VAT Flashcards
Give a summary of when VAT will be charged and how it operates
Generally, VAT is charged every time a business supplies goods or services
The current rate of VAT is a flat rate of 20%
The business charges the customer VAT at 20% on the value of the goods or services, known as ‘output tax’
The business deducts from the amount it collects in output tax any VAT it has itself paid (‘input tax’) on goods or services received, and pays the difference to HMRC
Give an example scenario of how VAT works
Manufacturer buys raw material from a producer and pays £40 VAT
They sell it to a retailer, who pays £200 VAT
Manufacturer gives HMRC £160 (the money it charged as VAT (output tax (£200)) - the money it itself paid to the producer (input tax (£40))
VAT does not cost businesses anything, because they recoup what they paid in charging their own VAT – consumer takes the burden
When must a person be registered to pay VAT?
Person must be registered if the value of their taxable supplies in the preceding 12 months exceeded £90,000
Businesses making less than £90,000 can voluntarily register
What are zero-rated and exempt supplies?
Person who makes zero-rated supplies can reclaim the VAT they have paid from HMRC
Person who makes exempt supplies only, cannot reclaim VAT
What are the possible penalities of failing to pay proper VAT?
Failure to comply with VAT legislation can lead to criminal/civil penalties, as well as needing to pay unpaid tax with interest
