VAT Flashcards

1
Q

How do you determine whether a company can fully recover input tax using the partial exemption Simplified Tests 1 and 2?

A

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)

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2
Q

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

A

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

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3
Q

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
A

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

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4
Q

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.

A

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)

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5
Q

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.

A

Tax evasion is the deliberate: suppression of information; or•
provision of false information.•
This is clearly not tax evasion

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6
Q

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

A

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

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7
Q

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

A

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.

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8
Q

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

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%).

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9
Q

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.

A

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

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10
Q

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

A

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.

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11
Q

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

A

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

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12
Q

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

A

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

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13
Q

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.

A

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
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14
Q

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.

A

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

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15
Q

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.

A

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

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16
Q

State the conditions to be satisfied if two or more companies wish to form a group for VAT purposes. You do not need to explain the rules as to whether a non-corporate entity may form part of a group for VAT purposes.

A

Two or more companies can be in a VAT group together if each has a fixed establishment in the UK and:
- one controls the other;•
- one person (individual or company) controls them all; or•
- two or more persons in partnership control all of them•
Where control means there is a shareholding of more than 50%

Many candidates lost marks for inaccurate use of language. ‘Control’ is a key word in relation to VAT groups. Many candidates stated that companies should be UK resident which is not the same as having a UK fixed establishment

17
Q

Yemi owns:
- 80% Aldo Ltd
- 60% Kwon SA
- 80% of Dorrit Ltd

Dorrit Ltd own 805 of Eko Ltd

All companies are UK resident except Kwon SA, which is resident in Japan. The companies make supplies as follows:
- Yemi Ltd: Standard-rate supplies
- Aldo Ltd: Exempt supplies
- Kwon SA: All supplies are made in Japan (outside the EU), but would be standard rated if made in the UK
- Dorrit Ltd: Zero-rated supplies
- Eko Ltd: Standard-rated supplies

All companies that are able to VAT register have done so individually. However, the directors are considering forming a VAT group from 1 January 2023 so that they can complete a single VAT return each quarter.

Yemi Ltd owns a freehold office building in Birmingham which it uses for its trade. The newly
constructed building was purchased in October 2020 for £140,000 plus VAT. The directors intend to
sell the freehold of the building to either Dorrit Ltd or Eko Ltd for its current value of £200,000, plus
VAT if appropriate. The purchasing company will then lease the property back to Yemi Ltd for a market rent. The sale is expected to take place on 21 January 2023. There is no option to tax in place on the building, and the purchasing company does not intend to opt to tax it

Explain why Yemi Ltd and Eko Ltd, but none of the other companies, should be included in a VAT group.

A

Yemi Ltd and Eko Ltd should be included in a group VAT registration so that intra-group supplies can be made without accounting for VAT, and to save on administrative time and costs.
Aldo Ltd makes exempt supplies and could cause the whole group to become partially exempt. It should not be in a group with Yemi Ltd unless the level of exempt input VAT is de minimis such that it would not affect the recoverability of input tax for the whole group.

Kwon SA does not have a UK fixed establishment and so cannot be in a group for VAT purposes.

Dorrit Ltd should not be in a VAT group with Yemi, as it would lose the cashflow benefit of monthly VAT repayments.

18
Q

Yemi owns:
- 80% Aldo Ltd
- 60% Kwon SA
- 80% of Dorrit Ltd

Dorrit Ltd own 805 of Eko Ltd

All companies are UK resident except Kwon SA, which is resident in Japan. The companies make supplies as follows:
- Yemi Ltd: Standard-rate supplies
- Aldo Ltd: Exempt supplies
- Kwon SA: All supplies are made in Japan (outside the EU), but would be standard rated if made in the UK
- Dorrit Ltd: Zero-rated supplies
- Eko Ltd: Standard-rated supplies

All companies that are able to VAT register have done so individually. However, the directors are considering forming a VAT group from 1 January 2023 so that they can complete a single VAT return each quarter.

Yemi Ltd owns a freehold office building in Birmingham which it uses for its trade. The newly
constructed building was purchased in October 2020 for £140,000 plus VAT. The directors intend to
sell the freehold of the building to either Dorrit Ltd or Eko Ltd for its current value of £200,000, plus
VAT if appropriate. The purchasing company will then lease the property back to Yemi Ltd for a market rent. The sale is expected to take place on 21 January 2023. There is no option to tax in place on the building, and the purchasing company does not intend to opt to tax it

For Yemi Ltd and Eko Ltd, explain the VAT consequences of the sale of the building if sold to
Eko Ltd, assuming:
- Eko Ltd is in a VAT group with Yemi Ltd;
- Eko Ltd is not in any VAT group.

A

Eko Ltd in the VAT group:
If Eko Ltd is in a VAT group with Yemi Ltd then no VAT is charged on the intra-group supply of the building.

Eko Ltd not in the VAT group:
The sale of the building is standard rated as it is a sale of a ‘new’ building, ie less than three years old.
Input tax of £40,000 (£200,000 × 20%) will be suffered by Eko Ltd.

This cannot be recovered as Eko Ltd will be making exempt supplies from the building (ie renting it out).

As the original cost was below £250,000 the capital goods scheme does not apply.

19
Q

Yemi owns:
- 80% Aldo Ltd
- 60% Kwon SA
- 80% of Dorrit Ltd

Dorrit Ltd own 80% of Eko Ltd

All companies are UK resident except Kwon SA, which is resident in Japan. The companies make supplies as follows:

  • Yemi Ltd: Standard-rate supplies
  • Aldo Ltd: Exempt supplies
  • Kwon SA: All supplies are made in Japan (outside the EU), but would be standard rated if made in the UK
  • Dorrit Ltd: Zero-rated supplies
  • Eko Ltd: Standard-rated supplies

All companies that are able to VAT register have done so individually. However, the directors are considering forming a VAT group from 1 January 2023 so that they can complete a single VAT return each quarter.

Yemi Ltd owns a freehold office building in Birmingham which it uses for its trade. The newly constructed building was purchased in October 2020 for £140,000 plus VAT. The directors intend to sell the freehold of the building to either Dorrit Ltd or Eko Ltd for its current value of £200,000, plus VAT if appropriate.

The purchasing company will then lease the property back to Yemi Ltd for a market rent. The sale is expected to take place on 21 January 2023. There is no option to tax in place on the building, and the purchasing company does not intend to opt to tax it

Explain, with supporting calculations, the liability to stamp duty land tax (SDLT) on the purchase of the freehold office building by:
- Dorrit Ltd;
- Eko Ltd, if it is in a VAT group with Yemi Ltd; or
- Eko Ltd, if it is not in a VAT group with Yemi Ltd.

State the due date for payment of any SDLT and by whom it is paid.

A

Purchase by Dorrit Ltd:
As Yemi Ltd directly owns at least 75% of Dorrit Ltd they are in the same group for SDLT purposes.
Therefore, an exemption applies and there is no SDLT on sale.

Purchase by Eko Ltd
Although the direct shareholdings to Eko Ltd are at least 75%, the indirect shareholding from Yemi Ltd to Eko Ltd is less than 75% (80% × 80% = 64%), so they are not in a group for SDLT purposes.

So SDLT will be payable by Eko Ltd.

The amount payable will depend on whether Eko Ltd is in a VAT group with Yemi Ltd.

Assuming Eko Ltd is in a VAT group with Yemi, no VAT is charged and the SDLT is based on £200,000.

The SDLT payable by Eko Ltd is £1,000.
£150,000 × 0% = 0
£50,000 × 2% = 1,000
——-
£1,000

If they are not in a VAT group, as the building is less than 3 years old VAT should be charged at the standard rate on the sale.
The SDLT payable by Eko Ltd is based on £240,000 (£200,000 × 1.2).

£150,000 × 0% = 0
£90,000 × 2% = 1,800
——–
£1,800

The SDLT is payable within 14 days after the sale of the building ie, by 4 February 2023

20
Q

Pict Ltd is a VAT registered manufacturing company. Pict Ltd’s records show the following sales and purchases for the quarter ended 31 December 2021. All figures are stated exclusive of
VAT.

Standard-rated sales to UK customers 345,150
Exempt sales to UK customers 25,260
Sales to customers outside of the UK 1 75,000
Total sales 445,410

Standard-rated costs relating to:
Taxable supplies 2 89,150
Exempt supplies 8,875
Overheads for the whole business 26,290
Purchase of delivery van 3 28,800
Purchase of car for a director 4 20,000

Notes
1 One third of the sales made to overseas customers are to VAT registered customers. The remaining sales are to customers who are not VAT registered. If the sales had been made in the UK they would have been made at the reduced rate.

2 Expenses of £2,500 were incurred without the receipt of a valid VAT invoice from the supplier.

3 The delivery van is used for delivering taxable supplies only

4 The director is responsible for standard-rated products sold to UK customers. The car is available for the director’s private use.

In addition, during the quarter, Pict Ltd sold the directors old car for £2,000

Calculate the net VAT payable by or repayable to Pict Ltd for the quarter ended 31 December 2021. Show the VAT treatment of all items.

Note: Ignore the simplified partial exemption tests

A

Taxable:
Standard-rated costs = (89,150-2,500) x 20% = 17,330

Exempt:
Exempt input VAT = 8,875 x 20% = 1,775

Non-attributable VAT
Non-attributable input VAT = £26,290 × 20% = £5,258

Recoverable amount = T / T+E
T = £345,150 + £75,000 / £445,410 = 95%
Ignore the sale of capital items

95% x £5,258 = 4,995 (Taxable)
5% x £5,258 = 263 (Exempt)

Delivery Van = £28,800 x 20% = Taxable

As £2,038 is more than £625 per month on average (although not more than 50% of total input tax), the exempt input tax is not recoverable.

VAT return £
Standard-rated UK sales = £345,150 × 20% 69,030
No VAT on exempt supplies –
Sales to overseas customers = exports = zero rated –
———-
69,030

Input VAT
Recoverable input tax (28,085)
Purchase of car (blocked input VAT) –
——————–
Net VAT payable 40,945

21
Q

On 1 July 2021 Edith purchased her first home in London for £1.25 million from Wilma.

Requirement
Calculate the amount of stamp duty land tax due on the purchase of the house and state when it was due to be paid.

A

SDLT on residential property

The first £250,000 at 0% = £0•
The next £675,000 at 5% = £33,750•
The next £325,000 at 10% = £32,500•
—————–
Total SDLT due is £66,250.
The SDLT should be paid by the period of 14 days after completion ie, 15 July 2021.

Tutorial Note
As the property is purchased 1 July 2021 the second period of temporary reduced rates applies. Despite this being Edith’s first home, she will not benefit from first time buyer relief as the property costs more than £500,000.

22
Q

The Hammer partnership owns 100% of Nut Ltd, 100% of Bolt Ltd, 75% of Screw Ltd, 52% of Nail Inc, and 49% of Tack Ltd. All the group companies are UK resident trading companies except Nail Inc which is resident in the United States and the Hammer partnership is established in the UK.

The Hammer partnership, Nut Ltd and Tack Ltd make wholly standard-rated supplies in the UK.

Bolt Ltd makes wholly zero-rated supplies in the UK.

Screw Ltd makes wholly exempt supplies in the UK.

Nail Inc sells all of its goods outside the EU. If the goods were sold in the UK, they would be standard-rated supplies.

Requirement
Explain why the Hammer partnership and Nut Ltd, but none of the other entities, should be included in a single VAT group.

A

A VAT group can be formed when a non-corporate entity controls corporate subsidiaries. The Hammer partnership can therefore be in a VAT group companies it owns more than 50% of the shares in. Therefore, Tack Ltd, as a 49% subsidiary, is not eligible to be included in a VAT group.

Nail Inc does not have a fixed establishment in the UK so is not eligible to be included in the group registration.

The Hammer partnership makes standard-rated supplies and should be included in the group to reduce administration as intra-group sales will not be subject to VAT with only one return required.

As Nut Ltd makes standard-rated supplies it should be included in the group with the Hammer partnership to reduce administration and access the group benefits as explained above.

As a zero-rated trader, Bolt Ltd is a repayment trader – it charges output VAT at 0% and can recover its input VAT suffered. It should therefore be excluded from the VAT group; otherwise, the cash flow advantage of a monthly VAT repayment will be lost

Screw Ltd is exempt so including it in the group will make the whole group partially exempt.

Screw Ltd should be excluded from the group unless the level of exempt input VAT is de minimis such that it would not affect the recoverability of input tax for the whole group.

23
Q

On 28 June 2021 Burro Ltd sold two newly constructed properties:
- A commercial property to Pane Ltd for £150 million
- A residential property to Abigail for £825,000

Both properties are located in London. All amounts are stated exclusive of any VAT.

Burro Ltd and Pane Ltd are UK resident, VAT registered, trading companies.

Burro Ltd is not connected with Pane Ltd or with Abigail. Abigail does not currently own any other residential properties although she is not a first-time buyer.

a) Briefly explain whether any input VAT incurred in relation to the construction of each property is recoverable by Burro Ltd.

b) Calculate how much stamp duty land tax is due on each purchase.

c) Briefly explain how much stamp duty land tax would be due on the purchase of the commercial property if Pane Ltd were a wholly owned subsidiary of Burro Ltd.

A

a) Input VAT recoverable on commercial property

As a standard-rated taxable supply, the input VAT is fully recoverable.

Input VAT recoverable on residential property
As a zero-rated supply which is a taxable supply, the input VAT is fully recoverable

b) SDLT on commercial property
SDLT due on VAT inclusive amount:
£150m × 1.2 = £180m
- The first £150,000 at 0% = £0
- £100,000 at 2% = £2,000
- £179,750,000 at 5% = £8,987,500
Total SDLT due is £8,989,500

SDLT on residential property
- The first £500,000 at 0% = £0
- £325,000 at 5% = £16,250
Total SDLT due is £16,250
Tutorial Note
As the residential property is purchased on 28 June 2021 the first period of temporary relief to SDLT applies.

c) As the two companies would constitute a group (minimum 75% ownership) then no SDLT would be due on the transfer.

24
Q

Star Ltd is a UK VAT-registered company based in London manufacturing goods which are standard rated when supplied in the UK. The company sells its goods within and outside the UK to both private individuals and VAT-registered businesses and retains full documentation for all transactions. The following figures relate to the quarter ended 31 March 2022:

Sales £
All sales figures exclude any VAT.
Sales in Great Britain 385,000
Sales outside Great Britain:
To EU customers 20,000
To customers in Northern Ireland 5,000

Purchases and Expenses:
All figures below are the cash amounts paid directly to the suppliers, inclusive of any VAT where appropriate.

Materials – all standard-rated goods:
From UK suppliers 105,000
From suppliers in China (outside the EU) 78,000
Car purchased for private use by the managing director 24,000
Delivery van 15,600
Overhead costs – all standard rated 42,000
Professional services – from consultant in France 7,200

Star Ltd does not pay for the fuel for the managing director’s car.

Calculate the VAT payable by Star Ltd for the quarter ended 31 March 2022. Show the output tax and/or input tax for each item. Assume that Star Ltd took advantage of schemes to ease cashflow

A

Output tax
Sales in GB £385,000 × 20% = 77,000
Sales outside GB:
- To EU customers – zero rated 0
- To Northern Ireland £5,000 × 20% = 1,000
Postponed VAT accounting on imports from
China £78,000 × 20% = 15,600
Professional services – reverse charge 1,440
—————
95,040

Materials – all standard-rated goods:
- UK suppliers £105,000 × 1/6 = 17,500
- suppliers in China £78,000 × 20% = 15,600
Car Blocked –
Delivery van £15,600 × 1/6 = 2,600
Other overhead costs £42,000 × 1/6 = 7,000
Professional services (France) £7,200 × 20% = 1,440
————-
(44,140)
VAT payable by Star Ltd 50,900

It is assumed that Star Ltd will take advantage of postponed VAT accounting which is available from 1 January 2021. Rather than paying the £15,600 as customs duty as the goods entered the UK from China, Star Ltd declares and recovers the import VAT on this VAT return thus allowing it a cash flow advantage.

25
Q

Caitlin is VAT registered and owns many residential and commercial properties. She has recently received a substantial sum of money that she wishes to invest in her property business. She then intends to rent out any property purchased to tenants. On 1 December 2022 she will purchase one of the following properties located in London, directly from the builder, paying £200,000, plus VAT where appropriate:

  • A new residential property
  • A new freehold commercial property

a) Explain the VAT implications of the purchase and renting out of each of the properties, including the impact on Caitlin of opting to tax where possible

b) Calculate the stamp duty land tax (SDLT) payable by Caitlin on each of the purchases

A

a) Residential property:
- The supply of new residential property is a zero-rated supply. VAT will be charged at 0%.
- The letting of residential property is an exempt supply so no VAT will be charged.
- The option to tax cannot be made on residential property.

New commercial building:
- The purchase of the new (less than 3 years) freehold commercial property will be a standard-rated supply.
- Hence Caitlin will suffer irrecoverable input tax of £40,000 (£200,000 × 20%).
- The letting of the property is an exempt supply, so no VAT will be charged

Option to tax:
- If Caitlin makes an option to tax when letting the commercial building, she must charge VAT at 20% on the rents that she charges her tenants.
- She will also be able to recover input tax on her costs of renting and also on the purchase of the new building.

26
Q

Stark Ltd is a VAT-registered company, trading only in the UK. The accounting records for the quarter to 31 March 2022 include the following income and expenditure:

Income
Standard rated sales of goods 1 241,000
Sale of equipment – standard rated 2 2,500
——–
Exempt supplies 37,900

Expenditure – all standard rated
Relating to taxable supplies 3 135,000
Relating to exempt supplies 17,500
———–
Overheads 10,000

Notes
1. Standard rated sales include a delivery to a customer on 29 March 2022. On 5 April 2022 an invoice for £4,000 was raised for this delivery. The customer paid the invoice in May 2022.
2. The equipment sold was purchased three years ago. It was sold as it is no longer needed by the business.
3. The expenditure relating to taxable supplies includes £18,000 for the purchase of a car used by a sales representative who sells only taxable supplies. He also used the car for private purposes
4. Stark Ltd does not pass the simplified partial exemption tests for the quarter ended 31 March 2022

Where appropriate, all amounts are stated exclusive of VAT at 20%

Requirements:
a) Explain how the tax point rules apply to the delivery made on 29 March 2022, and on which VAT return the transaction should be reported
b) Calculate the VAT payable by Stark Ltd for the quarter ended 31 March 2022

A

a)) Delivery on 29 March 2022
Tax point determines the date of a supply, and so on which VAT return a supply should be included.
Basic tax point (BTP) is the date of delivery 29 March 2022.
However actual tax point overrides this if:
- Invoice or payment is before BTP•
- The invoice is issued within 14 days of BTP•
- The £4,000 delivery was invoiced on 5 April 2022 ie, within 14 days of BTP and so is the tax point.

Hence the transaction is on the VAT return to 30 June 2022

b))
Taxable:
Re taxable supplies (£135,000 – £18,000) × 20% = 23,400

Exempt:
Re exempt supplies £17,500 × 20% = 3,500

Non-attributable:
Overheads £10,000 × 20% = £2,000
Taxable supplies/Total supplies
(241,000 – 4,000) / (241,000 – 4,000 + 37,900)
= 86.2% = 87% × £2,000 = £1,740 taxable
13% x £2,000 = £260 exempt

Exempt total = £3,500 + £260 = £3,760

Exempt input tax of £3,760 is more than £625pm on average and so it cannot be recovered.

VAT payable £
Output tax
– Standard rated goods (£241,000 – £4,000) × 20% 47,400
– Equipment sale £2,500 × 20% 500
– Exempt supplies –
———
47,900

Input tax
From above (25,140)
———
VAT payable 22,760

27
Q

Patrick is at university in England, in the first year of a five-year course. He talked to his mother Louise about buying a house to live in for the next four years of his course.
Patrick has found a two-bedroom house that he would like to buy that is on sale for £210,000.

Patrick will live in the house and a friend of his will also move into the house, paying rent of £3,500pa. Allowable expenses are expected to be a total of £1,300pa.

Patrick and Louise have not decided which one of them will buy the house but anticipate making the purchase in August 2022. They each recently received an inheritance which will be used to purchase the property. If Louise buys the house Patrick will live in it rent-free.

Patrick has not previously purchased a property, but Louise owns the family home. Patrick’s only other source of income is a part-time job paying £13,000pa. Louise is a higher rate taxpayer.

Requirement
Explain, with supporting calculations, the stamp duty land tax and annual income tax payable in relation to the house if it is purchased by:
Patrick or Louise

A

If Patrick purchases the property
SDLT
Patrick is purchasing his first property as his only or main residence. As consideration is no more than £300,000 the rate of SDLT is 0%.

Income tax
As total income generated from renting out his own home does not exceed £7,500 then rent-a-room applies, and the rental income is exempt.

If Louise purchases the property
SDLT
This is a second residential property for Louise and so an additional 3% is added to the rate of each band

SDLT payable by Louise:
125,000 × 3% 3,750
(£210,000 – £125,000) × 5% 4,250
———-
8,000

Income tax
As the house is not Louise’s own home, the net property income of £2,200 (£3,500 – £1,300) will be taxed at her marginal rate of 40% ie, £880pa.

28
Q

You are an ICAEW Chartered Accountant working for a firm of ICAEW Chartered Accountants. A partner in the indirect tax department has asked you to deal with the following matters relating to two unconnected clients.

Radebe Ltd
Radebe Ltd, a VAT registered company, makes both standard-rated and exempt supplies. The company made the following supplies for the VAT year ended 31 May 2022:

Standard-rated supplies (excluding VAT) 680,000
Exempt supplies 132,000
———-
812,000

Input tax for the year:
Wholly attributable to taxable supplies 8,100
Wholly attributable to exempt supplies 6,500
Non-attributable input tax 11,000
————
25,600

The company recovered input tax of £21,287 during the four VAT quarters of the year ended 31 May 2022. Radebe Ltd is in the process of calculating the annual adjustment. The financial controller of Radebe Ltd already applied simplified tests one and two. Neither test was passed, so a full partial exemption calculation is required.

Calculate Radebe Ltd’s annual adjustment for the VAT year ended 31 May 2022.

A

Set-up a table:

Taxable:
8,100

Exempt:
6,500

Non-attributable:
£680,000/(£680,000+£132,000) = 83.7%
Taxable element £11,000 × 84% (round
up) = 9,240
Balance £11,000
Taxable - £9,240
Exempt - 1,760

De minimis tests
Is exempt input tax less than 50% of total input tax? £8,260/£25,600 = 32.3% - Yes
Is exempt input tax less than £625 pm on average? £8,260/12 = £688 - No
So the test is failed
The annual adjustment is input tax repayable to HMRC of £3,947 (£21,287 - £17,340)

29
Q

Gorka recently received £620,000 following the death of his grandmother. He has recently left university and so has no other savings. In January 2022, Gorka intends to invest £600,000 of the money in residential property. He has never owned property before. His options are as follows:

Option 1:
To buy two houses: one for £400,000 that he will live in, and shortly afterwards to buy a second house for £200,000 that he will rent out to tenants; or

Option 2:
To buy a house for £600,000 that he will live in.
The remaining £20,000 that he received from his grandmother will be used to pay the stamp duty land tax (SDLT) and legal fees on the purchase(s). The legal fees are £3,000 per house purchase.

Gorka is not sure whether the £20,000 is sufficient to pay these costs.

Explain, with supporting calculations, whether Gorka’s £20,000 remaining cash is sufficient to pay the SDLT and legal costs for each of the two options

A

Gorka has £20,000 to spend on the costs of purchasing properties (SDLT and legal fees)

If Gorka buys two properties the costs of purchase are £18,500 (£12,500(W1) +(£3,000 × 2)), so Gorka has enough money to buy both properties.

If Gorka just buys the one larger property the costs of purchase are £23,000 (£20,000(W2) + £3,000), so Gorka does not have enough money to buy both properties

(1)
Purchase of only or main residence (OMR) – first house
This is the purchase of Gorka’s first house as his OMR, and it cost no more than £500,000 so SDLT is:
£300,000 × 0% -
(£400,000 - £300,000) × 5% = 5,000
——
5,000

Purchase of second house:
As Gorka already owns one residential property an additional 3% applies to each rate band
£125,000 × 3% = 3,750
(£200,000 - £125,000) × 5% = 3,750
———
7,500
Total SDLT of two properties 12,500

Purchase of one property:
Although this is Gorka’s first OMR it cost more than £500,000 so the first-time buyer relief does not apply

£125,000 × 0%
(£250,000 - £125,000) × 2% = 2500
(£600,000 - £250,000) × 5% = 17,500
——–
20,000

30
Q

Teal Ltd is VAT registered and makes 60% taxable and 40% exempt supplies. On 1 December 2021, Teal Ltd purchased a new commercial building in London for £10 million plus VAT of £2 million. For the next five years Teal Ltd will either:
- Exercise the option to tax and rent the whole building out to unconnected tenants; or
- use the building in its trade

Teal Ltd paid the stamp duty land tax (SDLT) and submitted the land transaction form to HMRC on 28 February 2022

Teal Ltd has a financial and VAT year end of 31 December. No change is planned to the balance of Teal Ltd’s taxable and exempt supplies.

Calculate the SDLT payable on the purchase of the building in 2021.

State when the SDLT should have been paid by Teal Ltd and calculate the amount of any interest and penalties due. Work to the nearest day.

A

Office building purchase:

SDLT is due on the VAT-inclusive purchase price (£12,000,000)
- £150,000 @ 0% = £0
- £100,000 @ 2% = £2,000
- £11,750,000 @ 5% = £547,500

= £589,500

The SLT return should be submitted to HMRC within 14 days of the purchase, by 15 December 2021

Interest will be charged from the due date to the day before SDLT was paid:

£589,500 x 2.6% x 75/365 = £3,149

In addition, a £100 penalty applies for late filing

31
Q

Teal Ltd is VAT registered and makes 60% taxable and 40% exempt supplies. On 1 December 2021, Teal Ltd purchased a new commercial building in London for £10 million plus VAT of £2 million. For the next five years Teal Ltd will either:
- Exercise the option to tax and rent the whole building out to unconnected tenants; or
- use the building in its trade

Teal Ltd paid the stamp duty land tax (SDLT) and submitted the land transaction form to HMRC on 28 February 2022

Teal Ltd has a financial and VAT year end of 31 December. No change is planned to the balance of Teal Ltd’s taxable and exempt supplies.

Explain the VAT implications of Teal Ltd exercising the option to tax in respect of the building, renting it to unconnected tenants and then selling the building in year six

A

If Teal Ltd opts to tax (OTT) the building, then the rental property changes nature for VAT purposes.

Rental is normally an exempt supply.

The option to tax makes it a standard-rated taxable supply. This means the £2 million input VAT becomes recoverable.

Normally, once a commercial building is more than three years old it would be an exempt disposal/or as have purchased a new (less than 3 years old) commercial building VAT is payable

However, the option is irrevocable for 20 years and would mean that on disposal VAT would have to be charged even when the building is more than 3 years old.

Whilst rented, Teal Ltd would have to charge the tenants VAT on their rent

If the tenants are VAT registered and making wholly taxable supplies, the VAT would be fully recoverable and would not be a cost of renting.

Any costs incurred whilst renting the property would also be recoverable

32
Q

Teal Ltd is VAT registered and makes 60% taxable and 40% exempt supplies. On 1 December 2021, Teal Ltd purchased a new commercial building in London for £10 million plus VAT of £2 million. For the next five years Teal Ltd will either:
- Exercise the option to tax and rent the whole building out to unconnected tenants; or
- use the building in its trade

Teal Ltd paid the stamp duty land tax (SDLT) and submitted the land transaction form to HMRC on 28 February 2022

Teal Ltd has a financial and VAT year end of 31 December. No change is planned to the balance of Teal Ltd’s taxable and exempt supplies.

Explain the VAT implications of Teal Ltd using the building in its trade and then selling the building in year six for £15 million

A

If Teal Ltd uses the building in its partially exempt business, the £2 million input VAT is partially recoverable - 60% recoverable = £1.2 million

As the building cost more than £250,000 (excluding VAT), the capital goods scheme applies

Assuming no change in the use of the building whilst owned there will be no annual adjustments to the amount of input VAT initially recovered

A disposal within the 10-year CGS period will require a VAT adjustment on sale

As the building is sold after three years it will be an exempt disposal and no VAT will be charged on the sale, some of the input VAT recovered at acquisition will be repaid:
£2 million/10 x (0%-60%) x 4 = £0.48 million repayable to HMRC