Seminar 10 Flashcards
what is VAT?
value added tax
an indirect tax on spending
who are required to charge VAT?
registered traders are required to charge VAT when selling goods/services
when selling goods/services to customers, which VAT must traders account for?
output VAT
what is the purpose of input tax?
input VAT allows traders to recover VAT on their purchases & expenses
who is VAT ultimately borne by?
VAT is borne by the end consumer who pays VAT when buying supplies but cannot reclaim input VAT on it
borne = ?
one is responsible to pay for a certain tax
when is VAT charged?
when a taxable supply is made by a taxable person
taxable person = ?
someone who should be paying for VAT
someone who is registered for VAT
who can be a taxable person?
can refer to a sole trader, a partnership or company as long as they supply goods/services
taxable supply = ?
any supply of goods/services which isn’t exempt nor outside the scope of VAT
what are the three categories of supplies?
outside the scope of VAT
exempt supplies
taxable supplies
supply of goods = ?
goods being passed from one person to another
examples of supply of goods?
a sale of goods to customers
gifting of assets (non-exempt)
goods taken out of the business by owner or employee for private use
supply of services = ?
any supply for money which isn’t a supply of goods
examples of supply of services?
sale of services
customer hiring goods
business services privately used by employee/employer
private use of fuel by owner/employee
which supplies are outside the scope of VAT?
payment of wages
dividends
sale of shares
(these supplies aren’t subject to VAT)
what supplies are exempt from VAT?
land
insurance
postal services
(these supplies aren’t subject to VAT)
what are the three categories for taxable supplies?
zero rated (0%)
reduced rate (5%)
standard rate (20%)
a taxable supply is…
a supply on which output VAT is chargeable and input VAT can be recovered
what is the difference between zero rated supplies and exempt supplies?
input VAT can be recovered on zero rated supplies
no input VAT can be recovered on exempt supplies
what are examples of zero rated supplies?
certain human foods & animal foods
books & newspaper (including digital versions of both)
dispensing of drugs/prescribed medicine
examples of reduced rated supplies?
domestic fuel
children’s car seats
which supplies are standard rated?
any supply which isn’t reduced rated is standard rated
which category of taxable supplies does ‘luxury food items’ fall into?
standard rate of 20%
most human foods fall into which category of taxable supplies?
zero rated
standard rate inclusive/exclusive calculation = ?
VAT inclusive = 1/6 x price
VAT exclusive = 1/5 x price
reduced rate inclusive/exclusive calculation = ?
VAT inclusive = 1/21 x price
VAT exclusive = 1/20 x price
what does the VAT inclusive price include?
taxable supply + VAT
what does the VAT exclusive price include?
only the taxable supply
taxable turnover = ?
total value of the taxable supplies made by a taxable person
when must someone register for VAT with HMRC?
if their taxable turnover is over £85,000
when doesn’t someone have to register with HMRC for VAT?
if their predicted taxable turnover for the following 12 months won’t exceed the deregistration threshold of £83,000
when is registration for VAT also required, besides exceeding £85,000 taxable turnover?
if its predicted that taxable turnover will exceed the registration threshold (£85,000)
when must one notify HMRC of their liability to register for VAT?
if taxable turnover for previous 12 months exceeds registration threshold (85,000), the person must notify HMRC within 30 days of the end of the month in which the threshold was exceeded
when does registration for VAT take effect?
after the end of the month following the month in which the threshold was exceeded
e.g., threshold was exceeded in March… after the end of April, VAT will be in effect
if a person believes that taxable turnover for the next 30 days will exceed 85,000, what should they do?
notify HMRC by the end of the 30 day period
a person who fails to apply for VAT registration…
is still liable to account for output VAT on taxable turnover from the compulsory registration date, as if the registration had taken place at the correct time
how is taxable turnover treated?
(VAT inclusive or VAT exclusive amount?)
VAT Inclusive amount is what is regarded as the taxable turnover
if taxpayer fails to notify HMRC of the liability to register…
a penalty is payable
can a person under the registration threshold still register for VAT with HMRC?
yes
often to make it look like they sell taxable supplies worth more than £85,000
it also enables them to collect input VAT, but means output VAT must be charged to customers
under what conditions can a registered person deregister voluntarily?
if HMRC is convinced that taxable turnover won’t exceed 85,000 in the next 12 months
when is compulsory deregistration triggered?
when a person ceases trading
or if a person’s legal status changes (e.g., sole trader gets married)
what are the consequences of deregistration?
the person is deemed to make a supply of all the tangible assets of the business & output VAT is charged on this
assets on which no input tax was reclaimed are excluded from the deemed supply and output and the output tax due isn’t collected if it doesn’t exceed £1,000
the deemed supply doesn’t take place if the business is sold
time of supply = ?
tax point
the date of supply on which VAT is due
basic tax point = ?
goods: when made available to the customer
services: when completed
actual tax point = ?
the earlier of the invoice date or the date of the payment
when is actual tax point used?
if invoice is issued or payment is received before the basic tax point (before goods/services are provided)
or if tax invoice is issued within 14 days after the basic tax point
e.g., goods provided 01/04, invoice issued 09/04… invoice issuance date of 09/04 is used (actual tax point)
if a deposit is paid, what is the tax point?
the deposit date is its own tax point, and there’s a separate tax point for the balancing payment
value of a supply = ?
the figure on which VAT is calculated
usually the VAT exclusive price charged to the customer
what is the value of a supply when the supply is a gift of assets?
the VAT exclusive amount that would be payable by the person making the supply at that time to purchase goods (replacement cost)
if the customer gets a discount for prompt payment, what is the value of the supply?
the value of the supply is the price charged less any cash discount taken by the customer
this rule only applies to prompt payment discounts
the issue is that it’s unknown at the point of invoice whether or not prompt payment will be made
what are the 2 approaches that can be made to prompt payment discounts?
you can charge VAT on undiscounted amount, then issue a credit note if prompt payment is made
OR
the initial invoice can contain the terms of the discount & state the customer can recover the VAT paid as input tax
how is fuel provided for private motoring by employee/employer charged?
charged at a scale rate
what is the fuel scale charge solely based on?
the CO2 rating of the car and represents the VAT inclusive value of the fuel supplied
how is output VAT accounted for?
output VAT is accounted for according to the tax point and therefore may be payable before payment of an invoice has been received
where an invoice hasn’t been paid for more than 6 months after the due date and the bad debt has been written off, what happens?
bad debt relief is available
when must bad debt claims be made?
within 4 years of the time the debt became eligible for relief
the VAT is reclaimed in the supplier’s VAT return together with input VAT on purchases
under what condition can one receive input VAT?
goods/services must actually be supplied
input VAT recoverable must be supported by an invoice
goods/services must be used for business purposes
what happens when goods/services are partially used for private use?
can either deduct all input tax & account only for output tax with respect to private use
OR
deduct only business proportion of input tax
(when services are bought for private use partially, only the second method can be used)
is input VAT recoverable on fuel supplied for private use?
yes, when the VAT scale charge for output tax applies
is input tax on assets purchased for private use by employees allowable?
yes
for which assets are input VAT not recoverable?
motor cars (unless exclusively used for business purposes)
goods & services used for entertaining
non-business items
items for which no VAT receipt is held
can input VAT be recovered on goods supplied in the 4 years before registration?
yes
the goods must have been supplied for business use, and must still be on hand (in possession) at the point of registration
can input VAT be recovered on services supplied 6 months before registration?
yes
the services must have been supplied for business purposes
