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
