the amount on which to charge stamp duty?

Answer 20

on the consideration which is the amount paid in money or money’s worth (e.g. assumption or forgiveness of a debt) for the shares.

Question 21

What administration rules apply to stamp duty?

Answer 21

Share sales are recorded on a stock transfer form which must be sent to HMRC for stamping within 30 days of the transfer along with the stamp duty payable.

Question 22

What stamp taxes apply to land and property?

Answer 22

Stamp duty land tax (SDLT) is payable on transactions in land and property situated in England and Northern Ireland.

Land and buildings transaction tax (LBTT) is a devolved tax that is payable on transactions in land and property situated in Scotland.

• It’s charged on the purchase of land and property, or the grant or sale of a lease over land and property.

Question 23

When will a purchaser pay stamp duty land tax and when will they pay land and buildings transaction tax?

Answer 23

When they submit their SDLT/LBTT return to either HMRC or Revenue Scotland.

Question 24

How do stamp taxes apply to existing and new leases?

Answer 24

Existing: SDLT/LBTT will be due on the capital sum paid on the assignment/assignation (e.g. sale) of a lease.

New lease: Two transactions. One tax on the premium of the lease. Another tax on the NPV of the future rental payments.

Question 25

What administration rules apply to stamp taxes on land and property?

Answer 25

In England and Northern Ireland, a land transaction return must be completed online to report the transaction to HMRC. The deadline for this is within 14 days of the ‘effective date’ of the transaction.

An LBTT return must be submitted, and payment of tax made, before title to the land can be registered with the Keeper of the Registers of Scotland. The deadline for this is within 30 days of the ‘effective date’ of the transaction.

Question 26

Whats the rule with share penalties for not completing form/

Answer 26

If the return stock form is late but not more than a year it will be the lower of £300 or £325 + interest on the unpaid tax payable from the due date until the actual submitted date.