Value Added Tax

Question 1

Describe VAT

Answer 1

VAT is a sales tax — this is a tax on consumer spending and provides an important source of revenue for the government,

The final consumer of the goods/services supplier will be the bearer of the VAT charged.

Question 2

Describe output VAT

Answer 2

• Each time a VAT registered business make a sale it must charge VAT on the value of goods/services it provides.
• This is referred to as output tax, i.e., tax on goods going OUT.
• It is charged on top of the sales price.

Question 3

Describe input VAT

Answer 3

• When VAT registered business makes a purchase on which they pay VAT, they can reclaim this VAT.
• This is known as the input tax, i.e., tax on goods coming IN.
• Individuals cannot reclaim VAT.
• We can reclaim input VAT, tax we have suffered, from HMRC.
• In practice it wouldn’t work to pay over VAT each time we make a sale so therefore we operate on a system that aims to group together the VAT transactions, usually for a quarter. We add together all the output VAT we have charged and and net it off against all the input VAT suffered on purchases.

Question 4

The total VAT on an invoice should be…

Answer 4

Rounded down to the nearest 1p

Question 5

Describe a VAT return

Answer 5

• Each quarter (normally) the business will then complete a VAT return which will detail input and output VAT totals, and calculate the final VAT to be paid or reclaimed from HMRC.
• Output VAT > Input VAT = Net payable to HMRC
• Output VAY < Input VAT = Net reclaimable from HMRC

Question 6

VAT is charged on ___ supplies made by ___ persons

Answer 6

• Taxable
• Taxable

Question 7

Describe 4 different rates (or other) of VAT

Answer 7

1. Standard rate (20%) — Most supplies of goods/services
2. Reduced rate (5%) — Applies to certain types of domestic fuel, child care seats, etc.
3. Zero rate (0%) — Still taxable suppliers but VAT rate is 0%, includes non-luxury goods, books, children’s goods, etc.
4. Exempt (Non-taxable) — This is not a rate of VAT but a category of supplies, e.g., postal service and insurance.

Question 8

The balance on the VAT account is the amount that…

Answer 8

Must be paid or received from HMRC

Question 9

Which statement does VAT appear on?

Answer 9

SFP as either an asset or liability — the business cannot keep the VAT so it does’t appear in the P/L account.

Question 10

What is the rule for transactions that include VAT?

Answer 10

• Receivables and payables are recorded at the gross amount, i.e., including VAT in the RLCA/PLCA.
• Sales and purchases are recorded at the net amount, i.e., excluding VAT.

Question 11

Double entry for sales with VAT

Answer 11

Dr Receivables (gross amount)
Cr Sales (net amount)
Cr VAT (VAT amount)

Question 12

Double entry for purchases with VAT

Answer 12

Dr Purchases (net amount)
Dr VAT (VAT amount)
Cr Payables (gross amount)

Question 13

Describe how VAT works with cars

Answer 13

• VAT is allowed to be reclaimed on all items you buy including non-current assets.
• However, you can only claim the VAT back from HMRC if the item is wholly, necessarily, and exclusively for the use of the business.
• When a business buys a car there is usually some personal use of the car so business’s rarely claim back VAT on cars.

Double entry is:
- Dr Non-current asset—motor vehicles (gross amount)
- Cr Cash (gross amount)