VAT Flashcards
VAT is charged on
taxable supplies of goods and services in the UK by a taxable person and is suffered by the end user.
It is also suffered on the import of goods (whetehr for business or not) or on services recieved from abroad if a taxable person recieves them.
Define a taxable supply
A supply of goods or services made in the UK other than an exempt supply
Compulsory reg
A person must register if they fail the historic or future test
What are the historic and future tests?
Historic - Where atxable supplies are over 85k in the prev 12 months. Have 30 days to notify HMRC and start charging VAT from the end of the month that exceeded
Future - where taxable supplies are expected to exceed 85k in the next 30 days. 30 days to notify HMRC. Start charging immediatly.
Dereg
Compulsory - Cease making taxable supplies
Voluntarily - If taxable supplies full under 83k
For both - 30 days to notify HMRC and dereg from date of request. VAT due on all assets owned at date of dereg that input VAT was claimed on. If VAT is less than £1,000 there is no need.
VAT group registration
Allow groups to nominate one entity to prepare the VAT returns.
Intragroup transactions are disregarded
All members are jointly liable for VAT liability
Subs under common control of an overseas company
Can also apply for group reg
The inclusion of an exempt entity
could result in the whole group becoming partially exempt
Cash accounting
Available if turnover is less than £1,350,000 in following 12 months of returns
Advant - Cash flow and automatic bad debt relief
Trade must leave the scheme once turnover exceeds 1.6m
Annual accounting
Available if turnover not expected to exceed
Flat rate scheme
Available if not expected to exceed £150,000 in next 12 months
1% deduction in first year of VAT reg
if the 16.5% VAT rate applies it is usually nto advantageous to use the flat rate scheme unless input VAT is really low
If a business passes the partial exemption tests it can
reclaim all input VAT
What is the partial exemption / de minimis test?
Total input VAT is < £625 per month and exempt supplies < 50% of total supplies
OR
Total Input less input VAT re taxable supplies < £635 per month and exempt supplies < 50% total supplies
To use the annual deminimis test
The trader must:
Have been deminimis in the previous partial exemption year
Consistently apply the annual test
Have reasonable grounds to not expect to incur more than 1m input tax in its current year.
If these are satisfied the trader can reclaim inut VAT in full. Giving a cash flow benefit.
If one test has failed then there must eb an adjustment
If a trader does not use the annual test they must use the
de minimis test each VAT return period
Annual adjustment
If tests 1 and 2 are passed - no need to pay back
If tests 1 and 2 failed - Will need to carry out a full partial exemption to determine is test 3 is passed. If it is, no VAT needs to be paid back
Business gifts are not supplies of gifts if:
The total cost to the same person does not exceed £50 in any 12 month period. If exceeded VAT is due on entire amount and the £50 limit and 12 mo period restart
The gift is a sample (unlimited samples are allowed)
What are the common items that are Z rated
Human and animal food
Books and newspapers
Construction work on new homes or the sale of a freehold or lease over 21 years
Export of goods
Clothing and footwear for young children and protective clothing
What are the common items that are exempt?
Sales of freeholds (other than commercial buldings within 3 years from completion) and leaseholds of land and buildings inc surrender of lease
Financial services
Insurance
What are the common items that are 5%
Fuel for domestic use
Services installing energy saving materials to homes
Hot food and luxury food items
Have VAT at 20%
If a business makes taxable supplies int he UK but has no establishment here
It must register for VAT, whatever the value of it’s taxable supplies - even if below the threshold.
When a business is aware they should be charging VAT but they do not have a VAT number
They should gross uo invoices and let customers know that a replacement invoice stating the VAT and VAT number will follow. Once the VAT number is recieved all customers should receive the new invoices within 30 days.
Exemption from reg
If a person makes only Z rated supplies they are able to apply for an exemption
A person who also only has a small amount of S rated supplies can also apply provided they are normally in the position of receiving a refund
Is is possible to apply for
advange group reg but HMRC has 90 days to decline.
Changes in legal status also require dereg
Sole trader becoming a partnership and vice versa
Business becoming incorporated and vica versa
What are the consequence sof degreg?
All inventory and assets that have had VAT reclaimed are chargeable. Not applicable if total VAT is under £1,000
If a business or part of it is sold to another taxable person as a going concern
there is no need to dereg. Such transfers are outside the scope.
The new owner takes over the rights and liabilities.
Vat incurred before reg
Goods must have been aquired for business and have not been sold before the date of registration.
VAT must have been incurred in the prev 4 years
If for services - were for a purpose which was carried on at the time of supply and the services were supplied within prev 6 months
The following input VAT is not deductible
VAT on purchased cars that are not wholly for business purposes such as resale or a taxi business. If VAT is not originally reclaimed then VAT is not charged on the sale.
50% of the VAT on leased cars which are qualifying cars - cars that have not already been irrecoverable.
Business entertaining - unless overseas customers
Adjustments for personal use.
If fuel is reimbursed by an employee
It is a taxable supply and VAT must be accounted for
If fuel is either not reimbursed or is low cost
A business can:
Not claim VAT in respect of fuel so no output tax is charged
Claim input VAT only on the fuel for bsuiness journeys
Claim input VAT but then have to charge output VAT on the receipts based on full cost or the VAT fuel scale charge
A trader may claim a refund of VAT on amounts unpaid by debtors if: (Impairment loss relief)
They have accoutned for the VAT
The debt is over 6 months old
The debt has been written off on the creditors account
Impairment loss relief is available
4 years after of the time the bad debt became eligible for relief - i.e 4 years and 6 months from the date it fell due.
A person whos input VAT will regulary exceeed their output VAT
Can elect for 1 month VAT returns
Records must be obtained for
6 years
Substantial traders for VAT
Once a traders liability exceeds 2.3m in a 12 month or less periodthey must start mkaing payments on account dueing each quarter.
the first payment is due one month before the end of the quarter and the second is due at the end of the month which is the final month of the quarter.
The amount paid is 1/24 of the traders annual VAT liability in the period that the threshold was exceeded. VAT due on imports from outside the EU are ignored.
they do not recieve the extra 7 days to pay
Further info on substatntial traders
Once a trade is in the scheme, payments on account are checked annually.
Can apply to reduce payments on account at any time if VAT liability for last 4 returns is less than 80% of total that payments on account were based. Same for increases.
Can apply to leave the scheme is VAT liab less than 1.8m in prev 12 months or if at annual review under 2.3 then can leave anyway.
Other options
Trader can also just elect to pay actual VAT bill on a monthly basis insterad of making payments on account and cotinue to submit quarterly retuns as long as HMRC are satisfied they are paying a sufficient amount.
What is the time limit to reclaim overpaid VAT?
4 years
HMRC can refuse to make any payment that
would unjustly enrich the claimant and was notsuffered by the taxpayer unless the taxpayer can show loss or damage to their business as a result.
What is a composite supply
Cannot be split into components - One element of the suppy is incidental to the main element - Inflight meal as it is part of the flight price
What is a mixed supply?
when different elements of the supply are subject to different VAT rates
When business goods are put to non business use
VAT must eb accounted for on the cost to the taxable person of providing that service/goods
Land and buildings
Standard rated - sale of freehold of new commercial building (less than 3 years old)
Z rated - Construction of new dwellings to be used for residential or charitable purposes
Exempt - Most other transactions in commercial property for eg the rent/lease of a property
If a taxable person is using the building for their trade they X
If they have partially exempt sales then X
If a new commercial building is purchased as an investment property and rented out X
Can recover the input VAT assuming they sell taxable supplies
Recover using the capital goods scheme
Input VAT suffered is not allowable unless they opt to use the option to tax which means VAT can be recovered on the building along with any running costs going forwards
Option to tax
Chosen as the VAT on the purchase and future running costs can be claimed.
This does mean that VAT needs to be charged on the rental income which would normally be exempt.
VAT will also need to be charge on the sale of the property.
Does not transfer to new owner
When can the option to tax be revoked?
During a 6 month cooling off period
Where no interest has been held in the property for 6 years or more
Where more than 20 years have elapsed since the election first had effect
Transfer of going concern - what rules should apply
The supply of assets are deemed to be outside the scope.
Purchaser must be VAT registered
Assets to be used int he same kind of business
If only part is sold, that part is capable of seperate operation
There is no significant break in trading
VAT on buildings is still applicable unless new owner elects option to tax
What is Capital goods scheme
Mainly effects partially exempt businesses and enables the amount of VAT recovered ro be adjusted for each years use
CGS applies to
Computers boats and aircraft costing 50k or more which are dealth with over 5 VAT years
Land and buildings costing 250k or more which are dealth with over 10 VAT years
Where an asset under the capital goods scheme is purchased
Initial recovery of input VAT is based on the assets initial use.
For partially exempt businesses the vAT recovery is based on it’s use in the first quarter and then adjusted at the end of the VAT year
What is the formula for the adjustment?
Orig Input VAT / 10/5 intervals
X (taxable use now - org taxable use)
The adjustment is made in the second VAT return following the end of the VAT year
If the asset is sold before the end of the recovery period
two adjustments are needed:
The normal adjustment for the VAT year of sale as if the proportion of use for the period from the start ofd the year until the date of sale had applied for the entire VAT year
A sale adjustment for each remaining VAT year of recovery calculated using 100% if VAT on sale and 0% if exempt sale
There are now penaties for two types of lateness
Late filing
Late payment
There is also late payment interest
Late filing penalties
A point is received for each late filing.
4 points = £200 penalty
Thereafter each point = another £200 penalty
Penalty points expire after
Penalty points expire after 2 years but nto once the penalty threshold is reached.
Once the threshold has been reached a business has to submit returns on time over a period of 12 months for their penalty points to be reset to zero.
Late payment penalties
Each late payment is considered seperatly.
No penalty if paid within 15 days of due date
2% if paid wihtin 16-30 days
4% if paid more than 30 days
In addition a daily penalty at an annual rate of 4% is charged at the 30 day point.
Late payment interest is charged from the due date to the date of payment
Errors corrected on next return
VAT errors not exceeding 10k net or 1% net VAT turnover for return period (upper limit of 50k can be corrected on the next return
Other errors should be notified to HMRC on a VAT 652
A penalty for error may be made and interest may be charged on the error if it exceeds the thresholds above
Reasonable excuse
A penalty may not be due if the taxpayer can show that there is a reasonable excuse.
Ignorance of complex matters can constitute an excuse or misunderstandings
Place of supply
If goods ar eprovide din the UK they are subject to UK VAT
If a supply of services is B2B then it is treated as being provided where the customer has established their business.
B2C is where the supplier has established their business
An importer of goods
Must account for output VAT at the point of entry into the UK and can claim the input VAT payable on their next VAT return
Postponed VAT accounting is where
The output VAT is accounted for on the next VAT return and not the one when the goods enter the UK. This gives a cashf low advantage
Duty Deferrment scheme
Needs to be approved. Deferred charges are calculated for imports for each calender month and must be paid in one sum on the 15th of the month following importation
HMRC Warehouse
Import of the goods into the warehouse is disregarded but output VAT is accounted for either when the goods are removed or under the Duty Deferrment scheme if the trader is approved
Export of goods
Z rated
VAT on international services
Where B2B services are treated as supplied in the UK, the UK business customer must apply the reverse charge
The tax point for a RC transaction is the earlier of
The date of payment
The date of supply
