VAT: Overview

Question 1

When is VAT Charged?

Answer 1

VAT collected by businesses belongs to the UK Government.

VAT registered business supplies goods or services to a customer

Question 2

When can sales be shown as VAT exclusive?

Answer 2

(plus VAT) if it’s a business-to-business sale

(VAT inclusive price) if consumer sale

Question 3

What is VAT?

Answer 3

Indirect tax on the end-user

It’s collected at each stage of a supply chain but paid for by the end user

Question 4

What is:
1. Input Tax
2. Output Tax

Answer 4

1. VAT incurred by the business on goods and services it buys
2. VAT charged by the business on supplying its goods and service

Question 5

What are the different rates for VAT?

Answer 5

• outside the scope of VAT (transactions outside the VAT tax system)
• exempt (where no VAT can be charged): Exempt supplies cannot register for VAT and therefore cannot recover the input VAT it suffers in the course of its business.
• zero rated (where VAT is charged at 0%)
• reduced rated (where VAT is charged at 5%)
• standard rated (where VAT is charged at 20%)

Examples:

Exempt:
* Supplies connected with betting, gaming and lotteries
* Supplies of insurance
* Supplies of postage stamps or services
* Health services provided by doctors

Zero:
* Supplies of young children’s clothing and footwear
* Dispensing of drugs, medicines by a pharmacist or doctor
* Supplies of protective equipment such as motorcycle helmets and protective boots

Reduced:
* Supplies of children’s car seats
* Supplies of smoking cessation products

Standard:
Any supply that meets the first four conditions, but is not outside the scope of VAT, and is not specifically listed in the legislation as exempt, zero rated or reduced rated, is treated as a standard rated supply. Most goods and services are subject to VAT at the standard rate of 20%. Examples of standard rated supplies include:

Question 6

When is a sale outside scope of VAT?

Answer 6

When any of these are not met:
1. A supply of goods and services
2. Made in the UK
3. By a taxable person
4. In the course of business
5. Taxable supply (don’t need this if doesn’t hit the other markers)

Question 7

What’s a supply of:
1. Goods
2. Services

Answer 7

1. Sales of physical items
2. Anything not a supply of goods

Example 1 - Mike is a sole trader who runs a car dealership.

He sells a car to Sharon, a consumer. Sharon takes possession of the car and begins using it. This is a supply of goods

If Mike hired the car to Sharon, rather than sell it to her, this would be a supply of services

Question 8

Conditions of the Scope of VAT

Answer 8

1. A supply (consideration) of goods and services
2. Made in the UK: The supply must take place in the UK.
3. By a taxable person: A taxable person is a person who is, or is required to be, registered for VAT.
4. In the course of business: Activity has a degree of frequency and scale and be continued over a period of time. Isolated transactions are not normally business for VAT purposes
5. The supply is a ‘Taxable Supply’

Question 9

When is a sale standard-rated for VAT?

Answer 9

1. Meets the first four conditions, and
2. Not specifically listed in the legislation as exempt, zero rated or reduced rated, is treated as a standard rated supply.

The fundamental principle of VAT, tells us that VAT should be charged at the lowest applicable rate, however most goods and services are subject to VAT at the standard rate of 20%. Examples of standard rated supplies include:

• Supplies of catering and hot food
• Advertising services
• Legal and accountancy services

Question 10

Main VAT risks

Answer 10

1. • A failure to register by a business trading in the ‘hidden economy’.
2. • Manipulation of invoices businesses seek to gain a tax advantage by adjusting the nature or timing of transactions.
3. Artificial separation/disaggregation - separating business activities into smaller parts which individually trade below the VAT registration threshold.
4. Admin errors or late payments.
5. No business: Repayment Traders
6. Charge incorrect rates (Eg. Exempt reclassified as zero)

Exempt reclassified as zero would be they could recover VAT inputs

Question 11

Legislation:
1. Scope of VAT

Answer 11

1. s4 VATA 1994

Question 12

What is disaggregation

Answer 12

Where a separation is artificial and results in VAT avoidance

Question 13

What are the steps of charging VAT?

Answer 13

1. Within the scope of VAT?
2. Exempt supply? Schedule 9 VATA 1994
3. Zero-rated? Schedule 8 VATA 1994 - if zero-rated, are they listed in exceptions in this schedule? If in exceptions, continue to see if exceptions to exceptions
4. Reduce-rated? Schedule 7a VATA 1994
5. If it’s none of the above, then it is by default standard rated.

**Section 4(1) VAT Act 1994 **defines a taxable supply is ‘a supply of goods or services made in the UK other than an exempt supply’).

Example of exceptions to exceptions in Schedule 8 zero-rated was chocolate milkshake powder (zero-rated), and other milkshakes which were standard:

• As the strawberry and banana flavour milkshake powders are within the scope of VAT, are not exempt items, are excepted from zero-rating, and are not reduced-rated, they are by default standard-rated items.
• The chocolate milkshake powder is zero-rated due to being removed from the exceptions from zero-rating.

Question 14

What is:
1. value
2. consideration

Answer 14

1. Value: VAT exclusive
2. Consideration: VAT inclusive

Question 15

Time of supply
1. Why is it important?
2. What are basic tax points?
3. What are actual tax points?

Answer 15

1. Determines when VAT due becomes chargeable
2. BTP - Date goods were supplied or services completed
3. ATP - Invoice received within 14 days after the basic tax point, or invoice is raised before basic tax point. Note: pro-forma is not an invoice - it’s a quotation

Question 16

Place of Supply
1. What to consider first?
2. What to refer back to
3. What does it matter if it’s one or the other?
4. If no exceptions, what are the general rules?

Answer 16

1. Is it a supply of goods or services? If it’s not goods (tangible items) it’s likely services.
2. Scope of VAT-S4 VATA 1994
3. Exceptions are different and rules apply for each: See POS aide memoir for reference
4. B2B - Where recipient belongs
   B2C - Where supplier belongs

Example exceptions of supply of goods:
gas, electricity, water

Place of supply example:
Installation in the uk. Goods were initially bpught from Sweden. Installation = place of supply

Question 17

What’s B2B?

Answer 17

It is a B2B supply if both the supplier and customer are in business.

It is a B2B supply if the customer is also in business and meets the definition of a relevant business person (RBP) and the supply is for business use not for wholly private purposes.

Question 18

What’s B2C

Answer 18

If the supplier is in business but the customer is not an RBP, then it’s a B2C supply.

The most common B2C supplies you’ll come across are to:
Private individuals.
Charities or other organisations with no business activities.

Question 19

Questions that they may ask

Answer 19

1) What’s the general ruel for place of supply for Goods
2) Time of supply
3) Know which customers fall into the VAT regime and understand their obligations.

Question 20

Supply of Goods:
1) What’s the main rule/ “Basic rule”?
2) What to watch out for in compliance?
3) What legislation covers the hierarchical structure?

Answer 20

1) Place of supply of goods is generally where the goods are located at the time of the supply.

• POS = UK if the goods are already in the UK and the supply doesn’t involve them leaving
• POS = Outside UK if the goods are already outside of the UK and the supply doesn’t involve them entering the UK.

2) Identify the movement of goods in a supply chain and not to be distracted by invoicing and payment arrangements, or the location of the supplier and customer.

3) Section 7 of the VAT Act 1994 has a hierarchical structure.

Example:

Harrowsmith Limited, based in Cardiff and registered for VAT in the UK, is a wholesale supplier of dartboards. The dartboards are supplied from a business in China.
It receives two orders.

One from a UK sports shop for 30 dartboards. These are in stock in the UK and supplied from that stock, the place of supply is the UK.

The second is an urgent order from Sweden for 40 new boards. These are not in stock. Harrowsmith arranges for the boards to be sent directly from China to Sweden.

As the goods do not enter the UK, the place of supply is outside the UK.

Question 21

True or False:

The basic rule for the place of supply of goods is that it is where the goods are physically located at the time of supply.

Answer 21

True

Question 22

POS: Goods

Answer 22

1) Goods within or outside UK
2) Installed or assembled outside of the UK. POS= where the goods are installed or assembled. POS for the service of installing will also still be where they are installed and normally treated as one supply
3) Distance Sales - POS = where the supplier or goods are located UNLESS >10k for OSS. (this is to stop purchases from lowest VAT threshold state)
4)** Imports:** generally speaking, the importer of the goods is the owner of the goods at the time of importation.
5) Exports:: Goods leaving the UK: POSG= UK if
* removed from the UK to another member state (usually referred to as dispatches), or
* exported from the UK to a place outside the UK.
* There are special rules for UK and NI, and are considered not to be exports

Question 23

1) What are “distance sales” for POSG
2) What’s One Stop Shop?

Answer 23

1) Distance selling is the term used when supplies of delivered goods are made between EU member states or from Northern Ireland to a person in an EU member state or from an EU member state to a person in Northern Ireland, where
* the customer is not VAT-registered
* the supplier is responsible for delivery of the goods.
Typically, distance sales are made to private individuals purchasing goods via the internet or by mail order.

2) OSS is to ease admin burden of registering for VAT in each EU state or UK. Requirements are fixed establishment in the member state, and trading under the NI protocol. > 10,000 euros means you need to account for VAT at normal internal domestic supply rate (ie. Whichever VAT rate the state is in)

Note: UK legislation on distance selling was updated on 1 January 2021 to remove the sections which applied to distance sales from EU member States to customers in Great Britain (England, Scotland and Wales) and distance sales from Great Britain to customers in EU Member States.
The distance selling rules still apply to businesses moving goods from Northern Ireland to the EU and vice versa. The relevant UK legislation applying to these businesses is now contained in Para 29 Schedule 9ZB VAT Act.

Question 24

Imports:

1) Pods Inc is a Canadian company. They supply prefabricated en suite bathroom units to the building industry.
They arrange the importation and delivery of the en suite bathroom units to their UK customers’ premises.
Where is the place of supply?

2) Let’s use the same Canadian company Pods Inc but change the question slightly.
They supply prefabricated en suite bathroom units to the building industry. Where is the place of supply if Pods Inc customers arrange the importation and delivery of the goods to their own UK premises?

Answer 24

The place of supply is the UK. That’s because the supply involved the importation of the goods to the UK under the direction of the supplier.
Where the supplier makes the arrangements for importation and delivery to the UK customer the supplier is treated as making a supply of the goods in the UK.

2) The place of supply is ‘outside the UK’, it is Canada.
The supply falls within the normal rule for goods entering the UK from outside the EU. The UK customer is responsible for the importation of the goods into the UK. The Canadian supplier makes the supply to the UK customer but has no responsibility for the goods entering the UK. Their supply takes place outside of the UK.

(Remember goods moving between the EU and Northern Ireland are not imports.

Question 25

VAT Terminology 1
- Acquisition
- Dispatches
- Distance sales

Answer 25

Acquisition (arrivals) - Goods entering the UK from another EU member state (should match with a dispatch by the supplier).

Dispatches - Goods leaving the UK for another EU member state (should match with an acquisition by the customer).

Distance sales/selling - Goods supplied from one member state to another, where the customer is not VAT registered (mainly sales to private individuals via the internet or mail order).

Question 26

VAT Terminology 2:
Excise Duty
Export
Exporter

Answer 26

Excise duty - A UK duty charged on certain goods, such as beer, wine, spirits and other alcoholic drinks; hydrocarbon oils (including fuel oil); and tobacco goods.
Export - Goods leaving the UK to a destination outside the EU.
Exporter - Anybody (whether or not they are VAT registered) who exports goods from the UK to a place outside the EU.

Question 27

VAT Terminology 3
Imports
Importer
Member State
UK

Answer 27

Imports (of goods) - Goods entering the UK from outside the EU.
Importer - Anybody (whether or not they are VAT registered) who imports goods into the UK from outside the EU.
Member state - A country that is a member of the European Union (EU). For details refer to www.uktradeinfo.com.
UK - England, Scotland, Wales, Northern Ireland, (including The Isle of Man but not, for VAT purposes, the Channel Islands or Gibraltar).

Question 28

Explain what is meant by the reverse charge and how it works in practise.

Answer 28

Reverse Charge - For supplies of services from outside the UK you must account for VAT under the reverse charge procedure. https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a.

The reverse charge is not a complicated accounting procedure. Where it applies to services which you receive, you, the customer, must act as if you are both the supplier and the recipient of the service

Question 29

Pre-registration Expenses

Answer 29

Goods: 4 years but must be on hand at date of registration

Services: 6 months. Not supplied the services onward or performed on goods that are not on hand

Question 30

VAT Terminology 4
Partial Exemption
Blocked Input tax
Import VAT

Answer 30

• Partial Exemption: When a business makes both exempt and taxable supplies it is entitled to claim only the proportion of input tax that relates to the taxable supplies of the business.
• • The term ‘blocked input tax’ means VAT paid on purchases made by a VAT registered business that is specifically not recoverable by specific order.
• Import VAT - The transaction tax levied on imported goods. The rate is normally charged at the same rate as if they had been supplied in the UK; however if you import works of art, antiques and collectors’ items they’re entitled to a reduced rate of VAT.

Question 31

VAT Return: 1-5

Answer 31

-

Question 32

VAT Return: 6-9

Answer 32

Question 33

What’s the date by which a business must submit its VAT return

Answer 33

one calendar month and seven days after the end of your VAT ‘accounting period’

Question 34

True or False:

Exports are standard-rated for VAT purposes if certain general and specific conditions are met.

Answer 34

The statement is false. Exports are zero-rated for VAT purposes if certain general and specific conditions are met.

Question 35

True or False

A direct export is where the supplier is responsible for removing the goods from the UK.

Answer 35

The statement is true.

Question 36

True or False

Exports: The goods must leave the UK within 6 months of the supply, or 6 months if processing work needs to be carried out on them first.

Answer 36

The statement is false. The goods must leave the UK within 3 months of the supply, or 6 months if processing work needs to be carried out on them first.

Question 37

Check

Answer 37

Summary titles

Question 38

VAT Terminology 5
Cross Border Trade

Answer 38

CBT: It’s important to know which country the goods are going to, or coming from, because there are different VAT rules for NI and GB trade with the rest of the world. There are two main types of cross border trade.
* NI trade (within the single market)
* GB trade to the rest of the world.

Question 39

Acquisition:
1) What is making an Acquisition
2) Tax charged to who?
3) Tax point?
4) claims?

Answer 39

1)
2) Acquisition tax must be charged by the customer, subject to certain conditions,
3) Entered on their VAT return at the time of acquisition (the tax point).
4) The customer can sometimes claim back the acquisition tax as their input tax.

Question 40

What are Dispatches?
Tax?
Tax point?

Answer 40

Dispatches - Goods leaving NI for another EU member state (ie. single market trader) are called dispatches (whilst acquisitions is receiving them)

The dispatch of goods is zero-rated, subject to certain conditions, and entered on to the supplier’s VAT return at the time of supply (the tax point).

Dispatches can be zero-rated provided certain conditions are met. In NI this broadly means that the goods must have actually left NI for an EU country within a certain time and that the customer is VAT registered in an EU country.

Question 41

1) What are Imports?
2) VAT registered?
3) Not VAT Registered?

Answer 41

1) Goods entering GB from a country outside GB, or goods entering NI outiside EU.
2)
3) If you’re a UK trader and not registered for UK VAT, you still have to pay the import VAT but you will not be able to reclaim it. You can arrange for an agent in the UK to import and supply goods on your behalf. The agent’s supply of services to you will be at the standard rate of VAT which you will not be able to reclaim. The agent will be able to recover the import VAT as input tax

Question 42

What are Exports?

Answer 42

Goods leaving GB for a destination outside GB

Question 43

Acquisitions and Dispatches: How do they work

Answer 43

Question 44

Single Market and Export Rules: What are they?

Why do we have these rules?
What is we didn’t have them?

Answer 44

Question 45

Reverse Charge: what is it?

Answer 45

AKA Domestic Reverse Charge. Anti-fraud process.

Applied to certain services or goods (mobiles/microchips) purchased from suppliers locared outside the buyer’s country (regardless of EU or not)

Instead of supplier:
-Charging VAT on sale

reverse charge is:

The supplier:
- Doesn’t charge VAT
Buyer:
- responsible for self-assessing and paying VAT.
- Accounts for both input and output on their VAT return

Question 46

Sales between GB and NI

Answer 46

• A VAT registered GB based business selling goods to NI customers will, in most cases, be liable for the import VAT due in NI.
• If the goods are sold to another VAT registered business, the supplier will be required to issue an import document to its customer, usually in the form of a sales invoice.
• The supplier will account for the import VAT on its VAT return as output VAT (in the same way that it accounts for VAT on any other UK domestic supply).
• The NI business customer will be able to recover the VAT shown on the sales invoice as input VAT, subject to the normal rules.
• Where a VAT registered GB based business moves its own goods to NI, it will need to account for import VAT on its own VAT return.

Example:

Chris’s London-based VAT registered business has sold goods to a customer in Belfast. The goods will be transported directly from London to Belfast in Northern Ireland.
Goods in GB are sold by a UK VAT registered business to be received in NI. Chris should charge UK VAT to the customer.
The UK VAT that Chris charges their customer will be import VAT but should be accounted for on their UK VAT return in the same way as output VAT.
As the import VAT is accounted for via Chris’s VAT return, no additional import VAT is payable as part of the customs process.
The goods arrive at the customer’s address in Belfast If the customer is VAT registered and the goods are used in their business then they can recover the VAT paid, subject to normal rules of input tax recovery, using their VAT return.
For further information refer to Northern Ireland Protocol Brief 03/2021 - VAT Return Completion.

Question 47

Threshold for registering for VAT from NI to EU?

Answer 47

Selling goods from Northern Ireland to consumers in the EU (‘distance selling’) Total sales across the EU over £8,818

Question 48

Exports: What rate of VAT do you charge?

Answer 48

If you sell, send or transfer goods out of the UK you do not normally need to charge VAT on them. You can zero rate most exports from:

Great Britain to any destination outside the UK
Northern Ireland to a destination outside the UK and EU

Proof of export: to zero rate your exports you need documentary evidence of goods leaving either:
the UK from Great Britain
the UK and EU from Northern Ireland

If you do not get this evidence in time, you’ll have to account for the VAT on your return

Question 49

Northern Ireland Protocol

Answer 49

NI remains part of the UK VAT system, however under the NI Protocol it maintains in alignment with EU VAT rules in relation to the supply of goods.

HMRC issues ESLs (EC Sales list) when box 8 of the supplier’s VAT return is completed.
* The information on ESLs allows member states to check that acquisition tax is being accounted for on zero-rated EU supplies.

Question 50

Import VAT: Who is responsible for the tax?!

Answer 50

Depends on who takes ownership of importing the goods.
1) If the supplier takes ownership (direct exporter), they have to pay import VAT. To get the money back as input tax, they have to register for UK VAT and submit a VAT return.
2) If the customer takes ownership then they pay the import VAT

Question 51

What’s C79?

Answer 51

Import Certificate so the importer can claim your input tax

Question 52

Exports:
1) When can they be zero-rated?

Answer 52

1) Exports are zero-rated for VAT purposes if certain general and specific conditions are met. Goods must leave UK within 3 months of supply, or 6 months if there’s processing works that need to be carried out. Where there’s a series of supplies, only the final supply can be zero-rated. If the zero-rating conditions are not met, the supplier must charge UK VAT. Goods inside a customs warehouse are treated as already being outside the UK, which means

Question 53

Why zero rate exports and pay import VAT for imports?

Answer 53

• Zero-rating exports and paying import taxes means that VAT is paid in the country in which they are used, rather than where they are supplied.

Question 54

What is import tax charged on?

Answer 54

Pretty much the total amount:

Cost of goods 1,000.00
B Freight costs (shipping) 300.00
C Insurance costs 50.00
D Customs value (A+B+C) 1,350.00
E Import duty (8% OF D) 108.00
F Excise duty (N/A) 0.00
G Total for VAT (D+E+F) 1,458.00
H Import VAT (20% of G) 291.60
I Total duty and VAT due (E+F+H) 399.60
J Total cost (G+H) 1,749.60

Question 55

Blocked inputs

Answer 55

1) Cars - 100% unless no private use possible (Hackney Carraiges)
Leased cars - 50% (note: Private purposes include commuting back and forward to work from home.)
2) businesses using second-hand margin scheme
3) business entertainment - business entertainment means the free provision of hospitality to persons who are not employees or directors. It’s worth noting that entertainment for employees is not blocked.

Question 56

Aged Creditors: What is it?

Answer 56

Where there are any aged creditors - where the output tax has not been paid within 6 months of payment being due - then any input tax claimed must be recovered.

Question 57

1) Basic tax point
2) Actual tax point

Answer 57

1) goods are made available
Services when work is completed

2) before basic tax point, or
Within 14 days of BTP