Value Added Tax Flashcards
Value added tax is
… a tax on the supply of good and services
-> made by a registered pension
-> in the course of business
-> within the UK
Taxable person
-> while registered under VAT Act 1984
-> a trader is required by law to register for VAT move their annual turnover reaches the registration threshold that is set each year as part of the budget (£85,000)
-> any trade making taxable supplies can register for VAT even if their turnover is less than the threshold
-> a taxable person can be an individual, a partnership, a company, club or association
Taxable supply
-> includes all forms of business supply made in return for consideration unless specifically exempted
-> business gifts are taxable supplies, unless it is a gift of goods made in course of furtherance if the business (must be <£50), or a gift to an actual or potential customer
-> taxable supply has occurred once the ownership of the asset being supplied transfers from one person to another. Physical transfer of asset can be after transfer of ownership
Taxable assets include
1. Any transfer of a while asset is a supply of goods. The supply of a share is an asset is a supply of services
2. The transfer of fixed or current assets, whether or not for consideration
3. Supply of any form of power, heat, ventilation
Input and output tax
The vat system operates by registered traders collecting vat on behalf of the government from customers they supply to. Vat is therefore an indirect tax.
Input tax =into the business
Output tax =charged on things sold/out of the business
In any vat accounting period
-if input vat > output vat = trader reclaims the net vat from government
-if output vat < input vat = trader pays balance to government
Transactions can be liable to vat at
- Standard rate 20%
- Reduced rate 5%
- Zero rate 0%
- Exempt
-transactions can also be outdid the scope of VAT
Vat is charged on
-supply of goods or services in the UK
-acquisition of goods in the UK from other EU member states
-importation of goods from outside the EU
Registration for VAT
-the value of a persons taxable supplies is that persons taxable turnover
-if this is over £85,000 in 12 months they must register with HMRC. Register within 30 days from end of the relevant month. Effective from end if the month following the relevant month.
-registration not required if can demonstrate that taxable supplies will be less in the next 12 months
-if there are reasonable grounds for believing that the value of taxable supplies in the period of the next 30 days will exceed £85,000. This test is the future prospects rule and is designed to capture large, one off transactions that are standard rates. Register within 30 days from start of 30 day period. Effective from 30 day period.
-can avoid registration if can demonstrate that business has only exceeded the limit because of unusual circumstances and turnover will fall below the threshold once circumstances have passed
-a person who is liable to register but does not do so is personally responsible for the output VAT on supplies with effect from the date that the registration threshold is passed
Voluntary registration
- Recover input tax (compare v output tax)
- Disguise size of business
- Avoid risk of penalties for late registration
- Commercial necessity
- Must consider vat position of customers
-can they recover vat
-will they go elsewhere - Recognition brings added admin burden
De registration
- Must de register if cease to make taxable supplies (compulsory), 30 days to notify HMRC
- May de register if vat exclusive taxable supplies will be below £83,000 in next year (voluntary)
-output vat payable based on deemed supply of all stock and capital assets still owned at date of de registration
Standard rated supplies
-20%
Zero rated supplies
Zero rated supplies are taxable supplies.
1. Food (not ice cream, confectionary or chocolate)
2. Books
3. Construction of buildings
4. Transport
5. Children’s clothes
Exempt supplies (IMPORTANT)
-> Vat cannot be charged on an exempt supply.
-> if a person only makes exempt supplies then they cannot register for VAT
-> cannot reclaim and input VAT in connection with the exempt supply
1. Land
2. Insurance
3. Postal services- Royal Mail only
4. Finance
5. Burial and cremation
Reduced rate supplies
By special exemption are taxed at 5%.
1. Domestic fuel and power
2. Energy saving materials
3. Residual conversions and alterations
Mixed/multiple supplies
Bundle of different goods at one price
-vat calculated using a fair apportionment
Usually where customer wants the different products purchased as one item (book and cd as foreign language course)
Composite supplies
Combination of different goods/services at one price
-cannot split into separate components
-vat calculated at one rate
Usually where one main supply and rest incidental to the main supply
Value of supplies - cash discounts
Vat is payable on the actual consideration paid by the customer
If a customer does not tax advantages of the discount, then vat is payable on the full amount, if a customer takes the discount, vat is payable on the amount net of the discount
Input tax
-> only recover input tax relating to the cost of making taxable supplies
Non deductible (blocked) input tax
-vat on goods and services not used for the business
-motor cars (even with private use)
-entertaining (other than oversees customers)
-second hand goods scheme
Other requirements for VAT recovery
- Tax properly charged
- No recovery of input VAT allowed if wrong VAT charged
- Tax invoice obtained. Invoice must be issued within 30 days and must contain required information
Tax points (IMPORTANT)
- Tax point determines in the period in which a vat supply falls
- The tax point determines
-> for outputs, the tax period in which the tax on that supply must be accounted for
-> for inputs, the tax period in which the tax on that supply may be reclaimed
->the rate of VAT applicable to the supply (if VAT rate changes) - basic tax point is the date the goods are removed or made available
- Actual tax point differs from basic tax point if
-> supplier issues a tax invoice or receivables payment on date which is earlier than the basic tax point
-> supplier issues invoice within 14 days after basic tax point, then invoice date becomes tax point
Vat invoice must show
- An invoice number which is unique and follows on from the number of the previous invoice
- The sellers name or trading name and address
- Sellers vat registration number
- Invoice date
- Time of supply (tax point) if this differs from invoice date
- Customers name or trading name and address
- Description sufficient to identify the goods or services supplied to the customer
For each type of item listed on the invoice you must show
- Unit price or rate, excluding vat
- Quantity of goods or the extent of the services
- Rate of vat that applies to what’s being sold
- Total amount payable, excluding vat
- Rate of any cash discount
- total amount of vat charged
Bad debt relief
Trader may recover output VAT (on sales) re bad debts if
-supply is made and output vat has been accounted for (but not necessarily paid)
-more than 6 months have elapsed since the due date
-debt is written off in the traders accounts
-> trader who has recovered VAT (on purchases) as input tax on an invoice must repay this VAT to HMRC if the trader has not paid the supplier within 6 months
-> if a customer becomes insolvent, bad debt relief is available
Contents of VAT return
- vat due in acq from other EU
- Total output vat due
- Input tax claimed
- Amount due to/from HMRC
- Value of outputs
- Value of inputs
- Value of supplies to EU states
- Value of acquisitions from EU states
- VAT due on sales
Partial exemption
-input tax is only recoverable if it has been paid on acquiring goods and services which are directly attributed to taxable supplies made by the trader
-if trader has both taxable and exempt supplies them only input tax relating to taxable outputs is recoverable
-input tax that related to exempt supplies is not deductible
-input tax that relates to taxable supplies is fully reclaimable
