Output Tax And Input Tax Flashcards
Describe the tax point
- The tax point determines the date that VAT is charged (and is therefore due to HMRC), and also the date VAT can be reclaimed as input VAT by the customer.
- The basic tax point is the date the goods were dispatched to the customer or the date the services were provided.
- The basic tax point can be overridden if the payment date or invoice date is earlier (actual tax point).
How do you decide on the tax point? (On reference sheet)
3 things to consider:
1. Date of dispatch
2. Date of payment
3. Date of invoice
Check date of dispatch as this is the basic tax point.
- If dispatch date is the earliest date, check invoice date. If invoice date is within 14 days of basic tax point, then invoice date becomes the tax point.
- If invoice date is not within 14 days, basic tax point stands.
- If payment date is earliest this will be the tax point.
- If invoice date is earliest this will be the tax point.
Why might discounts be offered?
- For loyalty
- To encourage customers to buy in bulk
- Being a trade customer
- Paying invoice promptly
What does it mean when a business offers to pay the VAT?
- The amount the customer pays which is advertised as the net VAT price is treated as the VAT inclusive amount.
- In this scenario, the business isn’t actually paying the VAT, they are just reducing their gross selling price to the pre-discount net figure.
- If £300 is the net price plus VAT of £60, this discount would reduce the amount to £300 VAT inclusive, with £50 VAT.
Describe prompt payment discounts (PPD)
- Prompt payment discounts are conditional discounts offered as an incentive to the customer to pay the invoice earlier than the standard payment terms.
- The discount will be given on the invoice value if payment is made by a set date.
- Since business doesn’t know whether customer is going to take up this discount until the amount is settled, the discount cannot be deducted at point of invoicing.
- On issuing a VAT invoice offering PPD a supplier should enter invoice into their accounts and record the VAT IGNORING the PPD.
- If full amount is received without PPD, no adjustment is necessary. If discounted price is paid in accordance with the PPD terms, the supplier must adjust their records to reflect the actual amount received.
What are the two methods HMRC allows to adjust records if a prompt payment discount is taken up by a customer?
- A credit note can be issued for the reduction in consideration
- If supplier doesn’t wish to issue a credit note, the original invoice must include the following information:
- Terms of PPD (including time and discounted price)
- A statement that the customer can only recover as input tax the VAT actually paid to the supplier.
Describe bad debts with relation to VAT
- Using tax point tules, any sale made on credit will be accounted for on the VAT return when the goods are dispatched/invoice is issued meaning output VAT may be paid over before payment is received.
- If customer never pays, business will not have collected the VAT on behalf of HMRC.
- As it has already been paid to HMRC as output VAT it can be reclaimed as input VAT.
What 4 conditions must be met in order to make a reclaim of VAT on bad debts?
- The debt is more than 6 months old and less than 4year6months overdu
- Debt has been written off in the books
- Debt has not been sold to a factoring company
- The VAT has been paid to HMRC, the VAT on the bad debt side will be shown as an increase to INPUT VAT.
The amount of VAT on the bad debt is ___ to the ___.
- Added
- Input VAT
What happens if a business has vehicles which are used privately as well?
The business is only allowed to reclaim VAT on fuel which is used for business purposes.
How can a business claim back VAT used on fuel for business purchases (3)?
- Keep detailed records of business and private use and just reclaim VAT on fuel used for business purposes.
- Do not reclaim VAT — useful if mileage is low and if fuel is used for both business and private motoring. If business chooses this option is must apply it to all vehicles, including commercial ones.
- Reclaimable all the VAT for road fuel and pay the appropriate fuel scale charge
What is fuel scale charge?
- It could be virtually impossible to identify what fuel relates to business use and what relates to private use, so fuel scale charge makes this process more manageable.
- Fuel scale charge is the amount which will be ADDED to OUTPUT VAT.
- As business reclaims the full amount of VAT in respect of fuel purchased as input VAT, the scale compensates for the private use included within this by increasing output VAT.
- A business can reclaim all the input VAT it pays in respect of fuel purchased for cars, provided it has the invoices.
Describe how the fuel scale charge is operated
- The scale charge determines an amount of VAT which must be included as output VAT.
- The amount of the scale charge will be dependent on the CO2 emissions of the vehicle.
- The net figure will also be added to sales and other outputs on the VAT return.
Once the scale charge is determined, what is the double entry?
Dr Motor Expenses
Cr VAT control a/c
If the CO2 emission figure is not a multiple of 5, what do you do when dealing with the table?
Round down to the next multiple of 5 to determine the level of charge
What does ‘VAT inclusive consideration mean’?
Gross amount of the adjustment — the amounts shown are VAT inclusive, you must work out the VAT to figure out what will be added to the output tax on the VAT return.
Describe irrecoverable input VAT
- ‘Blocked expenses’
- Business entertainment (VAT on any entertaining of customers/suppliers is not allowable).
- However VAT incurred overseas when entertaining can be reclaimed.
- Staff entertainment is recoverable, so if VAT is incurred on entertaining a mixed group of both employees and non-employees, only the proportion of VAT relating to the employees and overseas customers can be recovered.
- Cars —> VAT on cars with any element of private use is not recoverable, e.g., travel between home and work (so generally the cost to the business of the car is the gross), if the business is not able to recover the VAT on purchase of the car no VAT is charged when car is sold. If car has no private use, e.g., taxi then input VAT can be recovered.
- If a business hires or leases a car, they can usually recover 50% of the input VAT.
- VAT on commercial vehicles such as lorries and vans can usually be recovered.
What happens when as asset is purchased for both private and business use?
VAT recovery should be based on the proportion related to business use.
If business goes on to sell the asset, only the business proportion is subject to VAT.
If VAT is irrecoverable, it is added to the cost of the expense or asset as appropriate.
Input VAT can only be recovered if it is attributable to ___ ___
Taxable supplies
What are 3 rules which must be followed by businesses that have a combination of taxable of exempt supplies?
- Any VAT on purchases which can be fully attributable to taxable supplies will be fully recoverable.
- Any VAT on purchases which are fully attributable to exempt supplies will be irrecoverable (unless they are ‘small’ - fall below the de-minimis limit).
- Any VAT on purchases that cannot be attributed to either taxable or exempt supplies will have to apportioned. An example of this could be the cost of shared services. This is called residual input tax.
Describe the de-minimis rules
- All amounts left as irrecoverable are then considered to see if they meet the de-minimis rules.
- If they do, they can be recovered.
- You can claim all of the exempt input tax back if it £625 or less per month AND less than 50% of all input VAT.
