VAT Processes Chapter 3 - Input and Output

Question 1

List the rules which apply to input/output tax on business/employee entertainment?

Answer 1

Cannot reclaim the input tax which has been spent on business entertainment with the exception of oversees customers.
Input tax can be reclaimed if the business has provided entertainment for employees.

Question 2

Name 3 exceptions where you can reclaim input Vat back on vehicles

Answer 2

Businesses are not normally able to reclaim the input VAT when buying a car however the exception is:
The car will be used for business purposes only (no private use)
The business is a taxi business/driving instructor
Business is a car dealer and the car will be part of it’s inventory and intends to sell within 12 months

Can reclaim all VAT on commercial vehicles such as Vans, lorries and tractors

Question 3

How can a business approach being charged VAT on fuel?

Answer 3

Business does not need to reclaim all VAT - good option if mileage is low
Business can reclaim all the VAT if the vehicle is used for business purposes only
If vehicle is used for private and business purposes then the busienss can reclaim all of the VAT back on the mileage used for business (records must be kept)
If the vehcile is used for business and private pruposes then they can claim all of the VAT back and then pay a fuel scale charge

Question 4

What is postponed accounting?

Answer 4

When a business is importing goods, a business who uses postponed accounting, can declare import VAT and reclaim it as input tax on the same VAT return.

Good for cash flow as businesses wont have to pay the VAT upfront but can delay payment by declaring and recovering the VAT on the VAT return.

Question 5

How is VAT applied when importing goods into the country

Answer 5

A business can choose to pay import tax when the goods enter the country, the VAT incurred on the imported goods can be reclaimed as normal input tax.

Question 6

How is VAT applied when exporting goods to another country?

Answer 6

Businesses do not charge VAT on goods which are exported, normally goods can be zero rated.

NOt zero rated if the overseas customer asks it to be delievered to a UK address.

Question 7

How often do you submit a VAT return when using Annual Accounting?

Answer 7

Annual Accounting is when a business makes VAT returns anually rather than quaterly

Question 8

What is the process of Annual Accounting?

Answer 8

Must pay 90% of it’s expected annual VAT payment in 9 equal monthly instalments starting in month 4 of the VAT year.
Also
Trader can use three interim payments each equal to 25% of the previous years VAT. This is paid on months 4, 7, 10.
Trader must then pay the balance due and submit the VAT return, which is classed as payment 10 and 4.

Question 9

What are the requirments to join and leave the annual accounting scheme?

Answer 9

To join a businesses maximum expected taxable turnover for the next 12 months is no more than £1.35 million.
Required to leave the scheme if your expected taxable turnover surpasses £1.6 million.

Question 10

Name 2 advantages and 2 disadvanatges of the annual accounting scheme?

Answer 10

Advantages:
- Helps the business smooth out its cash flow by paying a set amount each year
- Business only needs to submit one VAT return each year.
Disadvantages:
- If a business regularly recclaims VAT then it means that they will only recieve one repayment of VAT each year.
- If a businesses turnover decreases, its VAT payments may be higher than they would under the standard VAT accounting.

Question 11

What is the flat rate scheme?

Answer 11

A scheme designed for small businesses whose forecast turnover for the next 12 months is expected to be £150,000. Instead of calculating the Input and Output VAT the business simply pays HMRC a flat % rate on the vat inclusive sales figure for each VAT period either quartlery or using the annual accounting scheme.

Question 12

Explain the process for the flat rate scheme?

Answer 12

Find out the flat rate of your business, then apply the percenatge to the VAT inclusive income figure.

Flat Rate is only used to work out how much the business pays to HMRC

Question 13

Rules regarding VAT on single capital items?

Answer 13

A business which has bought an expensive item can claim the full percentage of VAT back instead of only claiming back the flat rate percentage.

The item must be in excess of £2,000 including VAT.

Question 14

What is a limited cost business and what is their flat rate?

Answer 14

Limited cost businesses expenditure on goods including VAT has to be less than £1,000 per year or 2% of its VAT inclusive turnover.

Flate rate is 16.5%

Question 15

Name an advantage of the flat rate scheme when a business is using it for the first time?

Answer 15

A business in its first year of VAT registration gets a 1% discount on its flat rate %.

Question 16

What is cash accounting?

Answer 16

Allows businesses to account for VAT on the basis of the date of payments recieved and made, rather than on the tax point on invoices issued and recieved.

In other words a business doesn’t have to account for output tax on the date of supply but instead only when payment is recieved.

Question 17

How does a business qualify for cash accounting?

Answer 17

To join a businesses maximum expected taxable turnover for the next 12 months is no more than £1.35 million.
Has a clean VAT record.
Required to leave the scheme if your expected taxable turnover surpasses £1.6 million.

Question 18

How often do you have to complete a VAT return using the cash accounting scheme?

Answer 18

Can be completed on a quarterly basis or can run along side with the annual accounting scheme.

Question 19

Name 2 advantages and 2 disadvanatges of the cash accounting scheme?

Answer 19

Advantages:
- Cash flow is improved, especially if customers are late payers
-Bad debt relief
Disadvantgages:
- Input VAT cannot be reclaimed on purchases until they are paid for.
- Have to pay VAT to suppliers but sometimes havent recieved VAT from customers

Question 20

What does a business base the timings of their claim on?

Answer 20

Tax point of the transaction

Question 21

When is the VAT return due using the annual accounting scheme?

Answer 21

Due within 2 months of year end

Question 22

which tax will purchase returns effect

Answer 22

effect input tax, buying in