Tax Processes - Chapter 3 - Inputs and Outputs and special schemes Flashcards
Definition of input tax?
VAT a business charged on purchases and expenses
Definition of output tax?
VAT due to HMRC on supplies of goods or services made by a business
What is the calculation on the VAT return?
Output tax less input tax
What is a partially exempt business?
A business VAT registered that has some exempt and some taxable supplies
What does ‘de minimis’ mean?
So small it’s nothing worth bothering over
What is the de minimis test?
It allows a business to recover all the input VAT charged on taxable and exempt purchases
What conditions does the de minimis test have?
The exempt supplies must be:
- no more than £625 per month
- less than 50% of total input VAT for the period
What are blocked expenses?
Expenses that a business cannot reclaim input VAT on
A business cannot recover input tax on business entertainment. What are examples?
- Provision for food and drink
- Provision for accommodation
- Theatre and concert tickets
- Entry to sporting events
- Use of facilities with the purpose to entertain
What is the exception for business entertainment?
When you are entertaining overseas customers
Can VAT be reclaimed on employee entertainment?
Yes
When can a business reclaim VAT on a car?
- Only for business purposes not even driving to work
- Taxi business
- Car dealer, intends to sell in next 12 months
Can you claim VAT on a lease car?
Can usually claim 50% of the VAT back
If a business pays for fuel used by employees how can they deal with the VAT?
- If used only for business can claim all
- If they don’t claim on one they can’t claim on any
- Can keep record of what used for and only claim business miles
- Can claim all and pay a separate fuel scale charge
What is the fuel scale charge based on?
CO2 emissions, higher emissions mean higher fuel scale charge
How should business reclaim VAT on assets?
Reclaim the VAT based on percentage of use for business
How is VAT on imports paid?
It is paid by the importer and treated as input tax
How do most businesses account for import VAT?
They use postponed VAT accounting
What does postpones VAT accounting allow?
It allows the business to declare import VAT and reclaim it as input tax on the same VAT return
What happens with VAT on most exports?
They are normally zero rated as long as all laws are obeyed and as long as the overseas customer does not ask for them to a UK address
Why is VAT for services more complicated?
Deciding where the place of supply is tricky
Where is the place of supply for a business customer?
Where the customer is located and this is what outside scope for UK VAT however the net sales should be included in the VAT return
Where is the place of supply for a non-business customer?
Where the supplier is located they should be charged VAT as if they were a customer in the UK
What might a business have to do if they buy services from a supplier in another country?
Reverse charge the VAT to themselves and on the VAT return include it as input and output tax
What is the annual accounting scheme?
Enables businesses to make one annual VAT return
What is the maximum taxable turnover to be in the annual accounting scheme?
£1.35m and you must leave if you will exceed £1.6m in the next accounting year
How must you pay VAT under this scheme?
- Pay 90% based on previous VAT return over 9 equal months starting in month 4 of VAT year
- Three interim payments each equal to 25% of previous VAT liability in months 4, 7 and 10
What are advantages of annual accounting scheme?
- Smooth out cash flow with equal payments
- Only one VAT return needed each year
- Allowed 2 months instead of 1 to submit VAT return
- Can align VAT and business tax year
What are disadvantages of annual accounting scheme?
- If VAT is regularly reclaimed you only get one repayment each year
- If turnover decreases interim payments will be higher as for last year
What is the flat rate scheme?
Business will apply a flat percentage rate to its total turnover for the VAT period
What is the expected turnover to join the flat rate scheme?
Less than £150,000 and they must leave if they are to exceed £230,000 in the next 12 months
What is a limited cost business?
A business that provides services but incur minimal costs and might be labour only businesses
What is the flat rate for limited cost businesses?
16.5%
A business is classed as limited cost if there expenditure is less than either…
- 2% of its VAT inclusive turnover
- £1,000 a year
What is the cash accounting scheme?
This allows businesses to account for VAT when the payments are received or made rather than on the tax point for invoices issued and received
How can the cash accounting scheme be beneficial to a business?
- If they have to pay suppliers promptly but have to wait some time before receiving payment.
- Also helps with bad debts as no adjustment needed for claiming VAT
- Reclaim VAT on purchases when suppliers are paid
What’s the requirements for the cash accounting scheme?
- Annual turnover of less than £1.35m
- Have a clean VAT record with no convictions or late returns
What’s a disadvantage of the Cash Accounting Scheme?
VAT liability can vary according to amounts received and paid.
What are advantages of the Flat Rate Scheme?
- Simplified record keeping
- Saves small businesses a lot of time
- VAT liability is easy to calculate
What’s the disadvantage of the Flat Rate Scheme?
VAT liability is based solely on income with no adjustment if spend is more than usual
