VAT Flashcards
What is Value added tax?
It is indirect tax charged on goods and services
Direct vs indirect tax
direct: on earnings
indirect: on consumption
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
those finished goods and services on which tax dept allows recovery of VAT on raw material and requires charging of VAT on sale of finished goods & services
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?
those finished goods and services on which:
-recovery of VAT on raw material
-no VAT charged on sale
in this category goods and services get cheaper
it includes:
1-medicines
2-basic food
3-residential and charitable land and buildings
4-children clothes and footwear
5-education material
6-exports
what are exempt supplies
those finished goods and services in which
-no recovery of VAT on raw material
-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 are classified in zero rated category
-Commercial land and building (office, factory, etc) is classified as exempt. however may be standard rated in some situations
when is commercial land and building classified as standard rated?
-during construction period and uptil 3 years after finishing construction.
after this it gets transferred to exempt category
VAT recovery depends on…
whether land & building is used for taxable supplies (standard rated or zero rated) or not
if yes, then VAT will be recovered
if exempt supplies are made or its rented out, then VAT will not be recovered
how can VAT be recovered in case land and building is used for exempt purpose?
business can make an election called as opt to tax
then the 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
what is partial exemption rule
if a business deals in both taxable (standard and 0 rated) and exempt supplies then 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%
what is the deminimis test
if a business passes any of the 3 deminimis test, it can recover its total VAT (taxable +exempt)
deminimis test # 1
2 conditions
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 (part b is same as test1)
deminimis test # 3
a) Exempt VAT should be less than 625 per month
b) Exempt VAT should be less than 50% of total VAT.
when is VAT recovered during tax year
VAT recovery is filed at every quarter end, and a final annual adjustment is also made at end of year
any over/ under recovery is adjusted in annual adjustment
what happens if you pass the annual demininis test?
annual working of demininis test is carried out during annual adjustment, and if passed:
-total VAT of current year is recovered
-total VAT recovery in next year quarters 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?
VAT will be recovered in first year according to the % of taxable use in first year.
then taxable use will not be monitored except for 2 assets:
-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) * ( taxable % in current year less taxable % in initial year)
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
if a business gets registered for VAT
it can recover VAT paid
now required to charge VAT on its sales
