VAT

Question 1

What is the Principle of Value Added Tax?

Answer 1

VAT is charged on taxable supplies, a taxable person, or in the course of business (not to private sector).
Sole traders (1 VAT registered business), companies, and partnerships are taxable people.

Question 2

How does VAT Work?

Answer 2

VAT collected at each value-added stage of distribution change.
Payable by final consumer who cannot reclaim.

Question 3

What are Outputs of VAT?

Answer 3

Output VAT paid by customers, collected by businesses once sold, and submitted to HMRC.

Question 4

What are Inputs of VAT?

Answer 4

Business can be customer, paying VAT on purchases. Registered businesses can reclaim input VAT when purchase is made.

Question 5

What are the Rates of VAT?

Answer 5

• Standard Rate
• Reduced Rate
• Zero-Rate
• Exempt

Question 6

What is the VAT Standard Rate?

Answer 6

• Most goods & services.
• Tax-exclusive products = 20%.
• Tax inclusive products = 1/6 of value.

Question 7

What is the VAT Reduced Rate?

Answer 7

• Children’s car seats & domestic fuel.
• Tax exclusive value = 5%.
• Tax inclusive value = 1/21 of value.

Question 8

What is the VAT Zero-Rated?

Answer 8

• Food (except luxuries), books, children’s clothing/footwear, transport for passengers <11yrs old.
• 0%.

Question 9

What is the VAT Exempt?

Answer 9

• Royal mail postal services, education, insurance services, burial & cremation.
• No VAT charged.

Question 10

How does Output VAT Varies Depending on the Value of Supply?

Answer 10

• No discount, value of supply = amount charged by supplier (VAT exclusive value).
• Trade discount offered, value of supply = actual amount for VAT.
• Settlement discount offered, VAT charged net of discount, adjust.
  o Charge VAT on full amount and issue credit note if discount is taken up, or supplier could issue 2 different amounts, stating VAT depends on if discount is taken.
• Supply = gift, not taxable.
• Free samples to customers are NOT taxable.

Question 11

How is VAT Charged on Fuel?

Answer 11

When business pays employees fuel costs:
* Output VAT charged – fuel scale charge x 1/6
* Business can reclaim all input VAT on fuel purchased for private use.
* Input VAT can be recovered, but must collect & submit output VAT.

Question 12

What are the Basic Rules for Input VAT?

Answer 12

Taxable person making taxable supplies can recover input VAT incurred, but not all.
Only reclaim business % of input VAT if purchase is for mixed private & business use.

Question 13

What are Irrecoverable Input VATs?

Answer 13

Purchases of motor cars unless 100% used for business purposes.
o Lorries & tractors are recoverable, even if 2nd.

Expense on UK customer. Staff, foreign customer entertainment is recoverable.

Non-business items.

Items with no VAT receipt.

Question 14

What are the Tests for Compulsory Registration for VAT?

Answer 14

Historical Test -
Last 12 months, cumulative taxable overturn must exceed £85,000. Must notify HMRC within 30 days of the end of the month. Registration effective day 1 of second month. E.g. exceed limit 20/07/23, notify 30/08/23, effective 01/09/23.

Future Test -
Look at next 30 days if £85,000 exceeded. Must notify within 30 days of exceeding. Registration effective beginning of same 30 day period, VAT charged straight away.

Question 15

What is Voluntary Registration?

Answer 15

Even if below threshold, can still register for VAT.
Advantage = ability to recover input VAT.
Disadvantage = start charging VAT from sales to customers. Increase price, reduce competitivity.

Question 16

What is Deregistration?

Answer 16

Compulsory Deregistration -
Trader ceases to make taxable supplies, must notify HMRC within 30 days. Takes effect date supplies cease.

Voluntary Deregistration -
Estimated turnover next 12 months < £83,000. From date which request is made/agreed.