Tax 6: VAT

Question 1

What goods and services are exempt from VAT?

Answer 1

Supply of
- land
- insurance
- financial services
- education
- heath
- postal services

Sales of
- company shares
- a business as a going concern

Question 2

What is the VAT rate

Answer 2

Generally 20%

Zero-Rated supplies (0%)
- food (not catering)
- books
- newspapers
- water and sewage services
- transport
- residential construction

Reduced Rate (5%)
- domestic fuel
- installation of energy saving material
- child car seats

Question 3

When must a business register for VAT

Answer 3

When sale of non-exempt goods within 12 month period exceeds £85,000
- or voluntarily if they want to

Historic Test
- looks back past year (every month) to see if surpassed threshold
- must notify HMRC within 30 days (after which they charge VAT)

Future Test
- if expected to exceed threshold in next 30 days alone
- must notify HMRC before that 30 day period expires
- will be registered and VAT charged from date was aware it would exceed threshold (will include period)

Question 4

Do you need to charge VAT on the sale or lease of land?

Answer 4

No

However, owner of interest in commercial land and buildings have option to charge VAT.
- once exercised it applies to all future supplies to that land (selling it, leasing it etc.)

Revocation
- can change mind in 6 months provided option has not been exercised
- otherwise irrevocable for 20 years with consent of HMRC
- new owner not bound

Question 5

Is VAT chargeable to construction of commercial buildings?

Answer 5

YES
- also to sale if building is less than 3 years old

Question 6

When is VAT accountable for?

Answer 6

1 month after end of each VAT quarter.

Question 7

What is a VAT tax point? What determines when the tax point is?

Answer 7

Tax point decides in which VAT quarter the VAT needs to accounted for.

Use basic tax point unless invoice is issued according to rules

Basic Tax Point
- time of delivery of goods; or
- time service is performed

Invoice Date used instead (become new tax point) if
- supplier issues VAT invoice or receives payment before basic tax point
- VAT invoice is issued 14 days after basic tax point

Question 8

What must be included in a VAT invoice?

Answer 8

Must always be given to all customers:

• supplier VAT number
• the tax point
• value of supply
• rate of tax charge

Question 9

What restrictions are there reclaiming VAT on supplies?

Answer 9

Cannot reclaim VAT on supplies that relate to non-business activity
- is mixed use then can only reclaim for proportion used for business purposes

Strict limit on not claiming:
- VAT on business entertainment
- VAT on purchase of a car (most cases)

Question 10

What happens if input VAT exceeds output VAT?

Answer 10

HMRC will issue a rebate

Question 11

Can a business that makes zero rated supplies be able to claim input VAT tax from HMRC?

Answer 11

Yes

Question 12

Can a business that makes exempt supplies be able to claim input VAT tax from HMRC?

Answer 12

No as they cannot register for VAT

Question 13

What are the penalties for not complying with VAT legislation?

Answer 13

Failure to register
- penalty charge of percentage of VAT due from when they should have registered

Submitting late return or not paying on time
- HMRC imposes percentage surcharge on VAT due
(max of 15%)

Under-Declaring amount of VAT due to lack of care
- penalty as percent of tax that should have been paid

Dishonest Evasion of Tax
- penalty up to amount of VAT evaded
- potential unlimited fine or imprisonment of 7 years