Value Added Tax Flashcards
What kind of tax is VAT?
Indirect
What is output tax?
What you put out
Charged on sales
What is imput tax?
What you bring in
Incurred on purchases and expenses
What is NET of?
Exclusive of VAT
X*0.2
What is Gross of?
Inclusive of VAT X *(20/120)
What are taxable supplies?
Standard Rated -20%
Zero rated- 0%
What is exempt supplies?
This when you only make exempt registered supplies so you cannot register for VAT and therefore cannot claim on purchases
What is a tax point?
The tax point is the date that goods are supplied and it determines the VAT return period in which the supply is accounted and the rate of VAT (when there is a change in rate or classification of a supply)
What is basic tax point?
▪ Basic Tax point
Date the goods were delivered/made or the date the services were completed
When is basic tax point overridden?
▪ Actual Tax point
- Earlier date chosen IF—> The invoice was issued OR the payment received before the BTP
- Later date IF—-> Invoice is issued within 14 days after basic tax point. In this case, the ATP is the date of invoice
What is outside of the scope of tax? Be specific!!!!!!
Outside the scope ✓ The gift is a sample ✓ Gifts do not exceed £50 per customer per year ✓ Wages ✓ Dividends ✓ Transfer as a going concern
When things can you not claim input VAT on?
i.e. List of things
& WHat is the general rule?
Cannot claim input VAT back;
▪ Business entertainment
-Exception of staff entertaining and entertaining overseas CUSTOMERS
are allowed. NO suppliers however allowed!
- (Except from entertaining staff overseas OUTSIDE EU)…
▪ Private use element for telephone cost. Private use is NOT allowable
Motor cars rules are the following;
▪ Purchase cost only recoverable if used 100% in Business
▪ If leasing and there is a private use element to the car, only 50% of car leasing charges are recoverable
▪ Motor expenses (running expenses i.e. repair and fuel) are 100% recoverable as long as there is SOME business use
▪ General rule- if input VAT was not recovered on the purchase then no output VAT is charged on Disposal
What is the profoma for VAT?
Output VAT
Standard Rated Sales X
Zero Rated Sales X
Fuel Scale Charge X
Input VAT
Standard Rated Purchases (X)
Zero rated Purchases (X)
Bad Debt Relief (X)
VAT Payable/RecoverableX/(X)
When is bad debt relief allowed under Input VAT in the profoma?
Only if:
▪ You have paid the output VAT on original sales paid to HMRC
▪ Written off in accounts
▪ 6 months elapsed since due for payment
What is the VAT treatment of a bulk discount and prompt payment discount? BE SPECIFIC
bulk discount; The output VAT is calculated on the revised, discounted, selling price
Early payment discount; The output VAT is calculated on the amount that the customer actually pays.
When is registration compulsory?
What items make this limit?
Required when the value of taxable supplies exceed £85k
▪ Taxable supplies = zero + reduced + standard rate
what is the historic test and when is it done
▪ Look back last 12 months to see if taxable supplies exceed £85k
▪ On last day of each month- on a rolling basis
In the historic test, when do you have to notify HMRC?
Notify
▪ Within 30 days of end of month in which limit exceeded
E.g. exceeded on 28th Feb, notify by 30th March
In the historic test, when do you have to be registered from?
From the start of the following month, the business will be registered for VAT and must charge VAT on supplies .
For example, where a business’ taxable supplies exceed the threshold for the first time on 31 March 2016, it must notify for VAT by 30 April 2016 and charge VAT from 1 May 2016.
on 28th Feb, notify by 30th March, register from 1st April
what is the future test
▪ Look forward every day at next 30 days taxable supplies in isolation and see if they are exceeding £85k
▪ Done constantly
In the futures test, when do you have to notify HMRC?
Notify
▪ By end of 30 days period in which limit is expected to be exceeded. So if you know you’re going to exceed in Jan then notify by 31 Jan
In the futures test, when do you have to be registered from?
Registered from
▪ Start of 30 day period. So immediately when the ££ is reached
So if you know you’re going to exceed in Jan then register by 1st Jan
Who can register for VAT voluntarily and what are the advantages of voluntary registration?
Advantages:
▪ You can recover input VAT
▪ No impact to customer if they are VAT registered
▪ Avoid penalties for late registration if ££ exceeded
▪ Perception of the business may be seen to be bigger
What are the disadvantages of voluntary registration?
▪ Output tax will be charged on Sales
- If make stadard rated supplies to customers who are not VAT registered (i.e. public) there will be an additional cost to them and so affecting competitiveness
▪ VAT admin burden
What are the disadvantages of voluntary registration?
▪ Output tax will be charged on Sales
- If make stadard rated supplies to customers who are not VAT registered (i.e. public) there will be an additional cost to them and so affecting competitiveness
▪ VAT admin burden
When is de-registration voluntary?
Voluntary
▪
▪ If expected taxable supplies in next 12 months ≤ £83,000
when do you have to notify HMRC for voluntary de-registration and then de-register?
Notify
▪ At any time
Deregistration from
▪ Date of request for deregistration, or
▪ An agreed earlier date
When is de-registration compulsory?
▪ Cease to make taxable supplies
This could be
- Stopped trading
- Sold the business–> Transfer of going concern
- Changed the type of supplies
- Now Selling 100% exempt supplies so won’t be able to register for VAT
when do you have to notify HMRC for compulsory de-registration and then de-register?
Notify
▪ Within EXACT 30 days of ceasing supply. So if ceased trading in 16th June, Notify by 16th July
Deregistration from
▪ Date of cessation, or
▪ An agreed earlier date
What happens when you deregister? What is the calculation
When do you not have to pay this?
What is excluded?
At the date of ceasing trade, look at the value of the Inventory and non current asset. This is basically to pay back the VAT that you claimed originally. Not necessary if this is below £1k
▪ You are deemed to have made a supply of all stock and business assets held at the date when you have ceased to be a taxable person i.e. de-registered (Including capital items and trading inventory)
▪ Exclude items if no output tax were reclaimed on them (e.g. cars purchased with private use as this wouldn’t have qualified for Input when it was bought)
▪ No charge if output VAT on non-current assets and inventory ≤ £1,000
When is pre registration VAT recoverable for services?
Services
▪ Acquired in 6 months pre-registration
* Supplied for business purposes
When is pre registration VAT recoverable for goods and the conditions?
▪ Acquired in 4 years pre-registration
▪ Still held at registration
* It’s still allowable if it was not used until the company commenced trading
What is a VAT group?
It is a volunatory membership by any UK companies under common control. Common control can be a person or company who own s more than 50%
What are the consequences of VAT Group?
Adv, disadv
Advantages?
✓ No VAT on intra-group sales so helps with cash flow
✓ Helps with admin
✓ Only one VAT return to prepare
Disadvantages?
✓Issues with admin–>Collecting the informatin from the group companies is difficult as all have different systems so becomes a problem
✓ Representative member responsible for accounting for VAT
✓ All members jointly / severally liable for VAT- so if there is one naughty company this will affect everyone
✓ If there is a zero supplies then they will loose on the refunds as the company totals are netted
What are small business accounting schemes and who are they aimed at?
✓ Medium small business; Cash & Annual accounting
✓ Flat rate
What is cash accounting in VAT?
VAT accounted for on a cash received and cash paid basis
What is cash accounting conditions in VAT?
Conditions
▪ Net Taxable turnover (Exclusive of VAT)≤£1,350,000
▪ VAT payments up to date “Good Company”
▪ Must leave if taxable turnover >£1,600,000 (CA only)
It’s conditions and advantages/disadvantages of cash accounting ?
Advantages
▪ Helps with cash flow as you don’t have to pay output tax until you receive payment from customer
▪ Immediate bad debt relief
Disadvantages
▪ You cannot claim input VAT until you’re paid your suppliers
What is annual accounting in VAT?
One vat return prepared a year with payments made on account.
For annual accounting, when are the conditions
Conditions
▪ Net Taxable turnover (Exclusive of VAT)≤£1,350,000
▪ VAT payments up to date “Good Company”
▪ Must leave if taxable turnover >£1,600,000 (CA only)
What are the advantages/disadvantages of annual accounting ?
Advantages
▪ Helps with cash flow- you know the regular fixed payment
▪ Less admin
- Only one VAT return
For, annual accounting When is the VAT return due and give example
- Due 2 months after end of annual VAT period
So if the year end is 31 March 19, the balancing payment will be dye 2 months after the end of the VAT period i.e. 31 May 2019
For, annual accounting, how are the Payments on account worked out and everything about it?
▪ Pay On Account
- 9 fixed POAs in months 4 to 12
- each payment = 10% x VAT for last year
- Balancing payment is due with the VAT return
- New business base their POA on estimated VAT liability
What is flat rate accounting in VAT?
Flat rate of VAT % is applied to GROSS TOTAL TURNOVER (Including exempt supplies & Zero rated!!!*****) This means the total of all supplies PLUS the VAT. The GROSS Amount- Not jjust the VAT bit
The rate is determined by the sector.▪ flat rate of 16.5% has been introduced for those businesses which have no, or only a limited amount of, purchases of goods.
It is used only to simplify the preparation of VAT return- you still need to issue tax invoices
For flat rate accounting, when are the conditions and who can use them
Be specific on the limit and the definition of what it consists of
▪ Expected net taxable turnover/supplies (excluding VAT) for next 12 months ≤£150,000
▪ Must leave scheme when annual income (INCLUDING >£230,000
The scheme can be used by both small incorporated and incorporated businesses
What are the advantages/disadvantages of Flat rate accounting ?
& What is the exemptions on what you CAN recover VAT on?
Advantages
▪ Flat rate simplifies preparation of VAT return
▪ Less administration
- no need to keep records of input VAT on individual purchases
▪ May reduce total VAT payable
Disadvantages
▪ No input VAT is recovered (CAN recover input VAT on ONE purchase of capital assets>£2,000 e.g. computer set with printer, camera, scanner
What is transfer as a going concern ?
The transfer of a business is not treated as a taxable supply for VAT purposes therefore;
- No output VAT is charged on Assets transferred by the seller
- No input is recovered by the purchaser
When is transfer as going concern exempt (conditions)?
Conditions:
✓ Transferred as a going concer
✓ Transfer of the same kind– Cannot change business activity
✓ Capable of trade
✓ No significant break in the normal trade
✓ Both parties need to be a taxable person; VAT registered or liable to become VAT registered
What can the transferee do when there is a transfer as a going concern
->The transferee may take over the VAT registeration from the transferor but they would also interest their liabilities if they choose to do so.
Or they can register again
What happens when there is a transfer of a business that does not meet the VAT togc condition
If the conditions above are not met, the VAT is then payable on the individual assets transferred
What are the key points for trade within and outside of EU?
..All supplies of goods whether within or outside of EU are taxable supplies.
The issue is whether the supply is standard or zero rated as it will never be an exempt supply. When a UK VAT registered business exports goods outside of the European Union, then the supply is zero-rated.
The net effect on purchases from within or outside of the EU is the same unless the purchaser makes exempt supplies
What is the treatment when there is a transaction within the EU where the supplier and customer are VAT registered?
Reverse charge procedure
Supplier/Exports will have No VAT as supply is zero rated
Customer-> In and Out (Output VAT will be accounted for by the customer but the input VAT suffered can be claimed in the same return so it is tax neutral)
What is the treatment when the supplier is EU for imports OF GOODS?
VAT will have to be accounted for according to the date of acquisition. The customer will pay output VAT which is the earlier of
- date that a VAT invoice is issued or
the 15th day of the following month in which the goods comes into the UK
The VAT charged will be declared as on the VAT return as output Tax but will be reclaimed as input vat on the SAME return. This is known as reverse charge procedure.
When a UK VAT registered business supplies goods to another VAT registered business within the European Union, then the supply is zero-rated.
What is the treatment when the supplier is non-EU for imports?
will have to pay HMRC VAT at the time of importation. This will then be reclaimed as input VAT on the VAT return for the period during which the item is imported
Imports-> The business/customer (Purchaser) will have to pay VAT to HMRC at the time of importation. This will then be reclaimed as input VAT on the VAT return for the period during which the machinery is imported
The net effect is the same as for purchases within the UK
What is a default surcharge?
This arises when the return is submitted late or the VAT is paid late.
HM Revenue and Customs (HMRC) record a ‘default’ if:
▪ they do not receive your VAT return by the deadline
▪ full payment for the VAT due on your return has not reached their account by the deadline
Explain the surcharge period with
examples of dates
first offence; 31 October 2019
Q2 31 Jan 2020 -> Submitted on 23 March 2020
Naughty step.
Surcharges
You may enter a 12-month ‘surcharge period’ if you default. Which is exact 12m period from the date of the end of the quarter to which the late payment relates to
*** If you default again during this time:
▪ the surcharge period is extended for a further 12 months
▪ you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe
E.g.
Q 31 October 2019 -> Submitted on 13 December 2019
Q2 31 Jan 2020 -> Submitted on 23 March 2020
On the first offence a surcharge liability period would start and end on 31 October (12month anniversary of the VAT to which the default relates.
Second offense is the first default in the SLP and the SLP is extended to 31 Jan 2021 and a 2% penalty is also charged
What is the surcharge rate and the minimum ££ and when are the rates not paid
If you Defaults within 12 months, the % is applied to you VAT due;
2nd. 2% (no surcharge if this is less than £400)
3rd. .. 5% (no surcharge if this is less than £400)
4th. . 10% or £30 (whichever is more)
5th. … 15% or £30 (whichever is more)
Surcharge assessments at rates below 10% will not be issued for amounts of amounts of 400
Where the rate is more than 10%, the minimum surcharge is £30
What is the payment date/time frame for VAT returns for both electronic or paper?
1 month and 7 Days
For how long must you keep your VAT records for?
6 Years
What kind of records must you retain?
▪ Copies of VAT invoices issues
▪ Record of outputs
▪ Evidence to support recovery of input tax
▪ VAT account
When is it required to issue a VAT invoice and by when should you issue an invoice?
When you are making a standard rated supply to one of your VAT registered customers.
The VAT invoice should be issued within 30days of the date that the supply of services is treated as being made
When is it not required to issue a VAT invoice
It is not required if the supply is zero rated OR if the supply is to a non-vat registered customer (e.g. member of the public) then an invoice need not be issued unless the customer requests
When can a simplified invoice be issued?
And what is included in a simplified invoice?
And what can be left out in a simplified invoice?
A simplified invoice can be issued if the supply is less than £250
A less detailed invoice need only show the following information; Suppliers name , address , VAT reg number, Date of supply, description of goods/service supplied, consideration for the supply, rate of VAT in force at the time of supply
The amount of VAT payable on the supply is not required on a less detailed VAT invoice
What must be included in a invoice
Identifying number date of issue tax point suppliers name, address and VAT reg number Customers name and address Description of goods and each description; - Quantity - Price/iten (Excluding vate) - Rate of VAT - Rate of discount offered
Total vat amount payable
Which errors can be corrected in the next return and what are the conditions
Errors corrected in next return if it was found by Trader and disclosed voluntarily
Errors on previous VAT returns not exceeding the greater of:
▪ £10,000 value of error; or
▪ 1% x net VAT turnover for return period (maximum £50,000)
If the net error is < de minis then you can include this on the next VAT return and there is no default interest- only a standard penalty. Any error that can be corrected on the next return will not attract an interest charge
If the net error is > de minis limit the nerrors should be notified to HMRC on form VAT652 or by letter. and both default interest and standard penalty is applied
What is making tax digital?
VAT registered businesses should use digital accounting softwares which can create digital VAT returns which can then be directly sent to HMRC. This also includes keeping digital records.
The requirements do not apply to businesses with a turnover below the VAT registration threshold of £85k but it is mandatory for those that exceed this amount
what is the impact on incorrectly identifying a sale as zero rated instead of standard?
Output VAT is only due in respect of standard rated supplies so incorrectly classifying supply as zero rated would not remove the liability of that company to pay the output vat which is calculated on the actual price charged. This would then be an additional cost to the business and they themselves would have to pay that 20%.
The type of supply they make (whether standard or zero rated) will have no effect on the recover of input VAT for that company
What conditions must be met in order to recover input VAT?
The supply must be made to Denzel since he is a taxable person making the claim
The supply must be supported by evidence, normally in the form of a VAT invoice. So if it was paid by cash then this is not possible to claim.
Denzel must use the goods or services supplied for business purposes, although an apportion can be made where supplies ar acquired partly for business purposes and partly private purposes
What happens when goods are taken out of the business for personal use?
Output VAT is charged on it
What is the conditions for refunds on over payment?
The general rule is that a refund or repayment cannot be claimed more than 4 years after the end of the relevant tax year.
For example: if you are claiming a refund for the 2019/20 tax year, you add 4 years to 2019. You must make your claim by 5 April 2024.
The refund of VAT that has been overpaid is normally subject to four year limit to the beginning of the period it relates to.
E.g. for the return for quarter ended 31 March, you can claim up to 4 years back e.g. 1st Jan 16- 2019
Where an employee/director is charged the full cost for the private fuel provided, how is this treated?
Output VAT will instead be calculated on this charge to the employee.
Where a motor car is leased but has private use, how is this treated?
50% of the input VAT on the leasing cost will not be allowed
Revenue and Capital?
There is no distinction for VAT purposes
Rent paid early. How is this treated?
If rent for April (Invoice dated 1st April) was paid early in 31st March then the tax point is in March because Rent is a continuous supply therefore the tax point for April 2020 rental invoice is the date of payment
If a company exceeds the limit but was not registered on time, will they have to account to HMRC for the output tax at 20/120 of the value of sales from the date that she should have been registered from?
Yes, Output VAT must be accounted for to HMRC from the date that they should have been registered. Sales from the date of compulsory registration are treated as VAT INCLUSIVE ( even though VAT was not actually charged to customer) so the business basically have to pay it out of pocket. Cost x (20/120)
What things do you look out for impairment loss before it can be relieved
Whether it has been 6 months since it was due
if it has been written off
AND**Claims must be made within 4 years and six months of the payment being due. So it the invoice was due for e.g 30th Nov 2015, this cannot be relieved as it’s over due
What is the treatment when the supplier OF SERVICES is EU for imports?
For Services, VAT should be accounted for on the eaerlier of the date when the service is completed and the date the service is paid for.
The amount of VAT payable on the supply is not required on a less detailed VAT invoice
The amount of VAT payable on the supply is not required on a less detailed VAT invoice
Any error that can be correct on the next return will not attract what?
Interest charge.
However, an error that a CAN be correct on the next return will still be charged a penalty for an incorrect VAT return
