SA 2 Flashcards
Is VAT chargeable on gifts?
Gift of goods is VAT chargeable
Gifted supply of services is not
(so pro bono work is NOT vat chargeable)
What supplies are exempt from VAT
- land (except new commercial sales and leases of comm prop which opted to be taxable)
- insurance
- some postal services
- finance
- health services
- burial and cremation
examples of zero-rates supplies
water, food, books, international services and transport
examples of reduced rate vat supplies and what rate are they reduced at?
5% chargeable VAT
- mobility aids
- domestic fuel
- installing energy-saving materials
- things that help stop smoking
- renovation
- some dwelling and residential conversions
- children’s car seats
- carrycots with restraint straps
can you voluntarily register for VAT? if so why would you?
yes
recover input tax
Is a person (inc company) a “taxable person” if make
a) only exempt supplies
b) taxable and exempt
A) no - can’t recover input
B) partly exempt - recover proportion input
if no VAT included in quoted price, what is the customer liable to pay?
just the fee quoted and business will have to pay VAT from that
What will time of supply (ie tax point) be?
Time at which:
- goods removed or available for purchaser
- or services completed
Exceptions:
- if supplier issues tax invoice 14 days after basic tax point, then date issued becomes tax point
- extension agreed with HMRC
(e.g. solicitors - 3 month to deliver bills / date bill = tax point)
- if issue tax invoice or receive payment BEFORE basic tax point, that date will become tax point
What does ‘time of supply’ determine?
(clue: it’s about quarters)
- quarter at end of which liable to account for output tax (supplier)
- quarter during which can claim input tax on supply made to them (customer)
why are tax invoices so imp?
can’t recover input tax without
How long does a taxable person have to provide a tax invoice (basic rule)?
30 days after time of supply
What must tax invoice contain?
- identifying number (VAT number)
- the date of the supply, ie the tax point;
- the supplier’s name, address and VAT registration number;
- name and address of recipient
- type of supply, eg sale, hire;
- description of the goods or services supplied
- quantity goods/extent of services and amount (exc VAT) payable for each description
- total amount payable (exc VAT)
- rate of cash discount; and
- rate and amount of tax charged
When must taxable person submit return form to HMRC and what must it contain and have attached?
within one month after end of each quarter
contain
- output tax charged (eg to clients)
- less input tax suffered (eg by suppliers)
- amount due to HMRC
attach: payment for tax due
Will VAT be charged on disbursements paid by law firms?
no,
as long as paid purely as AGENT of client
and conditions met:
- for client not solicitors use
main one!
- client authorised you to pay
- client knew goods or services paid for would be provided by a TP
- recover only exact amount owed to TP
- dibs clearly additional to your own supplies
(not if you have used TP to assist supply of own services eg assisting you in interpreting client maybe?)
Examples of legal disbursements which will not be VAT chargeable?
Disbursements (not VAT chargeable):
- client responsible for payment
(e.g. IHT, capital gains tax, estate agents fees and stamp duty) - statutory charges
(eg stamp duty, court fees, land registry fees) - professional services of a TP
(e.g. Counsel’s fees, estate agents, surveyors)
Examples of things in law firms which WILL NOT be a disbursement (even though may seem it) and so not VAT-chargeable?
- CHAPS/telegraphic transfer fees
- solicitor’s expenses (e.g. fuel) - treat as part of overall charge (!!!!!!)
(e.g. travel expenses, not dibs, but not meant to charge for as separate expense - same with overheads like photocopying, UNLESS loads of it like lots of photocopying) - necessary part of client offering
e.g. telephone charges, postage
(shouldn’t even charge client for this unless loads of it)
e.g. A firm’s professional charges for acting for a client are £1,000. The firm has paid £50 for train fares in connection with the client’s transaction.
- would be £200 not £210 VAT chargeable to client
Will search fees be dibs (and therefore not VAT-chargeable)?
if info from search passed to client w/o comment, then yes
unusual - so usually part of services and subject to VAT
official copy entries defo NOT dibs
What are non-disbursements?
Payments made to third parties by firm which do not fall within disbursements definition
(also known as recharges)
Part of firm’s chargeable supply
How are non-disbursements treated in law firm’s accounts?
(TP payments which don’t fall in dibs definition)
- things like postage are just overheads, so just make sure bill covers
- search fees:
CR cash account (business)
DR client ledger (business)
(or could DR searches acc but not got record for each client then)
DR HMRC (if taxable - usually are)
Difference between whether tax from non-disbursements will be treated as input or output tax by solicitors?
Output = if supplier did not charge VAT
(bcos client is paying VAT only on legal fees, which wouldn’t have otherwise)
Input = if supplier did charge VAT
(nb there will be no difference to client - there will be vat regardless if non-disb)
What are client non-taxable disbursements and how will they be paid by law firm?
Payments for something not subject to VAT
e.g. exempt supplies and supplies NOT in course of business (e.g. court fees/stamp duty/LR fees)
{basically all except if disb is provided by taxable person eg surveyor}
Firm pay out of client account (or business acc if not enough)
No VAT charged to cl or paid
Explain when law firm disbursements will inc a VAT element?
(even though satisfy HMRC definition of disbursements)
fees of taxable person
- usually surveyors/estate agents etc
law firm doesn’t charge any additional VAT (bcos satisfied disb definition)
but the taxable person does
If a law firm disbursement includes a VAT element (from original supplier), what are the two ways the law firm will treat the disb?
What will decision be governed by?
- Agency basis
- principal basis
If addressed to client, agency basis
Explain the ‘agency basis’ for paying VAT-chargeable dibs?
What is it and how is it recorded on firm accounts?
Invoice addressed to client - VAT simply passed on to client
Firm pays supplier on behalf of client
No entries on HMRC and do not separate tax amount
DR cl ledge cl side
CR cash acc cl side
(or business side for both if not enough in cl account)
Cl can reclaim input if taxable person - must pass invoice to them if taxable person
Explain principal method for law firm’s payment of dibs?
(when will it be used, effect on who claims input, how must be paid and billed)
Dibs is for taxable supply and invoice addressed to firm
Means supply treated as made to the firm
Law firm can claim input, client cannot
Charge client output tax on dibs:
e.g. surveyor’s invoice of £200 + £40 VAT. own legal fees are £400 + £80 VAT.
send invoice to client with surveyor’s fee and prof charges separate, but output tax added together.
How must law firm pay dibs under principal method?
Inc what ledger entries?
MUST use business money to pay fees AND tax
CR: dibs and VAT: cash (business side)
(can show together or sep)
DR client ledger business side
DR HMRC
What ledger entries principal method once bill issued?
DR client ledger business side,
(VAT and costs as two separate amounts)
CR HMRC with total VAT
(for VAT on dibs and professional fees added together)
CR profit costs with firm’s costs
Do you need to issue a single or separate invoices for payment of disbursements under principal method?
Single invoice
Are Counsel’s fees treated on principal or agency basis?
Agency
(due to HMRC concession)
Firms can alter fee notes so addressed to client
What do Rules state on whether law firms need to account to clients and third parties for interest on money held for them?
Have to account FAIR SUM
Unless have an arrangement with them, based on informed consent
How does firm determine whether interest need to be paid to clients and third parties / how it’s to be calculated?
Do Rules stipulate this?
Rules don’t state so individual firms own policy
Consider in what circumstances fair to account to client and how to calculate
Usually will account for interest unless below some reasonable level
Terms of policy should be given to client at start of retainer, unless continued relationship
Two ways law firms can deal with interest?
(clue: relates to bank accounts)
- Pay client money into general client bank account
(use own policy to decide whether to transfer and how to calculate) - Pay into separate deposit bank account, designated to that client
(account to client for all interest earned on it)
Considerations for firms re opening separate designated bank account vs just paying into general client account?
(for interest purposes)
Sep designated accounts:
- administratively inconvenient if had for each client
- bank calculates and that exact interest goes to client
(good for best interests etc)
General cl account:
(more likely)
- bank doesn’t calculate
- have to pay appropriate amount in lieu of interest from BUSINESS bank account
- but if paying via general account, statute permits keeping remaining interest
(after paid fair sum)
- more money kept in general account, more interest will accrue
