VAT Flashcards
What is Value added tax?
It is indirect tax charged on goods and services
Rate of VAT
20%
Who pays VAT
everyone. individuals and companies
What does it mean to be VAT registered?
if one is registered, VAT paid can be recovered
if that good will be used in business
who cannot recover VAT paid?
final consumer.
3 heads of goods and services
1) standard rated supplies (taxable-VAT is recovered)
2) 0 rated supplies (taxable-VAT is recovered)
3) exempt supplies (VAT is not recovered)
what are standard rated supplies
VAT can be recovered
VAT must be charged
all goods and services which do not fall in category of zero rated and exempt, are classified as standard rated
what are zero rated supplies?
-VAT can be recovered
-VAT can not be charged
in this category goods and services get cheaper
it includes: MCBEER
1-medicines
2-children clothes and footwear
3-basic food
4-education material
5-exports
6- residential and charitable land and buildings
what are exempt supplies
-no recovery of VAT
-no VAT to be charged on sale
includes:
1- commercial land and building
2- postal services
3- accounting services
transactions related to land and building
Residential & Charitable land and building=
-Zero rated (VAT recoverable but can not be charged)
Commercial land and building (office, factory, etc)=
-Standard rated during construction and upto 3 years after construction
-Tranferred to exempt category after that unless opt to tax election is made.
what is opt to tax
after 3 years of construction, business can make an election called as opt to tax
then the commercial land will be considered as used for taxable purpose.
VAT will now be recoverable but
VAT will now also need to be charged from customers on sale or rent.
Opt to tax election - pros and cons
Pros:
good for those business whose customers are VAT registered.
cons:
-if customer not VAT registered, then they wouldnt be interested in buying/renting your property due to VAT charge
-once election is made, it can be revoked in the first 6 months (for mind change), after which it will become binding for 20 yrs
if a company has not made opt to tax election?? And business is being sold which includes building ?
No VAT on building .
if a business makes both taxable and exempt supplies
Partial exemption rule will apply
this business cannot recover all of the VAT they incur on their costs
VAT paid in relation to taxable supplies will be recoverable but not recoverable on exempt supplies
if any VAT is paid on unattributable activities (like head office) not specifically related to taxable or exempt head
that VAT will be allocated according to % of taxable supplies made during that period
always round up this % (for taxable supplies only, dont round up exempt, we want taxable to be higher)
like 60.2% should be 61%
in what case can a business recover total VAT? exempt and taxable both?
if a business passes any of the 3 deminimis test, it can recover its total VAT (taxable +exempt)
de minimis means something is too minor thus it can be ignored
deminimis test # 1
The simple test
If both conditions are met then business can recover all input tax.
a) total input VAT is less than £625 per month
b) exempt supplies should be less than 50% of total supplies
deminimis test # 2
a) Total input VAT less directly attributable input VAT to taxable supplies is less than 625 per month
b) exempt supplies should be less than 50% of total supplies
deminimis test # 3
a) Exempt VAT should be less than 625 per month
b) Exempt VAT should be less than 50% of total VAT.
how is VAT administered?
VAT recovery (input tax claim) is filed at every quarter end, and a final annual adjustment is made at end of year.
any over/ under recovery is adjusted in the annual adjustment
when is the deminimis test carried out?
what happens when test is passed?
annual working of demininis test is carried out during annual adjustment, and if passed: (generally passed if exempt tax is under £7,500 per year or 50% of total input tax) or if any of the 3 tests are met
what happens if test is passed?
-total VAT of current year is recovered (eg. if they were only claiming taxable VAT, they can now go back and claim total VAT)
-total VAT will be recovered in all quarters of next year as well: IF expected annual input tax of next year is less than 1 million
(this will then be adjusted during next year annual adjustment. eg. if failed test in annual adjustment, VAT recovered during the yr will have to be returned)
having to calculate % of taxable supplies at each quarter is difficult, what to do?
tax dept allows us to just calculate % of taxable supplies annually and use that % in upcoming quarters.
annual % of previous year will be used in quarter of current year
if i buy a non current asset and pay VAT on its purchase, and i use it to make taxible supplies, how will VAT be recovered?
as per the capital good scheme, VAT will be recovered according to the % of taxable use in the year of purchase. (one shot)
for 2 assets change in use will be monitored:
-land and building worth more than 250,000 (monitored for 10 yrs)
-computers worth more than 50,000 are monitored for 5 years.
if taxable use changes during monitoring period, yearly recoveries/payments will be made.
how will yearly adjustment be calculated for assets whose taxable use is being monitored?
VAT paid initially / monitoring years (5 or 10) * ( current %- initial %)
what if asset is sold during monitoring period?
same as normal yearly adjustments
in year of sale adjustment will also be done
then sale adjustment will be made at lower of:
a) VAT paid on purchase/ monitoring years *remaining years * (100%/0%- original%)
100% will be used if VAT is charged on sale
0% will be used if VAT is not charged
b) VAT charged on sale of asset
if a business gets registered for VAT
it can recover VAT paid
now required to charge VAT on its sales
two types of VAT registeration
1- compulsory
2- voluntary
who is required for compulsory registration
if taxable supplies exceed £85,000 per year, VAT registration is compulsory.
either of the 2 tests must be satisfied for compulsory registration:
historic test
future test
what is the historic test
-taxable supplies of the past year exceed £85,000/yr
-check at end of every month
-register within 30 days of passing this test, or registration will be deemed (assumed) at the end of 30 days
what is future test
taxable supplies of previous 11 months and next 1 month budgeted exceed £85,000/yr
-this test also check every month
-register immediately or registration will be deemed.
who is exempt from compulsory registration
businesses dealing in zero rated supplies, even if 85k limit exceeds.
they are allowed for voluntary registration (to recover VAT paid)
what is disaggregation
tax avoidance technique
people split their business into small parts to avoid registration limit.
what has tax department done for disaggregation
Tax dept can make a reaggregation order and require VAT registration
reaggregation is made on the basis of strategic, operational and financial dependancy of each part on each other
why may a business register voluntary
ZEBRA TIGERS REQUIRE EXPERIENCE
-zero rated supplies
-target customer is VAT registered
-required for that business activity (eg. export business)
-exempt from tracking thresholds, wont have to review compulsory registration limit annually
disadvantages of VAT registration
AUNT URSULA;S PROBLEM
-administrative burden
-unregistered customer: price will rise, they cant reclaim, reduced demand
-Penalties: VAT errors can lead to penalties
can VAT paid prior to registration be recovered?
YES. must be purchased for business
4 GOODS 6 SERVICES
GOODS must be bought within 4 yrs prior
and present at time of registration
services: purchased within 6 months prior to registration
how does Group VAT work
GROUP PRID(E)
-P-arent- companies having a common parent, or one controls the other (50%shareholding) can get registered for VAT as a single group
R-eturn- one single VAT return for whole group saving admin costs
I-Intra group transactions: No VAT on intra group transactions
-D-iminimis test will get applied at group level
-E- Established in UK must
is group registration mandatory
no
disadvantage of group registration
WP
-whole group may fail demininis test due to exempt supplies of 1 sub
-penalty on whole group if one sub makes mistake and jointly and severally liable for VAT
if a company has multiple business divisions unrelated to each other, is filing separate VAT returns allowed?
YES BUT MUST MEET CONDITIONS
BUDS FOR COMPANY
B-Business divisions should be separate businesses
U-Unmanageable to do it together
D-Deadline: file all returns together
S- Sales between divisions should be ignored
C- Company as a whole: Registration, deregistration and partial exemption rules will apply on company as a whole.
What happens if a business deregisters for VAT?
-NO recovery of VAT paid
-no CHARGING of VAT on sales
-VAT is payable on MV of all Standard Rated supplies held. This is waived if less than £1000.
(Eg. Inventory, fixed assets, marketing items like mugs.
No VAT on goodwill as it is outside scope of vat
voluntarily deregistration can be done if
if taxable supplies of next 12 months are expected to be less than 83,000
deregistration is compulsory when
within 30 days when a business ceases to do business of taxable supplies
VAT implication on sale of ceased business (stopped trading then sold assets)
rules of deregistration will be followed.
-deregistration compulsory after ceasation
-VAT will be payable on MV of all SR supplies held
-less than 1000 will be waived
-no VAT after charged or recovered after deregistration
VAT implication on sale of ongoing business
-VAT is charged on sale of ongoing business. (On assets like equipment,stock, goodwill etc). Buyer can recover this VAT as well
-however if it qualifies as TOGC (transfer of going concern) business then NO VAT will be charged
No VAT on sale of shares themselves
TOGC rules
C-continuing business: business must be sold as going concern (expected to continue in the foreseeable future)
B-buyer intends to continue that business as going concern without any significant change or break
B-buyer should be registered for VAT or become registered within 30 days
Both parties agree sale is TOGC
VAT implication if goods are sold outside UK (export)
this transaction will be zero rated (VAT recovered, but not charged) remember MCBEER?
VAT implication if goods are imported to UK from abroad
postponed VAT accounting will apply
VAT will be charged on port before release of goods. (customs/ import duty)
if imports are used in business to make taxable supplies VAT can be reclaimed if customer is VAT registered
customer will record import VAT as output VAT on its VAT return in the quarter covering date of importation
VAT implication if services are taken from overseas
Registered customer will pay VAT in own country. and may recover it of taxable use.
Unregistered customer (normally final consumer) will pay VAT in supplier country and it cant be recovered.
what are VAT accounting schemes
-for small businesses
who dont have resources to do proper VAT maintenence
3 schemes are:
-cash accounting scheme
-annual accounting scheme
-Flat rate scheme
what is cash accounting scheme and its benefits?
VAT is charged on cash basis (normally VAT is on accrual basis)
benefits:
-improved cash flow
-no refund issues in case of bad debt
requirements to enter into cash accounting scheme?
-taxable supplies should be less than 1,350,000 per year
-once scheme is joined, it can continue uptil limit of 1,600,000 taxable supplies per year
-no default should have been done in relation to VAT in the past (clean compliance record)
what is annual accounting scheme?
normally VAT is filed at end of every quarter, however if this scheme is joined, VAT will only have to be filed at end of each year.
benefits of annual accounting scheme and disadvantage
save admin burden and cost
disadvantage: odd payments dates
conditions for annual accounting scheme
same as cash accounting scheme
1- taxable supplies should be less than 1,350,000 pounds per yr
2-once scheme is joined, it can continue uptil limit of 1,600,000 taxable supplies per year, (notify HMRC if expecting to exceed in next yr)
3-no default should have been done in relation to VAT in the past (clean compliance record)
how is VAT payment done during the year if annual accounting scheme is entered
VAT will be paid according to previous year VAT.
return will be made in end when over/ underpayment will be settled
it can be paid in 10 monthly installments or in 4 quarterly installments
10 monthly installments will be paid how
Prev yr VAT /10 = per month installment
payments will start in 4th month of accounting year
payments will continue till 14th month
in the 14th month final adjustment will be made
final adjustment=
actual VAT less VAT already paid in installments
quarterly payments will be made how
previous year VAT/ 4 = quarterly amount
payments will start in 4th month
then in 7th month
then 10th month
then 14th month (not 13th)
final adjustment= actual VAT less VAT paid
what is Flat rate scheme
no output or input tax
all VAT rules are ignored, a single rate of VAT is given which has to be applied on total revenue
-no concept of type of supplies, input tax, etc
on what basis is flat rate decided in this scheme
based on net VAT paid by industry on average. normally it is 14%
in first year of scheme, flat rate is discounted by 1%
conditions for flat rare scheme
1- total revenue should be less than 150,000/ year
2- if total revenue exceeds 230,000 then scheme should be left
3- No VAT default should exist in the past
Can VAT on entertainment expenses be recovered?
cannot be recovered unless the entertainment is for employees OR for overseas customers
VAT on gifts
cannot be recovered
except the following:
-gift is a sample
-gift is worth less than 50 pounds
-gift is made to overseas customer
VAT implication in case of bad debt
can be recovered if following conditions are satisfied:
-Debt is written off in FS
-6 months have passed after due date
-Claim should be within 4 yrs of VAT paid
VAT return and payment deadline
1 month and 7 days after each quarter
Late filing (submission) penalties
points based system
penalty point is incurred each time a VAT return is submitted late
after 4 points, 200 pound penalty is charged
after that each penalty point will incur 200 pound penalty
penalty points normally expire after 2 yrs however they wont expire if threshold has been reached (4 points)
once penalty threshold is reached, a business has to submit VAT returns on time for the next 4 quarters for their penalty point to be reset to 0
Late PAYMENT penalties
-each late payment is considered separately
-no penalty charged if paid within 15 days of due date
-2% penalty charged if paid within 16-30 days
-4% penalty if paid later than 30 days
-daily penalty at annual rate of 4% 94%/365= 0.011% per day) is charged beginning after the initial 30 day period
late payment interest will also be charged.
interest rate is same as underpayment interest rate (give in exam)
late payment and late submission penalties will not be charged if…
reasonable excuse
eg. unexpected hospital stay
insufficient funds is not a reasonable excuse
errors in previous VAT returns
if identified by tax payer:
change in next return if error is of less than 10,000 pounds or 1% of turnover (max 50,000)
for greater amount errors, separate return is filed on which interest is applied
if error is discovered by HMRC:
penalties will apply
if a business is being sold and includes land and building, and meets condition of TOGC
IF TOGC met then VAT will not be charged on sale of business
however VAT must be charged if land and building are included in the sale, if it is taxable supply i.e first 3 yrs rule or opt to tax is done
VAT implication on sale of company shares?
if a company is being sold from sole trader to a company, VAT implication?
-cancel VAT registration of sole trader
-company is separately required to register
-VAT registration number may be transferred to the new company and they will take over rights and liabilites of VAT at the date of transfer
VAT on Purchase of Cars and motoring expenses?
VAT on Purchase of Cars can only be recovered if Business use is 100%. If any Private use is involved then VAT paid cannot be recovered.
• VAT on motoring Expenses i.e. Repairs & Maintenance Expense can be recovered even if some private use is involved.
Fuel Issues of VAT
- If an Employer Purchases Fuel for Business use then he can recover VAT paid on purchases of Fuel.
- However following issues may be relevant:
o If Fuel purchased by Employer is sold to Employee then VAT cannot be recovered
o If Fuel purchased by Employer is provided to Employees for private use then VAT
recovered needs to be returned according to scale charge. Scale charge is multiplied by VAT Rate and this scale charge depends on CO2 emission rate of vehicle (it will be given in Exam).
