VAT

Question 1

How much is the reduced VAT percentage and what are some of the products that attract this rate?

Answer 1

The reduced rate of VAT is 5% and this rate can be used for fuel and services installing energy saving material.

Question 2

What are example of exempt supplies?

Answer 2

Sales of old commercial buildings, rent of buildings, financial services, insurance and postal and health services.

Question 3

What is the difference between zero rated and exempt supplies?

Answer 3

With zero rated supplies you can register for VAT and recover the input VAT that was generated on purchases. With exempt supplies, you cannot recover the VAT.

Question 4

What 3 items are outside of the scope of VAT?

Answer 4

Dividends, salaries and transfer of going concern.

Question 5

When must a VAT return be filed.

Answer 5

A VAT return must be filed 1 month and 7 days after the end of the VAT period. March21, June21, September21 December21 = 07/05/21, 07/08/21, 07/11/21 and 07/02/22.

Question 6

With regards to VAT registration, what is the historic test?

Answer 6

The historic test is where you must register for VAT if you produce taxable supplies in the last 12 months are more than £85,000. You must perform the test every month. Once you have crossed the threshold you must notify HMRC within 30 days.

Question 7

With regards to VAT registration. what is the future test?

Answer 7

Where you expect taxable supplies to be more than £85,000 in next 30 days you must register. You have 30 days to notify HMRC and you must start charging VAT immediately.

Question 8

What is an advantage of voluntarily registering for VAT?

Answer 8

You can reclaim the input VAT that you suffered on the purchase of supplies and you can appear more professional to customers if you are VAT registered.

Question 9

What are the disadvantages of registering for VAT?

Answer 9

You have to charge customers more to account for VAT and the customer cannot recover the VAT if they are not VAT registered. There is also increased administration, which could lead to increased costs for your business. There are also risks of fines and penalties if errors or late filings of your VAT return take place.

Question 10

What are the circumstances where a person would deregister compulsorily and voluntarily from VAT?

Answer 10

A person would compulsorily deregister from VAT if they they stopped making taxable supplies. A person would voluntarily deregister from VAT if their taxable supplies over the next year fall below £83k.

Question 11

How does an election for group VAT work?

Answer 11

It is an election and not automatic and not all eligible companies need to be included.

Question 12

What does a resident or non resident company need to be a part of a VAT group?

Answer 12

It needs to have a UK permanent establishment.

Question 13

What is the VAT treatment for goods that are sold from the UK to America?

Answer 13

As America is outside of the UK the goods should be treated as Zero rated goods. (recover input VAT on VAT return).

Question 14

What is the VAT treatment of goods purchased from America and imported into the UK?

Answer 14

HMRC will hold the goods at the point of entry. Input VAT will be paid on the value of the imported goods. The input VAT will be deductible on the next VAT return.

Question 15

What are the two scenarios that take place if goods are sold from the UK to an EU country?

Answer 15

If the UK supplier has a VAT number of EU recipient and has evidence of goods delivered to another EU state then the goods are treated as ZERO rated.

If the UK supplier does not have VAT number for the EU recipient or does not have evidence that the goods have been delivered to another EU state, then charge local VAT (UK VAT), this is known as distance selling.

Question 16

What is the VAT treatment with regards to buying EU good from the UK?

Answer 16

It is up to the UK purchaser to deal with the VAT. The output VAT must be accounted for at the point of acquisition. The UK company then charges itself input VAT and recovers the output VAT, which will offset itself on the return.

Question 17

What are the aspects of the cash accounting scheme?

Answer 17

Turnover should not exceed £1,350,000 over 12 months.

VAT can be accounted for on the basis of cash paid and received rather than using tax points.

Question 18

What are the advantages of the cash accounting scheme?

Answer 18

Cashflow is advantage of the cash accounting scheme because output VAT only has to be paid to HMRC when the cash has actually been received from the customer.

It also gives automatic bad debt relief i.e. if a customer does not pay you then you do not have to wait for a period of time to collect output VAT to HMRC, because you never received it.

Question 19

What are the aspects of the annual accounting scheme?

Answer 19

Taxable turnover should not exceed £1,350,000.

Only one annual return due within 2 months of year end.

Payment of 90% of the previous years VAT liability is due in 9 equal instalments at the end of month 4 to 12. Also the balance due with the return.

Question 20

What are the advantages of the annual accounting scheme?

Answer 20

Less frequent return submissions, so less likelihood of default.

Ability to manage cashflow more accurately.

Avoids quarterly calculations for partial exemption purposes and input VAT recovery.

Question 21

What are the disadvantages of the annual accounting scheme?

Answer 21

Need to monitor future taxable supplies to check that limit is not exceeded.

Timing of payment has less correlation to turnover.

Payments based on prior year may not reflect current years cashflow.

Cant be used by a company in a group VAT registration.

Question 22

What are the aspects of the flat rate accounting scheme?

Answer 22

Taxable turnover must not exceed £150,000.

The VAT due is equal to a flat % x Total turnover.

1% reduction in your first year of VAT registration.

There is no recovery of input VAT.

However VAT at 20% should still be treated normally.

Question 23

What are the benefits of the flat rate scheme?

Answer 23

Simplifies the VAT process for small businesses.

Question 24

What is the partial exemption with regards to VAT?

Answer 24

This is where a person makes a mixture of taxable and exempt supplies so that their goods are partially exempt. This means that all of their input tax is not recoverable because some of their supplies are exempt.

Question 25

What are the deminimis/ partial exemption tests?

Answer 25

Test 1: Total input VAT per month is less than or equal to £625 AND Exempt supplies (sales) are less than 50% of total supplies.

Test 2: Total input VAT less input VAT that is directly attributable to taxable supplies is less than £625 a month.

Exempt supplies are less than 50% of total supplies.

Test 3: Separate input VAT regarding taxable supplies and input VAT regarding exempt supplies.

Then multiply input VAT by taxable supplies divided by total supplies (round figure up to the nearest whole percent)

If the amount of unrecoverable VAT is less than £625 for the month and less than 50% of total input VAT, then this too can be recovered.

Question 26

What is the annual test?

Answer 26

This gives the trader the option to do the deminimis test once a year instead of doing it every month.

Question 27

What are the conditions for using the annual test?

Answer 27

Have been deminimis in the partial exemption year.

Consistently apply the annual test throughout any given partial exemption year.

Not expect to incur more than £1,000,000 in input tax in its current partial exemption year.

If the test fails then the trader needs to carry out an annual adjustment.

Question 28

When carrying out the annual adjustment what should you be aware of?

Answer 28

If you pass test 1 or 2, then no adjustment needs to be made.

If you fail test 1 or 2 then test 3 needs to be carried out and if test 3 is failed then any difference has to be added or deducted from the input tax on the last period in the year or on the the return of the first period of the new year.

Question 29

What type of land and buildings fall into the 3 categories of VAT (Standard, zero rated and exempt)

Answer 29

Standard: New commercial buildings.

Zero rated: Construction of new dwellings or buildings used for residential or charitable purposes.

Exempt: Sale of an old commercial property and rent or lease of a property.

Question 30

What happens when a trader opts to tax?

Answer 30

This is when a trader waives the exemption, which means that input VAT suffered on the purchase of the building and its ongoing running costs can be recovered.

Question 31

What are the issues with opting to tax?

Answer 31

If a company/individual opt to tax, that means that any sale or rent of the building must have output VAT added to it. If the buyer is not VAT registered then they will not be able to reclaim the VAT. This also means that the building will possibly be sold at higher prices due the inclusion of VAT, which may put off potential buyers.

Question 32

What are the conditions where an option to tax can be revoked?

Answer 32

During a six month cooling off period.

Where no interest has been held in the property for 6years.

After 20 years from the first election.

Question 33

With regards to a transfer of a going concern, how are assets which are subject to VAT treated on the sale?

Answer 33

The supply of assets is deemed to be treated as outside of the cope of VAT, therefore no VAT is chargeable.

Question 34

What are the transfer of going concern rules?

Answer 34

The purchaser must also be or immediately become VAT registered.

The assets must be used by the purchaser in the same kind of business.

If only part of the business is transferred, that part is capable of separate operation.

There must be no significant break in trading.

Question 35

What happens when and land buildings are transferred as part of a going concern?

Answer 35

Because these assets are standard rate, you MUST pay VAT on these assets. However this can be avoided if you opt to tax these individual assets.

Question 36

What is the capital goods scheme?

Answer 36

Is a scheme that relates to a partially exempt business and enables the amount of VAT recovered to be adjusted for each years use.

In the VAT year the asset is purchased we initially recover the percentage input VAT which relates to taxable supplies.

Question 37

What goods does the capital goods scheme apply to?

Answer 37

Computers, boats and cars for 50k a year over 5 VAT years.

Land and buildings costing 250k a year over 10 VAT years.