VAT Flashcards
How do you determine whether a company can fully recover input tax using the partial exemption Simplified Tests 1 and 2?
Simplified test 1:
- Fully recoverable if both:
- exempt supplies no more than 50% of total supplies
- monthly total input tax of £625 or less
Simplified test 2
- Fully recoverable if both:
exempt supplies no more than 50% of total supplies
- monthly total less taxable input tax of £625 or less
(In Hardman’s just check how to apply/be familiar)
Quarter ended 31 March 2022
Supplies:
Standard-rated supplies, excluding VAT (Note) 90,000
Zero-rated supplies 10,000
Exempt supplies 24,000
——–
124,000
Input tax:
Wholly attributable to taxable supplies 8,400
Wholly attributable to exempt supplies 1,400
Non-attributable 2,300
—–
12,100
Note: Standard-rated supplies include a sale of machinery for £9,000 excluding VAT.
Using the standard partial exemption calculation, calculate the net VAT payable by Schrayder Ltd for the quarter ended 31 March 2022
Net VAT payable
£
VAT payable
Output tax £90,000 × 20% 18,000
Input tax (W) (12,100)
————
Net VAT payable 5,900
£ £
Wholly attributable to taxable 8,400
Wholly attributable to exempt 1,400
Non-attributable:
(90,000 – 9,000 + 10,000)/(124,000 – 9,000) = 79.1%
Attributable to taxable: round up to 80% × £2,300 1,840
Attributable to exempt: (£2,300 – £1,840) 460
Input tax 10,240 (taxable) 1,860 (exempt)
De minimis tests:
Monthly average input tax attributable to exempt supplies £625 or less?
£1,860/3 = £620 – yes
VAT on exempt supplies no more than 50% of all input VAT
1,860/12,100 × 100 = 15.4% – yes
So, all input tax recoverable £10,240 + £1,860 = £12,100
Quarter ended 30 June 2022
On 10 May 2022 Schrayder Ltd purchased a newly constructed freehold factory in London for £1.2m excluding VAT. The factory is used for both taxable and exempt purposes. The partial exemption fraction for the quarter ended 30 June 2022 is 90%
In relation to the freehold factory purchased in the quarter ended 30 June 2022:
- State the VAT implications for Schrayder Ltd of the purchase; and
- Calculate the stamp duty land tax payable by Schrayder Ltd and state the date by which it is payable
The purchase of the new freehold factory is a standard-rated supply so the vendor will charge VAT of £240,000 (£1.2m × 20%).
As the factory is used 90% for taxable and 10% for exempt purposes, Schrayder Ltd can initially recover 90% of the input tax, ie, £216,000 (£240,000 × 90%).
The factory is subject to the capital goods scheme and so adjustments to the amount recovered may be required over the 10-year adjustment period if the use changes.
SDLT is payable on the VAT-inclusive amount £1.44m (£1.2m × 120%)
Stamp duty land tax on the building
£150,000 × 0% –
(£250,000 – £150,000) × 2% 2,000
(£1,440,000 – £250,000) × 5% 59,500
————
61,500
SDLT is payable by Schrayder Ltd by 24 May 2022
Kavitha is a VAT-registered sole trader making only standard-rated supplies. She uses the VAT flat rate scheme. Kavitha’s business category for flat rate purposes is advertising.
For the quarter ending 30 June 2022 Kavitha expects to have sales of £15,000. So far this quarter, Kavitha has spent £200 on the purchase of standard-rated goods for use in her business.
Kavitha normally buys most of her purchases in December each year.
However, Kavitha is concerned that her flat rate percentage now depends on the level of her costs in each quarter.
Therefore, she is considering spreading her purchases more evenly over the year. Kavitha anticipates spending a further £250 on standard-rated goods for use in her business before 30 June 2022.
All figures are stated exclusive of VAT
Calculate the VAT payable to HMRC by Kavitha for the quarter ending 30 June 2022 assuming:
- a total cost of goods purchased of £200•
- a total cost of goods purchased of £450.•
In each case, clearly show whether Kavitha is a limited cost trader.
Kavitha’s flat rate will depend on whether she is a limited cost trader. She will be a limited cost trader if her VAT inclusive costs for the quarter are less than:
- £1,000 / 4 = £250 or
- 2% of VAT inclusive turnover for the quarter = £15,000 × 1.2 × 2% = £360
With VAT inclusive purchases of £240, as this is less than £360, she will be a limited cost trader and her VAT liability will be:
£15,000 × 1.2 × 16.5% – 0 = £2,970
If Kavitha’s purchases exceed £360 then her VAT liability will be: £15,000 × 1.2 × 11% =
£1,980
(Check Hardman’s)
Kavitha is a VAT-registered sole trader making only standard-rated supplies. She uses the VAT flat rate scheme. Kavitha’s business category for flat rate purposes is advertising.
For the quarter ending 30 June 2022 Kavitha expects to have sales of £15,000. So far this quarter, Kavitha has spent £200 on the purchase of standard-rated goods for use in her business.
Kavitha normally buys most of her purchases in December each year.
However, Kavitha is concerned that her flat rate percentage now depends on the level of her costs in each quarter.
Therefore, she is considering spreading her purchases more evenly over the year. Kavitha anticipates spending a further £250 on standard-rated goods for use in her business before 30 June 2022.
All figures are stated exclusive of VAT
Explain whether bringing forward the timing of Kavitha’s purchases in order to lower the amount of VAT payable would be treated as tax evasion.
Tax evasion is the deliberate: suppression of information; or•
provision of false information.•
This is clearly not tax evasion
Bertie, Jeeves and Madeline are unconnected individuals.
On 1 January 2022 Bertie transferred a residential property to his wife, Georgiana, when it was
worth £1.5 million. The transfer was made as part of their divorce settlement and is Georgiana’s only property.
On 1 February 2022 Jeeves purchased a newly constructed commercial property for £1 million.
On 1 March 2022 Madeline was granted a 30-year lease over a newly constructed commercial property.
Madeline pays an annual rental of £12,000 for the term of the lease.
All properties are located in England. All figures are stated exclusive of VAT where applicable.
No options to tax have been exercised.
Calculate the VAT and stamp duty land tax, if any, due on each transaction
SDLT on transfer from spouse:
No VAT chargeable.
No SDLT as a transfer is exempt from SDLT where the transfer forms part of a divorce settlement.
On the purchase of a commercial property:
- VAT = £1m × 20% = £200,000•
- The first £150,000 at 0% = £0•
- The next £100,000 at 2% = £2,000•
- The remaining £950,000 at 5% = £47,500•
———–
Total SDLT = £49,500•
On the grant of a commercial lease:
- No VAT as leasehold•
- SDLT due on NPV of rent = £12,000 × 30 = £360,000•
£150,000 at 0% = £0•
- The remaining £210,000 at 1% = £2,100
Skate Ltd owns:
95% of Tuna Ltd, 80% of Velvet Ltd, and 49% of Whale Ltd.•
Tuna Ltd owns 75% of Unicorn Ltd.
All five companies are UK-resident trading companies. Skate Ltd and Tuna Ltd are registered together in a VAT group. Unicorn Ltd, Velvet Ltd and Whale Ltd are registered individually for VAT.
Skate Ltd, Tuna Ltd and Whale Ltd make wholly standard-rated supplies within the UK.
Velvet Ltd makes wholly zero-rated supplies within the UK.
Unicorn Ltd sells its goods to customers located overseas, all of whom are private individuals. If Unicorn Ltd’s goods were sold in the UK, they would be standard rated.
Skate Ltd sold a warehouse to Cat plc, an unconnected company, on 1 January 2022 for £200,000.
Skate Ltd purchased the newly constructed warehouse on 1 January 2021. Cat plc makes wholly standard-rated supplies in the course of its business
Explain the benefits for Skate Ltd and Tuna Ltd of being grouped for VAT, and why Velvet Ltd, Unicorn Ltd and Whale Ltd have been excluded from the group
Skate Ltd and Tuna Ltd make standard-rated supplies and have been included in the group to reduce VAT administration as intra-group sales will not be subject to VAT. Only one VAT return is required.
Whale Ltd cannot be included in the VAT group because the holding is only 49% which is less than the requirement of more than 50%/control/51% company
As a zero-rated trader, assuming its inputs are standard rated, Velvet Ltd is a repayment trader.
Velvet Ltd has been excluded from the VAT group because otherwise the cashflow advantage of a monthly VAT repayment would be lost.
As an exporter, Unicorn Ltd’s sales will be zero rated and it has been excluded from the group as a repayment trader for the same reasons as Velvet Ltd.
Skate Ltd owns:
95% of Tuna Ltd, 80% of Velvet Ltd, and 49% of Whale Ltd.•
Tuna Ltd owns 75% of Unicorn Ltd.
All five companies are UK-resident trading companies. Skate Ltd and Tuna Ltd are registered together in a VAT group. Unicorn Ltd, Velvet Ltd and Whale Ltd are registered individually for VAT.
Skate Ltd, Tuna Ltd and Whale Ltd make wholly standard-rated supplies within the UK.
Velvet Ltd makes wholly zero-rated supplies within the UK.
Unicorn Ltd sells its goods to customers located overseas, all of whom are private individuals. If Unicorn Ltd’s goods were sold in the UK, they would be standard rated.
Skate Ltd sold a warehouse to Cat plc, an unconnected company, on 1 January 2022 for £200,000.
Skate Ltd purchased the newly constructed warehouse on 1 January 2021. Cat plc makes wholly standard-rated supplies in the course of its business
Explain why Unicorn Ltd and Whale Ltd are not in a group with Skate Ltd for stamp duty land tax (SDLT) purposes
A group relationship for SDLT purposes exists where there is 75% ownership directly or indirectly between companies.
The direct holding in Whale Ltd is below 75% and therefore it cannot be in the SDLT group.
Unicorn Ltd is not in a group with Skate Ltd for SDLT purposes as the indirect holding is less than 75%/only 71.25% (95% × 75%).
Skate Ltd owns:
95% of Tuna Ltd, 80% of Velvet Ltd, and 49% of Whale Ltd.•
Tuna Ltd owns 75% of Unicorn Ltd.
All five companies are UK-resident trading companies. Skate Ltd and Tuna Ltd are registered together in a VAT group. Unicorn Ltd, Velvet Ltd and Whale Ltd are registered individually for VAT.
Skate Ltd, Tuna Ltd and Whale Ltd make wholly standard-rated supplies within the UK.
Velvet Ltd makes wholly zero-rated supplies within the UK.
Unicorn Ltd sells its goods to customers located overseas, all of whom are private individuals. If Unicorn Ltd’s goods were sold in the UK, they would be standard rated.
Skate Ltd sold a warehouse to Cat plc, an unconnected company, on 1 January 2022 for £200,000.
Skate Ltd purchased the newly constructed warehouse on 1 January 2021. Cat plc makes wholly standard-rated supplies in the course of its business
Explain, with supporting calculations, the VAT charged and stamp duty land tax payable (SDLT) on the sale of the warehouse to Cat plc. Explain how your answer would differ if the warehouse had been sold to Tuna Ltd instead.
VAT:
As the warehouse is a commercial building which is less than three years old, it is a standard-rated supply.
The VAT due is £200,000 × 20% = £40,000 (or £33,333 if taken as inclusive of VAT)
SDLT payable by purchaser
SDLT is payable on the VAT inclusive amount ie, £200,000 × 1.2 = £240,000
The first £150,000 at 0% = £0
The next £90,000 at 2% = £1,800
Sold to Tuna Ltd
As Tuna Ltd is in a VAT group with Skate Ltd, no VAT would be charged
As Tuna Ltd is in a SDLT group with Skate Ltd, no SDLT would be charged
Skate Ltd owns:
95% of Tuna Ltd, 80% of Velvet Ltd, and 49% of Whale Ltd.•
Tuna Ltd owns 75% of Unicorn Ltd.
All five companies are UK-resident trading companies. Skate Ltd and Tuna Ltd are registered together in a VAT group. Unicorn Ltd, Velvet Ltd and Whale Ltd are registered individually for VAT.
Skate Ltd, Tuna Ltd and Whale Ltd make wholly standard-rated supplies within the UK.
Velvet Ltd makes wholly zero-rated supplies within the UK.
Unicorn Ltd sells its goods to customers located overseas, all of whom are private individuals. If
Unicorn Ltd’s goods were sold in the UK, they would be standard rated.
Skate Ltd sold a warehouse to Cat plc, an unconnected company, on 1 January 2022 for £200,000.
Skate Ltd purchased the newly constructed warehouse on 1 January 2021. Cat plc makes wholly
standard-rated supplies in the course of its business
Assuming the warehouse is sold to Cat plc, briefly explain in what circumstances Cat plc would be able to recover any VAT payable on the purchase
The VAT is recoverable in full if Cat plc is a VAT-registered trader, uses the warehouse for the purposes of its trade/making taxable supplies, and has a VAT invoice for the purchase.
If Cat plc intends to rent out the warehouse it can only recover the input VAT if it opts to tax the
warehouse.
Pesca Ltd is VAT registered and makes taxable supplies. Pesca Ltd purchased a newly constructed office building for use in its business on 1 January 2019 for £2 million.
In the year ended 31 December 2019 Pesca Ltd used the entire building for trade purposes
From 1 January 2020 to 28 February 2022 Pesca Ltd rented out approximately 30% of the building’s floor area to Zucca Ltd, an unconnected company. Zucca Ltd vacated the building on 28 February 2022.
On 1 March 2022 Pesca Ltd sold the entire building for £3.5 million to Cipolla Ltd, an unconnected company.
Pesca Ltd’s VAT year for capital goods scheme purposes runs to 31 December.
Pesca Ltd had not opted to tax the building. The above amounts are stated exclusive of any VAT
Explain, with supporting calculations, the VAT treatment of the office building under the capital goods scheme over the period of ownership by Pesca Ltd
The group is treated as being a single taxable person/thing/entity.
Mela Ltd, as the representative member, will be responsible for paying VAT on behalf of the group and submitting the VAT returns.
The total VAT due will be based on the total output VAT for the group less the total input VAT suffered by the group.
No VAT will be charged on intra-group supplies/outside scope of VAT – therefore no need to consider tax point or amount of VAT due.
Only one VAT return required.
Including Pear Ltd in the group would make the group partially exempt, affecting recoverability of input for the whole group unless it was de minimis.
All companies in the group are equally/jointly and severally to pay the VAT due – eg, if Quince Ltd were to become insolvent, the other companies would be responsible for paying its VAT liability.
Given the companies have decentralised finance functions it may be administratively difficult to collate the information in time to file a single return.
Tutorial Note
No marks were awarded for phrases such as exempt, disallowed or zero rated.
Students must ensure that they use the correct technical language if they are to score marks
VAT on purchase (a)
All input VAT (£2,000,000 × 20% = £400,000) recoverable
VAT adjustments on usage
Y/E 31 December 2019
100% taxable use, so no adjustment required
Y/E 31 December 2020 and 31 December 2021
Only 70% taxable use so some VAT repayable to HMRC
£400,000 / 10 × 30% = £12,000
£12,000 repayable to HMRC each year
Pesca Ltd is VAT registered and makes taxable supplies. Pesca Ltd purchased a newly constructed office building for use in its business on 1 January 2019 for £2 million.
In the year ended 31 December 2019 Pesca Ltd used the entire building for trade purposes
From 1 January 2020 to 28 February 2022 Pesca Ltd rented out approximately 30% of the
building’s floor area to Zucca Ltd, an unconnected company. Zucca Ltd vacated the building
on 28 February 2022.
On 1 March 2022 Pesca Ltd sold the entire building for £3.5 million to Cipolla Ltd, an unconnected company.
Pesca Ltd’s VAT year for capital goods scheme purposes runs to 31 December. Pesca Ltd had
not opted to tax the building. The above amounts are stated exclusive of any VAT
Calculate the stamp duty land tax payable by Cipolla Ltd on the purchase of the office building in 2022, and state when it must be paid
VAT on purchase (a)
All input VAT (£2,000,000 × 20% = £400,000) recoverable
VAT adjustments on usage
Y/E 31 December 2019
100% taxable use, so no adjustment required
Y/E 31 December 2020 and 31 December 2021
Only 70% taxable use so some VAT repayable to HMRC
£400,000 / 10 × 30% = £12,000
£12,000 repayable to HMRC each year
VAT adjustments on sale
As it is still within CGS, an adjustment on disposal applies:
Normal adjustment for usage (Y/E 31 December 2022) = repay VAT of £12,000
Adjustment for sale (Y/E 31 December 2022) = six years remaining and no tax chargeable on/exempt disposal
£400,000 / 10 × 6 = £240,000 VAT repayable
Andy is a doctor in a private medical practice. Andy is VAT registered. He charges patients a single fixed fee that pays for both the medical consultation (an exempt supply) and any medicine provided (a standard-rated supply). The fee remains the same even if no medicine is provided.
Requirement
Explain how Andy should determine the VAT due on his fees.
How the VAT should be calculated depends on whether the supply is a single/composite supply with a single VAT rate, or a multiple/mixed supply with multiple VAT rates.
Whether a supply is in fact a single or a multiple supply depends on the circumstances.
This is a single supply/all exempt because of the following:
- The supply is a single supply because to split the healthcare supply into two parts would be ‘artificially splitting the transaction’.
- The supply is in essence a supply of healthcare, with an ancillary/minor/incidental supply of medicine. Where a supply is ancillary there is a single supply.
- The supply is a single economic supply as the customer was not offered a lower price if no medicines were required
On 5 April 2022 Jim was granted a 30-year lease of a commercial property in London. Jim paid a premium of £261,500 and agreed to pay an annual rent of £5,500. This is Jim’s first property purchase.
Requirement
Calculate Jim’s stamp duty land tax liability from the grant of the lease.
SDLT is payable on both the lease premium and the net present value of the lease rentals
On the grant of a non-residential lease with a premium of £261,500:
The first £150,000 at 0% = £0•
The next £100,000 at 2% = £2,000•
The remaining £11,500 at 5% = £575•
In addition, a lease is liable to SDLT on the NPV of the lease rentals over the life of the lease:
£5,500 × 30 = £165,000•
£165,000 – £150,000 = £15,000 × 1% = £150•
The total SDLT due is £2,000 + £575 + £150 = £2,725
Lamb Ltd is a VAT-registered company which is partially exempt. For the year ended 31 March 2022, Lamb Ltd failed both Simplified Test One and Simplified Test Two. Lamb Ltd needs to make an annual partial exemption adjustment calculation.
Lamb Ltd’s supplies of goods in the year ended 31 March 2022 were:
£
Standard-rated taxable supplies (excluding VAT) 562,562
Exempt supplies 68,821
———-
631,383
Lamb Ltd’s input VAT for the year ended 31 March 2022 was:
Wholly attributable to standard-rated supplies 100,100
Wholly attributable to exempt supplies 12,600
Non-attributable 26,780
———
139,480
The input VAT recovered during the year ended 31 March 2022 was £125,532.
Requirement
Calculate any annual adjustment required to the input VAT recovered by Lamb Ltd for the year ended 31 March 2022.
Wholly attributable input tax:
Taxable supplies: 100,100
Exempt supplies: 12,600
Non-attributable input tax:
Recoverable amount % is
£562,562 / £631,383 = 90% (rounded up)
Attributable to taxable supplies: 90% x £26,780 = 24,102
Attributable to exempt supplies: 10% x £26,780 = 2,678
Input VAT:
Taxable: 100,100 + 24,102
Exempt: 12,600 + 2,678
—-
139,480
Tests for de minimis limit:
Is the monthly average attributable to exempt supplies £625 or less?
Monthly average is £15,278 / 12 = £1,274 per month – fails this test
Is the proportion of VAT on exempt supplies not more than 50% of input VAT for the year?
£15,278 / £139,480 = 11% – passes this test
As at least one of the tests is not passed, input tax on exempt supplies exceeds de minimis limits.
Conclusion
Only input VAT attributable to taxable supplies is recoverable ie, £124,202
Therefore, the annual adjustment is:
£125,532 – £124,202 = £1,330 is payable to HMRC