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Accounting lvl 2 & 3 > Tax Processes for Businesses (UNIT 2) > Flashcards

Tax Processes for Businesses (UNIT 2) Flashcards

sit forst exam

1
Q

VAT

A

-Indirect Tax
-VAT can be claimed back by VAT registered businesses

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2
Q

Who can be a VAT registered business?

A

-Individual, partnership or limited company that make taxable supplies.

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3
Q

Businesses that make solely exempt supplies cannot register for VAT purposes:

A

Some examples of this can be
- Postage
- Insurance
- Burial and cremation services
- Financial services
- Betting and gaming
- Sports activities and physical education

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4
Q

What are the rates of VAT?

A

20% - all other supplies not classified as reduced standard rate, zero rated or exempt
5% - Domestic fuels, children’s car seats/booster seats
0% - books, children’s clothing and shoes, public transport

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5
Q

What is the standard rate of the invoice with the net value if 321.98

A

This would be rounded to £64 unless you are specifically advised to round down .

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6
Q

How will a HMRC representative contact a VAT registered business to inspect the records?

A

-They will let the business know 7 days in advance
-And will be confirmed in writing:
which records are to be inspected
to whom they wish to speak to
and the date and time of when they
are coming.

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7
Q

How long must records be kept?

A

Businesses must keep appropriate records for 6 years to support the VAT returns submitted.

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8
Q

What are some VAT records that need to be maintained?

A
  • VAT control account
  • Records of all taxable supplies and exempt supplies bought and sold
  • Records of goods and services with irrecoverable input VAT
  • Purchase and Sales invoices (copies)
  • Credit and Debit notes
  • Import and export documents
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9
Q

Do all businesses have to register for VAT?

A

No, this is based on thresholds for taxable supplies.
To determine if a business must register for VAT its taxable turnover must be calculated.

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10
Q

How do you calculate the taxable turnover for a business?

A

Include:
- Standard rate supplies (20%)
- Reduced standard rate supplies (5%)
- Zero rated supplies (0%)
Exclude:
- Exempt supplies
- Sales of capital items

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11
Q

When should a business register for VAT?

A

Voluntary registration :
- can choose to register for VAT even if their taxable supplies do not exceed thresholds
Compulsory registration :
- if taxable supplies exceed £85,000 = must register = Historic turnover method
- if taxable supplies are expected to exceed £85,000 in the next 30 days alone = must register = Future turnover method

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12
Q

Important note about VAT registration

A

Vat is due to HMRC on all taxable supplies made form the date registration becomes effective, even if the business doesn’t charge VAT on their taxable supplies the VAT remains due and will still have to be paid by the business.

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13
Q

How does a business register for VAT?

A

Online :
- Vat registration number should be received within 3 working days
Post :
- If you can’t register online for whatever reason, HMRC will consider your application via post, VAT registration number should be received within 15 days.

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14
Q

What is MTD (Making tax digital)?

A

Digital VAT records that a business must keep and submit VAT returns using a MTD compatible software.

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15
Q

Why must a business deregister for VAT?

A
  • If taxable supplies are lower than £83,000 in the next 12 months
  • If the business is sold
  • If business status changes (sole trader to limited company)
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16
Q

What is taxable turnover?

A

This consists of standard rated and zero rated supplies only

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17
Q

When must VAT returns be submitted?

A

-Must be submitted every quarter
-The return is due 1 month and 7 days after the quarter ends

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18
Q

When is payment due for VAT returns?

A

-1 month and 7 days
-7days don’t apply to trader using annual accounting scheme or trader making monthly payments which are compulsory for large businesses.

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19
Q

What is the annual accounting scheme?

A

Only 1 VAT report is required throughout the year rather than 4 under the standard scheme.

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20
Q

What are things to consider for the annual accounting scheme?

A

Conditions:
-Taxable turnover must be lower than £1,350,000
-Returns must be up to date
-Must leave the scheme if expected to rise over £1,600,000 in the next 12 months

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21
Q

What are some advantages and disadvantages of the annual accounting scheme?

A

Advantages:
- Reduced administrative workload for small businesses
- Provides a known VAT value on a monthly basis to aid cash flow
Disadvantages:
- Only receive 1 rebate per year
- If sales are declining payments on the account will exceed liability therefore negative cashflow

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22
Q

What is the cash accounting scheme?

A
  • Businesses account for the VAT when cash is paid in and out of a business rather than when invoices are raised.
  • Can also be used along side the annual accounting scheme
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23
Q

What are some advantages and disadvantages of the cash accounting scheme?

A

Advantages:
- If VAT is made on credit terms then its not due until the customer receives it.
- Avoids issues created by bad debts where VAT has already been paid to HMRC
Disadvantages:
- If sales are on a cash basis then the reclaim of VAT input is delayed.
- If sales are largely zero rated then the reclaim of VAT input is delayed.

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24
Q

What is the flat rate scheme?

A
  • This is determined by HMRC and can help small businesses calculate their VAT.
  • Business does not reclaim any input VAT
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25
Q

What are the Advantages and Disadvantages to the flat rate scheme?

A

Advantages:
- Reduces administrative burden of recording VAT transactions on individual transactions.
- Reduced risk of errors
Disadvantages:
- Not suitable for businesses that make zero rated supplies in the main
- Businesses that purchase high value standard rated items.

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26
Q

What are things to consider for the flat rate scheme?

A

Conditions:
- Taxable turnover should not be expected to exceed £150,000 in the next 12 month period.
- Businesses must leave the scheme if said business is expect to exceed £230,000 in the next 12 month period.

27
Q

What is the formula for working out the flat rate scheme?

A

Flat rate (%) x Gross total turnover

28
Q

What are some consequences to late registration?

A

-Businesses must register for VAT in line with the threshold advised by
HMRC
- HMRC has the power to administer penalties and fines to businesses that do not comply with VAT legislation

29
Q

What are the 2 consequences to a business if they fail to register for VAT?

A
  • The trader can either treat the sales as VAT inclusive and suffer the VAT element themselves, or they can liaise with they customers and send a VAT only invoice.
  • A penalty can be charged which is a percentage of the VAT due, this is known as the potential lost revenue (PLR). (Reference material for (% will be in the assessment)).
30
Q

What are the consequences of submitting a late VAT return?

A
  • For every late VAT filing a penalty point is issued
    ( Annually = 2 points threshold
    Quarterly = 4 points threshold)
    £200 fine which applies for all subsequent VAT returns that are filed late.
  • Individual points expire after 2 years as long as the taxpayer hasn’t reached the penalty threshold
31
Q

What are the consequences of late payment?

A
  • ## The penalty will be based on a percentage of the outstanding VAT due for payment
32
Q

T/F If the taxpayer has a reasonable excuse for paying late which HMRC are satisfied with there will be no penalty.

A

True

33
Q

What is a personalized payment plan?

A
  • If taxpayer is having financial difficulties then a time to pay arrangement can be requested from HMRC.
34
Q

What is late payment interest?

A
  • Interest is charged at 2.5% above the Bank of England rate i.e. if 4% then 6.5%
  • Interest will continue to be charged on amounts included in a time to pay agreement.
35
Q

What happens if errors made are not corrected?

A
  • HMRC issue a discovery assessment which is a demand to collect any VAT due.
36
Q

What penalties can arise when tax is underdeclared ?

A
  • Showing insufficient tax due on the VAT return
  • Claiming a repayment which is too large on the VAT return.
  • Failing to inform HMRC within 30 days that an assessment of tax due is too low.
37
Q

What are legal and ethical consequences of tax evasion?

A

Legal :
- This will be addressed by penalties and charges rather than through legal cases
Ethical :
- Threat to the integrity and professional behaviour of participating colleagues.

38
Q

VAT invoices :

A
  • A VAT invoice must be produced as evidence that VAT has been charged.
  • This must be done within 30 days of the supply of goods or services or receipt of the payment.
39
Q

What are the main contents of a VAT invoice?

A
  • VAT registration number
  • Rate of VAT charged per item
  • Total amount excluding VAT
  • Total amount of VAT
  • Customer name and address
  • Description of goods and services
40
Q

What is a simplified VAT invoice?

A
  • This type of invoice is issued when the value of supply is less than £250
41
Q

What is a modified VAT invoice?

A

-Shows same details as a full invoice
-Only issued if total is more than £250.

42
Q

What are e-invoices?

A
  • All e-invoices must contain same information as a normal invoice
  • Must be signed electronically
  • Invoice must not be altered
  • It must be readable and legible
43
Q

What are benefits of an e-invoice:

A
  • Reduced paper storage and associated cost
  • Improved cash flow
  • Rapid retrieval of documents
44
Q

What is Tax point ?

A

Tax point date :
- The date on an invoice when the VAT applies
Basic tax point :
- The date the goods/services are supplied
Actual Tax point:
- If payment was received before basic tax point
- Or invoice raised within 14 days of tax point

45
Q

What is a proforma invoice and how does this affect VAT?

A
  • This is a request for payment in advance of goods or services being dispatched
  • VAT invoice will be issued so the customer can reclaim the VAT suffered
46
Q

What is the difference between Output VAT and input VAT?

A

Output VAT - charged on the supply of taxable goods
Input VAT - charged on the purchase of taxable goods

47
Q

What are the 3 types of discounts?

A

Trade discount - For loyal customers
Bulk discount - For bulk buyers
Prompt payment discount -Prompted to pay before a certain date

48
Q

What things can a business not claim VAT on?

A
  • Business entertainment
  • Purchases for private use
  • Assets for private use
  • Purchase of cars
49
Q

Which conditions must be met in order to make a bad debt relief for the VAT paid in these circumstances?

A

Comparability - Out VAT must be paid to HMRC on an earlier return
Timeliness - The debt must be between 6 months and 4 years and six months overdue
Verifiability - The debt must not have been recovered, sold or factored
Understandability - The debt must have been written off in the day to day records to the bad debt account

50
Q

How do businesses make a bad debt relief claim?

A

The value of the VAT on the bad debt is included as input VAT in Box 4 of the VAT return

51
Q

Where business buy and sell goods from, there can be specific VAT rules based on where the supplier or customer is resident.

A
  • Sales to non-EU are known as Exports (Zero rated 0%)
  • Purchases from non-EU are known as imports (Standard rated 20%)
52
Q

How to account for postponed VAT?

A

This type of VAT can usually be reclaimed in full as long as the business is not making any supplies on which input VAT is not recoverable.

53
Q

How do changes in VAT legislation affect an organisation’s recording systems?

A
  • Accounting software would need to be updated for changes
  • Organisation stationery such as invoices and credit notes may need to be amended
  • Employees working within the accounts function would need to be trained in the changes and how it affects their day - to - day role
54
Q

What is Box 1 of the VAT return?

A

Purchase day book - UK purchases
Cash Book - UK purchases
Purchase Returns Day book
Total input VAT
VISE VERSA FOR OUTPUT

55
Q

What is Box 4 VAT return?

A

Output VAT - Input VAT = Total amount due to (from) HMRC

56
Q

What are the 2 methods of making adjustments for errors or omissions in VAT returns?

A

Method 1 : Amend the error on the next VAT return
Method 2 : Notify HMRC

57
Q

What is the normal VAT scheme?

A

VAT returns prepared - due by once a quarter
VAT return submitted electronically - due by within 1 month 7 days of quarter end
VAT return payment due (BACS, debit/credit card) - due within 1 month 7 days of quarter end
VAT return payment due (direct debit) - 3 working days after the 1 month 7 days deadline

58
Q

What is in Box 1 of VAT returns.

A
  • VAT on credit sales
  • VAT on cash sales
  • VAT on sales returns
  • Omissions from previous
  • Return due to HMRC
59
Q

What is in Box 4 of VAT returns ?

A
  • VAT on credit purchases
  • VAT on cash purchases
  • VAT on petty cash purchases
  • VAT on purchase returns
  • Bad debt relief claim
  • Omissions from previous
  • Returns due from HMRC
60
Q

How do you workout box 3 and box 5 ?

A
  • Box 3 = box 1 + box 2
  • Box 5 = Difference between box 3 and box 4
61
Q

What is the point of box 6 and box 7 ?

A

Box 6 : Total value of sales and all other outputs excluding any VAT
Box 7 : Total value of any purchases and all other inputs excluding any VAT

62
Q

How many months in advance can a business register in advance for payroll?

A
  • A business can register for payroll 2 months in advance, before paying its employees
63
Q
A

Accounting lvl 2 & 3 (4 decks)

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