VAT

Question 1

Name the two distinct aspect of VAT.

Answer 1

1) Input tax; and
2) Output tax.

Question 2

Briefly define output tax.

Answer 2

Output tax is VAT charged by a business to its customers.

Question 3

Briefly define input tax.

Answer 3

Input tax is the VAT charged by a business to its supplies.

Question 4

What is the definition of VAT (VATA 1994 s4(1))?

Answer 4

VAT is chargeable on the supply of goods or services where the supply is a taxable supply and is made by a taxable person in the course or furtherance of a business carried on by the taxable person.

The person making the supply must account for the tax charged to HMRC.

Question 5

What is the supply of goods for the purposes of VAT?

Answer 5

All forms of supply whereby the whole property in goods is transferred, including a gift of goods.

Question 6

What is the supply of services for the purposes of VAT?

Answer 6

Anything which is not a supply of goods by is done for consideration.

Question 7

Define taxable supply for the purposes of VAT.

Answer 7

Any goods or services other than an exempt supply.

Question 8

Name the two types of taxable supply.

Answer 8

• Those which are chargeable at zero rate;
• Those which are chargeable at the standard rate (20%).

Question 8

What is a zero rates supply?

Answer 8

supplies which are chargeable at the zero rate (0%). These include supplies of:

1) Water;
2) Insurance;
3) Some postal services
4) Finance;
5) Health services; and
6) Burial and cremation.

Question 9

What is the reduced rate of VAT and name some supplies it relates t?

Answer 9

The reduced rate is 5% and it applies to things like domestic fuel, stop smoking products, installation of energy saving materials etc.

Question 10

What is the difference between zero rated and exempt supplies?

Answer 10

• They are both supplies where no output VAT is charged.
• However, zero rated supplies means the business making these supplies can still recover input tax from their supplier. This is not the case on standard rated supplies.

Question 11

Do law firms make standard rated supplies?

Answer 11

Yes (other than when providing insurance services).

Question 12

Define taxable person.

Answer 12

• A person is a taxable person if they are required to be registered under the VATA 1994.
• A person must register if, the value of taxable supplies in the prior 12 months exceeded the figure specified in that years budget (85k for 23/24).
• Voluntary registration is also permitted, and someone may wish to do this so they can recover input tax.

Question 13

Define business for the purposes of VAT.

Answer 13

In the course of business means a supply made in the course of any trade, business, profession or vocation (but other things can also fall within this definition).

Question 14

Explain input tax.

Answer 14

Where a taxable person charges VAT on the supply of their goods or services for the purposes of their business, they are entitled to claim back any VAT charges to them (from their supplier) from the amount of output tax which they account for to HMRC.

Question 15

Is a taxable person making an exempt supply entitled to claim input tax?

Answer 15

No.

Question 16

What is the procedure for claiming input tax in situations where the taxable person makes both taxable and exempt supplies?

Answer 16

They can recover a proportion of input tax charged to them according to the supply that they make.

Question 17

How should solicitors quote their fees?

Answer 17

This should be the fee plus VAT. That way the VAT is expressed to be excluded from the price. This is important as if it is not specified, the VAT would come out of the fee, resulting in the firm receiving less money.

Question 18

Explain the general rule of the taxable point.

Answer 18

1) Goods - time of supply is when the goods are removed or made available to the purchaser;

2) Services - when the services are completed.

Question 18

Explain when the taxable point is varied.

Answer 18

a) If within 124 days of the basic tax point, supplier issues a tax invoice, the date of the invoice will become the tax point unless a longer peruse has been agreed with HMRC. For solicitors there is a general extension of the 14 day period to 3 months. Provided a solicitor delivers their bill within 3 months of completion of their services, the date of each bill will be the tax point.

b) If, before a bail cast point arises, the supplier issues a VAT tax invoice or received q payment, the supply will be treated as taking place at the date of the invoice or payment, to the extent covered by the invoice or payment.

Question 19

How long does a taxable person making a taxable supply to another taxable person have to provide them with a tax invoice?

Answer 19

It has to be provided within the 30 days after the time of supply.

Question 20

List the information a tax invoice should include.

Answer 20

(a) an identifying number;
(b) the date of the supply, ie the tax point;
(c) the supplier’s name, address and VAT registration number;
(d) the name and address of the person to whom the supply is made;
(e) the type of supply, eg sale, loan, hire;
(f) the description of the goods or services supplied;
(g) the quantity of goods or the extent of the services and the amount (excluding VAT)
payable for each description;
(h) the total amount payable (excluding VAT);
(i) the rate of cash discount; and
(j) the rate and amount of tax charged.

Question 21

What is the general formula for calculating the amount of taxation payable to HMRC?

Answer 21

• Total output tax charged less deductible inout tax.
• This is contained within the company’s statutory VAT account, a count required to be kept by every taxable person.

Question 22

If a company provides supplies at the zero rate, but paid input tax of 2k, is this still recoverable?

Answer 22

Yes - the company will be able to claim £2,000 from HMRC for the input tax incurred, even though they have not charged any VAT (ie charged at the zero rate).

Question 22

Does VAT have to be charged on disbursements?

Answer 22

No.

Question 23

Explain what qualifies as a disbursement.

Answer 23

Effectively it is a payment to a third party purely as an agent for a client.

For a payment to be a disbursement however, the following criteria must be met:

• you acted as an agent for your client when you paid the third party;
• your client received and used the goods or services provided by the third party;
• your client was responsible for paying the third party (eg stamp duty);
• your client authorised you to make the payment on their behalf;
• your client knew the goods/services you paid for would be provided by a third party;
• your outlay will be separately itemised when you invoice your client d you recover only the exact amount which you paid to the third party ; and
• the goods/services which you paid for are clearly additional to the supplies which you make to your client on your own account.

Question 24

Explain what is deemed NOT to be a disbursement.

Answer 24

Expenses paid to a third party that have been incurred by you in the course of making your own supply of services to your client and which are part of the whole of the services rendered by you to your client.

Question 25

Is a fee for a search treated as a disbursement?

Answer 25

Only if the results of the search are based straight to the client without comment or analysis from the solicitor. In practice this will never happen and therefore it is unlikely the search fee could qualify as a disbursement. VAT must therefore be charged.

Question 26

List some examples of non-taxable disbursements.

Answer 26

• Court fees;
• SDLT;
• LR fees;
• CH fees.

Question 27

What is a non-taxable disbursement ?

Answer 27

• Disbursements such as court fees or SDLT payments.
• The firm can pay these disbursements out of the client account if there is sufficient funds to do so. If there are insufficient funds to do so, the firm must make such payments out of their business bank account and recover the money from the client accordingly.

Question 27

List some examples of disbursements which would include a taxable element.

Answer 27

This will usually apply to taxable supplies (eg counsel, surveyors, accountant etc).

Question 28

Explain the agency method (in relation to taxable disbursements supplied to the client such as fees charged by counsel, accountants and surveyors).

Answer 28

• If invoice is addressed to client, supply is treated as made to the client.
• Firm therefore simply acts as an agent, paying the money on behalf of the client.
• If sufficient money is in the client account, this can be used. If not the payment must be made out of the firm’s business account.
• Firm does not need to separate supplier’s fees and VAT in firm’s accounting records (total paid is simply recorded).
• Firm MUST if asked send the client a copy of the supplier’s tax invoice (which the client may use to claim input tax).

Question 29

A firm is paying a disbursement of £1000 plus VAT to a supplier as an agent for a client. Assume the firm holds sufficient funds in the client account for this client. How is this recorded in the firm’s accounts?

Answer 29

1) DR Entry Client account (1.2k which is price and VAT); and
2) CR Entry Cash Account (client section) (1.2k which is price plus VAT).

Question 30

Explain the principal method (in relation to taxable disbursements supplied to the client such as fees charged by counsel, accountants and surveyors).

Answer 30

If invoice from the supplier is addressed to the firm, it’s treated as made to the firm in the first instance.

Firm can therefore claim the supply as an input, but must use business money to pay the supplier’s fees together with the input tax.

Firm then resupplies it to the client at the same price.

Firm will charge the client the output tax on both the firm’s professional charges and the disbursement.

Client can request invoices. Firm will provide the tax invoices for the professional charges and the disbursement.

Question 31

Explain the counsel’s fees concessionary treatment.

Answer 31

Agreement between the law society, Bar and HMRC.

The agreement is that when a law firm receives an invoice (addressed to them) from counsel in relation to a client matter, the firm can amend the name on the invoice to the client and subsequently use the agency method.