Value Added Tax

Question 1

Value added tax is

Answer 1

… a tax on the supply of good and services
-> made by a registered pension
-> in the course of business
-> within the UK

Question 2

Taxable person

Answer 2

-> 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

Question 3

Taxable supply

Answer 3

-> 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

Question 4

Input and output tax

Answer 4

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

Question 5

Transactions can be liable to vat at

Answer 5

1. Standard rate 20%
2. Reduced rate 5%
3. Zero rate 0%
4. Exempt

-transactions can also be outdid the scope of VAT

Question 6

Vat is charged on

Answer 6

-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

Question 7

Registration for VAT

Answer 7

-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

Question 8

Voluntary registration

Answer 8

1. Recover input tax (compare v output tax)
2. Disguise size of business
3. Avoid risk of penalties for late registration
4. Commercial necessity
5. Must consider vat position of customers
   -can they recover vat
   -will they go elsewhere
6. Recognition brings added admin burden

Question 9

De registration

Answer 9

1. Must de register if cease to make taxable supplies (compulsory), 30 days to notify HMRC
2. 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

Question 10

Standard rated supplies

Answer 10

-20%

Question 11

Zero rated supplies

Answer 11

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

Question 12

Exempt supplies (IMPORTANT)

Answer 12

-> 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

Question 13

Reduced rate supplies

Answer 13

By special exemption are taxed at 5%.
1. Domestic fuel and power
2. Energy saving materials
3. Residual conversions and alterations

Question 14

Mixed/multiple supplies

Answer 14

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)

Question 15

Composite supplies

Answer 15

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

Question 16

Value of supplies - cash discounts

Answer 16

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

Question 17

Input tax

Answer 17

-> 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

Question 18

Other requirements for VAT recovery

Answer 18

1. Tax properly charged
2. No recovery of input VAT allowed if wrong VAT charged
3. Tax invoice obtained. Invoice must be issued within 30 days and must contain required information

Question 19

Tax points (IMPORTANT)

Answer 19

1. Tax point determines in the period in which a vat supply falls
2. 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)
3. basic tax point is the date the goods are removed or made available
4. 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

Question 20

Vat invoice must show

Answer 20

1. An invoice number which is unique and follows on from the number of the previous invoice
2. The sellers name or trading name and address
3. Sellers vat registration number
4. Invoice date
5. Time of supply (tax point) if this differs from invoice date
6. Customers name or trading name and address
7. Description sufficient to identify the goods or services supplied to the customer

Question 21

For each type of item listed on the invoice you must show

Answer 21

1. Unit price or rate, excluding vat
2. Quantity of goods or the extent of the services
3. Rate of vat that applies to what’s being sold
4. Total amount payable, excluding vat
5. Rate of any cash discount
6. total amount of vat charged

Question 22

Bad debt relief

Answer 22

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

Question 23

Contents of VAT return

Answer 23

1. vat due in acq from other EU
2. Total output vat due
3. Input tax claimed
4. Amount due to/from HMRC
5. Value of outputs
6. Value of inputs
7. Value of supplies to EU states
8. Value of acquisitions from EU states
9. VAT due on sales

Question 24

Partial exemption

Answer 24

-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

Question 25

Partial exemption calculation

Answer 25

Remaining input deductible is
Taxable turnover excluding VAT/total turnover excluding vat x100=%

% is rounded up unless input vat is over £400k a month

If input vat relating to exempt supplies is <£625 per month then apportionment ignored and all input vat recovered. The £625 must be less than 50% of the input vat for the month

Question 26

Input vat specifically disallowed- cars

Answer 26

-input vat on cars cannot be reclaimed, and registered traders do not account for vat when a car is sold, unless sold at a profit
-accessories bought at same time as car are treated as car, however if acquired and fitted after car acquired, then vat can be reclaimed, provided that the expenditure is for business use
-exceptions are if car acquired new and intended to be resold or intending to lease to or used by a taxi business, or driving school

Question 27

Car maintenance and fuel

Answer 27

-vat on repair and maintenance is reclaimable if car owned by business and for business purpose
-vat on fuel used for business purpose is reclaimable

Question 28

Other specifically disallowed

Answer 28

1. Business entertaining
2. Living accommodation being paid by the business
3. Non business items which have been recorded in the business accounts

Question 29

Vat de registration

Answer 29

-trader is deemed to make a supply of all the tangible assets of the business and output tax is charged

Question 30

Vat accounting returns

Answer 30

Accounted for quarterly but can be
-monthly if regular repayment situation
-annually if choose annual accounting scheme

Returns and payments to be received by HMRC no later than one month and 7 days following the end of the return period

Question 31

Special vat accounting schemes

Answer 31

1. Cash accounting
2. Annual accounting
3. Flat rate scheme
   -> flat rate scheme for farmers
   -> second hand schemes
   -> retail schemes

Question 32

Vat cash accounting scheme (IMPORTANT)

Answer 32

1. If join scheme, then account for output tax in period in which PAYE,ent is received, and input VAT in period in which payment is made to supplier
2. Conditions to join
   -taxable supplies in next 12m vat period <£1.35m
   -not convicted of VAT offence in last year
   -all returns up to date
3. Must leave scheme if turnover >£1.6m
4. Key benefits are
   -cash flow where debtors pay late
   -automatic bad debt relief
   -simplicity (no cut off issues)

Question 33

Vat annual accounting scheme (IMPORTANT)

Answer 33

1. Only one vat completed
2. Value of sales <£1.35m
   -must leave if >£1.6m
3. Make 9 payments on account based on 1/10th of estimated liability (starting end month 4)
4. Balance to actual due with return 2m after end of year

Question 34

Vat flat rate scheme (IMPORTANT)

Answer 34

1. Aimed at smaller businesses
2. Significant compliance cost saving
3. Vat is charged as normal on supply, and is paid as normal on purchases. But these amounts of vat are not included in the vat return
4. Instead flat rate is applied to VAT inclusive turnover (dependent on type of business)
5. To join scheme
   -expected taxable sales <£150k (excluding tax)
6. Leave scheme
   -total income >£230k (inc vat)
7. Flat rate percentage between 4% to 14.5% depends on type of business, rates provided by HMRC
8. Vat on purchase is not recoverable (except vat on fixed assets costing over £2k)
9. Normal vat invoices issued for sales

Question 35

Accounting issues

Answer 35

-turnover is recorded vat inclusive but the flat rate scheme % is then deducted as an expense
-> expenses shown vat inclusive
-or normal vat accounting and back difference on vat account as expense

Question 36

Late filing of VAT returns

Answer 36

1 Jan 2023 a new points based system has been introduced and applied to vat periods starting on or after that date:
-taxable person incurs a penalty point each time vat return submitted late. If a person has a reasonable excuse for late filing, then no penalty point issues
-if hit a threshold a penalty of £200 is imposed
1. 2 points for annuals returns
2. 4 points for quarterly returns
3. 5 points for monthly returns
-any subsequent failures do not increase points total but each failure gets a £200 penalty
-penalty point expire after two years
-don’t expire after 2 years if threshold reached. Period of good compliance clears the points
1. 24 months for annual vat returns
2. 12 months for quarterly vat returns
3. 6 months for monthly vat returns

Question 37

Late payments of vat

Answer 37

-no penalty if vat paid within 15 days of due date
-if amount unpaid after 15 days a penalty of 2% of amount outstanding is charged
-if amount is still outstanding 30 days, a further 2% penalty is charged on the amount still outstanding
-from 30 days overdue onwards, a further penalty of 4% per year is charged until the vat is paid. Calculated on a daily basis

Question 38

Late registration penalty- failure to notify

Answer 38

1. Nit deliberate notified < 12 months. Unprompted disclosure = 0-30%. Prompted disclosure = 10-30%.
2. Not deliberate notified > 12 months. Unprompted disclosure = 10-30%. Prompted disclosure = 20-30%.
3. Deliberate but not concealed. Unprompted disclosure = 20-70%. Prompted disclosure = 35-70%.
4. Deliberate and concealed. Unprompted disclosure 30-100%. Prompted disclosure = 50-100%.

Question 39

Penalties for incorrect vat returns

Answer 39

No disclosure. Unprompted disclosure. Prompted disclosure.
Careless. 30%. 0%. 15%.
Deliberate
not 70%. 20%. 35%.
concealed
Deliberate
and 100%. 30%. 50%.
concealed