VAT

Question 1

What is Value added tax?

Answer 1

It is indirect tax charged on goods and services

Question 2

Rate of VAT

Answer 2

20%

Question 3

Who pays VAT

Answer 3

everyone. individuals and companies

Question 4

What does it mean to be VAT registered?

Answer 4

if one is registered, VAT paid can be recovered
if that good will be used in business

Question 5

who cannot recover VAT paid?

Answer 5

final consumer.

Question 6

3 heads of goods and services

Answer 6

1) standard rated supplies (taxable-VAT is recovered)
2) 0 rated supplies (taxable-VAT is recovered)
3) exempt supplies (VAT is not recovered)

Question 7

what are standard rated supplies

Answer 7

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

Question 8

what are zero rated supplies?

Answer 8

-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

Question 9

what are exempt supplies

Answer 9

-no recovery of VAT
-no VAT to be charged on sale

includes:
1- commercial land and building
2- postal services
3- accounting services

Question 10

transactions related to land and building

Answer 10

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.

Question 11

what is opt to tax

Answer 11

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.

Question 12

Opt to tax election - pros and cons

Answer 12

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

Question 13

if a company has not made opt to tax election?? And business is being sold which includes building ?

Answer 13

No VAT on building .

Question 14

if a business makes both taxable and exempt supplies

Answer 14

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

Question 15

if any VAT is paid on unattributable activities (like head office) not specifically related to taxable or exempt head

Answer 15

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%

Question 16

in what case can a business recover total VAT? exempt and taxable both?

Answer 16

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

Question 17

deminimis test # 1

Answer 17

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

Question 18

deminimis test # 2

Answer 18

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

Question 19

deminimis test # 3

Answer 19

a) Exempt VAT should be less than 625 per month
b) Exempt VAT should be less than 50% of total VAT.

Question 20

how is VAT administered?

Answer 20

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

Question 21

when is the deminimis test carried out?
what happens when test is passed?

Answer 21

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)

Question 22

having to calculate % of taxable supplies at each quarter is difficult, what to do?

Answer 22

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

Question 23

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?

Answer 23

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.

Question 24

how will yearly adjustment be calculated for assets whose taxable use is being monitored?

Answer 24

VAT paid initially / monitoring years (5 or 10) * ( current %- initial %)

Question 25

what if asset is sold during monitoring period?

Answer 25

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

Question 26

if a business gets registered for VAT

Answer 26

it can recover VAT paid now required to charge VAT on its sales

Question 27

two types of VAT registeration

Answer 27

1- compulsory 2- voluntary

Question 28

who is required for compulsory registration

Answer 28

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

Question 29

what is the historic test

Answer 29

-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

Question 30

what is future test

Answer 30

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.

Question 31

who is exempt from compulsory registration

Answer 31

businesses dealing in zero rated supplies, even if 85k limit exceeds. they are allowed for voluntary registration (to recover VAT paid)

Question 32

what is disaggregation

Answer 32

tax avoidance technique people split their business into small parts to avoid registration limit.

Question 33

what has tax department done for disaggregation

Answer 33

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

Question 34

why may a business register voluntary

Answer 34

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

Question 35

disadvantages of VAT registration

Answer 35

AUNT URSULA;S PROBLEM -administrative burden -unregistered customer: price will rise, they cant reclaim, reduced demand -Penalties: VAT errors can lead to penalties

Question 36

can VAT paid prior to registration be recovered?

Answer 36

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

Question 37

how does Group VAT work

Answer 37

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

Question 38

is group registration mandatory

Answer 38

no

Question 39

disadvantage of group registration

Answer 39

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

Question 40

if a company has multiple business divisions unrelated to each other, is filing separate VAT returns allowed?

Answer 40

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.

Question 41

What happens if a business deregisters for VAT?

Answer 41

-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

Question 42

voluntarily deregistration can be done if

Answer 42

if taxable supplies of next 12 months are expected to be less than 83,000

Question 43

deregistration is compulsory when

Answer 43

within 30 days when a business ceases to do business of taxable supplies

Question 44

VAT implication on sale of ceased business (stopped trading then sold assets)

Answer 44

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

Question 45

VAT implication on sale of ongoing business

Answer 45

-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

Question 46

TOGC rules

Answer 46

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

Question 47

VAT implication if goods are sold outside UK (export)

Answer 47

this transaction will be zero rated (VAT recovered, but not charged) remember MCBEER?

Question 48

VAT implication if goods are imported to UK from abroad

Answer 48

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

Question 49

VAT implication if services are taken from overseas

Answer 49

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.

Question 50

what are VAT accounting schemes

Answer 50

-for small businesses who dont have resources to do proper VAT maintenence 3 schemes are: -cash accounting scheme -annual accounting scheme -Flat rate scheme

Question 51

what is cash accounting scheme and its benefits?

Answer 51

VAT is charged on cash basis (normally VAT is on accrual basis) benefits: -improved cash flow -no refund issues in case of bad debt

Question 52

requirements to enter into cash accounting scheme?

Answer 52

-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)

Question 53

what is annual accounting scheme?

Answer 53

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.

Question 54

benefits of annual accounting scheme and disadvantage

Answer 54

save admin burden and cost disadvantage: odd payments dates

Question 55

conditions for annual accounting scheme

Answer 55

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)

Question 56

how is VAT payment done during the year if annual accounting scheme is entered

Answer 56

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

Question 57

10 monthly installments will be paid how

Answer 57

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

Question 58

quarterly payments will be made how

Answer 58

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

Question 59

what is Flat rate scheme

Answer 59

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

Question 60

on what basis is flat rate decided in this scheme

Answer 60

based on net VAT paid by industry on average. normally it is 14% in first year of scheme, flat rate is discounted by 1%

Question 61

conditions for flat rare scheme

Answer 61

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

Question 62

Can VAT on entertainment expenses be recovered?

Answer 62

cannot be recovered unless the entertainment is for employees OR for overseas customers

Question 63

VAT on gifts

Answer 63

cannot be recovered except the following: -gift is a sample -gift is worth less than 50 pounds -gift is made to overseas customer

Question 64

VAT implication in case of bad debt

Answer 64

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

Question 65

VAT return and payment deadline

Answer 65

1 month and 7 days after each quarter

Question 66

Late filing (submission) penalties

Answer 66

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

Question 67

Late PAYMENT penalties

Answer 67

-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)

Question 68

late payment and late submission penalties will not be charged if...

Answer 68

reasonable excuse eg. unexpected hospital stay insufficient funds is not a reasonable excuse

Question 69

errors in previous VAT returns

Answer 69

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

Question 70

if a business is being sold and includes land and building, and meets condition of TOGC

Answer 70

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

Question 71

VAT implication on sale of company shares?

Question 72

if a company is being sold from sole trader to a company, VAT implication?

Answer 72

-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

Question 73

VAT on Purchase of Cars and motoring expenses?

Answer 73

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.

Question 74

Fuel Issues of VAT

Answer 74

- 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).