VAT

Question 1

Value added tax (‘VAT’)

Answer 1

Value added tax (‘VAT’) is a tax that is applied when certain
goods or services are supplied by a business within the UK.
It can apply even when a business sells goods or services
to another business. The basic principle is to charge VAT at
each stage in the supply of goods and services (output tax).

Question 2

CHARGE TO VAT

Answer 2

VAT is charged on any supply of goods or services made in
the UK (unless the supply is exempt) if the supply is made
by a taxable person whilst carrying on business. Tax will be
charged on the ‘value of the supply’, which is defned wide-
ly to prevent VAT avoidance. Note that a taxable ‘person’
includes a sole trader, company, or partnership.

Question 3

What Goods and Services Are Taxable?

Answer 3

1. If a business supplies goods or services to others, the goods or services supplied typically are subject to VAT.
2. This includes the supply of power or heat and the supply of a solicitor’s services.
3. However, the supply of land, insurance, financial services, education, health services, or postal services is exempt.
4. Additionally, certain transactions are outside the scope of VAT entirely, including the sale of shares of a company and the sale of a business as a going concern.

Question 4

VAT RATES

Answer 4

1. The standard rate of VAT is 20%. 2. 2. However, a range of supplies are taxed at 0%—known as** ‘zero-rated’.** These include food (other than food supplied in the course of catering), books and newspapers, water and sewerage services, transport, and residential construction.

Question 5

Reduced Rate

Answer 5

A reduced rate of 5% is applied to a small range of supplies, including those of domestic fuel, installation of energy-saving materials, and child car seats.

Question 6

VAT REGISTRATION

Answer 6

1. A bussiness must register for VAT if its turnover (that is, if its gross income from the sale of non-exempt goods or
   services) within any 12-month period will exceed the VAT threshold.
2. The threshold is adjusted every few years but will be £85,000 until April 2024.
3. When determining whether the registration threshold will be crossed, exempt supplies are not included but zero-rated and reduced rate supplies are included as well as supplies subject to the full tax rate.
4. There are two tests that are performed simultaneously:
   (1) Historical test
   (2) Future test

Question 7

Historic Test

Answer 7

1. The historic test looks at the value of taxable sales in the **preceding 12 months **on a rolling basis.
2. If cumulative taxable sales (whether subject to the 20%, 5%, or 0% rate, as
   discussed above) exceed the registration threshold, HMRC must be notifed within the next 30 days.
3. From the start of the following month, the business will be registered for VAT and must charge VAT on supplies it makes. For example, if a business’s taxable supplies exceeded the threshold for the first time on 31 March 2023, it was required to register for VAT by 30 April 2023 and charge VAT from 1 May 2023.

Question 8

Future Test

Answer 8

1. In contrast, the future test looks only at the taxable sales in the next 30 days alone.
2. If the registration threshold is ex-pected to be exceeded in the following 30 days alone, then HMRC must be notifed before that 30-day period expires.
3. The business will be registered and VAT charged from the date that the business was aware that its taxable supplies were going to exceed the registration threshold within the 30-day period.

Question 9

Voluntary Registration

Answer 9

1. Above we discussed the compulsory registration. However, it also is possible to voluntarily register for VAT.
2. Voluntary registration enables businesses to recover VAT they paid on
   their own purchases (input tax) and to avoid penalties for late registration.
3. However, if a business registers for VAT, they must charge their customers VAT (generally 20%), a real cost if the customer is not able to recover the VAT charged.

Note: A person who supplies only exempt items or services cannot register.

Question 10

Cancelling Registration (Deregistration)

Answer 10

1. A business is allowed to deregister for VAT if its taxable turn-over falls below £83,000 for a 12-month period.
2. A business is also obliged to deregister if it stops trading or supplying goods or services that are subject to VAT. In the latter case,
   registration must be cancelled within 30 days.

Question 11

OPTION TO TAX

Answer 11

1. As indicated above, the sale or lease of land is normally an exempt supply for VAT.
2. However, owners of interests in commercial land and buildings may opt to charge VAT even if the sale or lease would normally be exempt.
3. Once the option to tax is exercised, it applies to all future supplies relating to that land or building, including selling it or leasing it to a tenant.

Question 12

Tax Consequences
The tax consequences of opting to tax are as follows:

Answer 12

1. Standard rate VAT (20%) must be charged on the sale or lease (premium and rents) of the property (this may be a problem for purchasers or tenants who make wholly or partially exempt supplies since they may be restricted in recovering this input tax);
2. If a landlord purchases a new commercial building, it is **a taxable transaction **and the landlord will therefore pay VAT at 20% on the value of the building.Unless they opt to tax the building, renting it out would be an exempt supply, thus making the signifcant input tax suffered irrecoverable.
3. Opting to tax the building converts the renting out of the building into a taxable supply and means the input tax suffered on the purchase price is recoverable.
4. If a VAT registered trader purchases a new commercial building for use in their taxable trade, the input VAT suf-
   fered will be recoverable; and
5. Any inputs relating to the supply may be recovered, including heating costs, cleaning, and repairs.
6. The option to tax relates to individual land or buildings, not to all the land and buildings owned by the person opting to tax. However, if made, the option applies to the whole building.

This may be a problem if there are several tenants, some of which make exempt supplies.

Question 13

Option Not Applicable to Residential Land
and Buildings

Answer 13

The option to tax does not apply to residential land and
buildings.

Question 14

Distinguish Construction of Commercial
Buildings

Answer 14

A contract to supply (that is, construct) a new commercial building is taxed to the standard 20% rate. The same is true for the sale of a commercial building that is less than three years old.

Question 15

ACCOUNTING FOR VAT
Time of Supply

Answer 15

A registered business must account for VAT one month
after the end of each VAT quarter. Diferent businesses are
allocated four diferent VAT periods in a year (for example,
March-June-September-December) so HMRC has an even
distribution of VAT receipts during the year.

Question 16

Tax Point

Answer 16

1. The time of supply (tax point)determines the accounting
   period within which a supply of goods or services falls.
2. For goods, the basic tax point is the time goods are removed, or the time they are made available to the person to whom they are supplied.
3. For services, it is when the services are performed.
4. However, the basic tax point can be varied. For example, if the supplier issues a VAT invoice or receives payment before the date the goods are delivered or made available, the tax point is brought forward to that earlier date. If a VAT invoice is issued within 14 days after the basic tax point, then the invoice date becomes the new tax point.

Question 17

VAT Invoices

Answer 17

A person making a taxable supply must provide the recipient with a tax invoice containing the supplier’s VAT number, the tax point, the value of the supply, and the rate of tax charged. These invoices can be used by a business seeking to deduct input tax from their output tax. A person deducting input tax in a VAT return must have tax invoices to back up any claim.

Question 18

Returns and Reclaiming VAT

Answer 18

1. A business must file an electronic VAT return each quar-ter, and payment of any VAT due is made by direct debit to HMRC.
2. The amount payable is the VAT the business charged its customers on all supplies of goods and services (that is,
   the business’s output tax) less any VAT the business paid on goods and services related to the goods or services it supplied (that is, the business’s input tax)
   Note: If input tax exceeds output tax, HMRC will issue a rebate.

Question 19

Non-Business Activities

Answer 19

1. A business cannot reclaim VAT on supplies made to thebusiness that relate to any non-business activity. If an item is used for both business and personal reasons (for example,a computer), VAT can be reclaimed only for the businessproportion.
2. Also, in most cases, input VAT paid on the pur-chase of a car cannot be reclaimed due to the potential for
   personal use. Neither can VAT on business entertaining be reclaimed.
3. A business that makes zero-rated supplies will be able to re-claim input tax from HMRC—they often make monthly claims to aid cashfow.
4. However, an exempt suppliercannot reclaim VAT as they cannot register.
5. If a business makes a combination of zero-rated and exempt supplies (a ‘partially exempt trader’), normally only a proportion of their input tax will be
   recoverable.