VAT schemes

Question 1

Land and Buildings - Option to tax

What are the rules for VAT on land and buildings?

Answer 1

Land and buildings in the UK can be either zero-rated, standard-rated or exempt.
A VAT registered vendor or lessor of a building can opt to waive the exemption of the building.

Question 2

Land and Buildings - Option to tax

What types of land and buildings fall into which VAT category?

Answer 2

Zero rated - Residential and charitable buildings

Standard rated - Sale of new freehold commercial buildings (i.e. within 3 years of their construction)

Exempt - All other supplies of land and buildings - unless exemption is waived

Question 3

Land and Buildings - Option to tax

What are the conditions?

Answer 3

1. Election must be filed within 30 days of signing
2. Can be withdrawn within initial 6 month cooling off period
3. Election cannot be made for a part of a building

Question 4

Land and Buildings - Option to tax

What is the impact?

Answer 4

• Supply becomes a taxable supply
• Input tax in respect of the building can be recovered
• Future supplies of the building (e.g. sales or rents, must be standard-rated
• New owners are not bound by a previous owner’s election, except for transfers within a VAT group

Question 5

What is ‘Partial exemption’ for VAT?

Answer 5

Traders who make both taxable and exempt supplies - only part of the input tax is recoverable

Question 6

Partial exemption

What are the methods of determining the recoverable income tax?

Answer 6

• Standard method
• Annual adjustment
• De minimis limits
• Annual test

Question 7

Partial exemption

How do we determine the recoverable income tax using the STANDARD METHOD?

Answer 7

Input tax is analysed into 3 categories:
Input tax on goods and services wholly used for the purpose of making….

Taxable supplies - wholly available for credit
Exempt supplies - wholly disallowed
The remainder (e.g. non-attributable input tax on overheads) - the amount available for credit is found by apportionment

Non-attributable input VAT reclaimable:
Total taxable supplies (exc. VAT)/Total supplies = %
(Any other reasonable apportionment can be agreed with HMRC)

Question 8

Partial exemption

How do we determine the recoverable income tax using the ANNUAL ADJUSTMENT?

Answer 8

1. Recalculate recoverable % at the end of each accounting period based on actual supplies for the year
2. Any under or over claim accounted for in the first VAT return next year, or can bring forward to final VAT return this period

Question 9

Partial exemption

How do we determine the recoverable income tax using the DE MINIMIS LIMITS?

Answer 9

There are 3 tests to see whether a business is de minimis:

1. Total input tax is LESS than £625 per month on average, and value of exempt supplies is less than 50% of value of total supplies
2. Total input tax less input tax directly attributable to taxable supplies is LESS than £625 per month on average, and value of exempt supplies is less than 50% of value of total supplies
3. Input tax relating to exempt supplies is LESS than £625 per month on average, and input tax relating to exempt supplies is less than 50% of total input VAT

• Only needs to satisfy one test

Question 10

Partial exemption

What is meant by de minimis limits?

Answer 10

All input tax (including that relating to wholly or partly exempt supplies) may be recovered if the business is below the de minimis limits

less than £625 per month
less than 50%

Question 11

Partial exemption

What happens if a business was in de minimis last year?

Answer 11

The business can provisionally recover all VAT this year (unless input tax expected to exceed £1 million)

Status must be reviewed at the end of the accounting period based on whole year

Annual adjustment made if necessary

Question 12

Partial exemption

What is the ANNUAL TEST?

Answer 12

A business can apply the de minimis tests once a year rather than every return period if:

• The business was de minimis in the previous year
• The annual test is applied consistently through the year, and
• The input VAT for the current year is not expected to exceed £1 million

This means the business can provisionally recover all input VAT relating to exempt supplies in each return period without having to perform de minimis calculations

At the end of the accounting period, the de minimis status must be reviewed based on the year as a whole and an annual adjustment made if necessary

Question 13

Capital goods scheme

What is the scheme and who is it available to?

Answer 13

Applies to partially exempt traders who spend large sums on land and buildings or computer equipment

Initial deduction of input tax is made in the ordinary way and then reviewed over a set adjustment period

Question 14

Capital good scheme

What assets are covered by the scheme? And how long is the adjustment period?

Answer 14

Land and buildings:
Value of £250,000 or more
Adjustment period of 10 years (or 5 for a lease with less than 10 years at acquisition)

Computers and computer equipment:
Value of £50,000 or more
Adjustment period of 5 years

Question 15

Capital goods scheme

What is the annual adjustment?

Answer 15

(Original input tax / 10 or 5 years) x (% now - % in the original year)

E.g. A trader making 70% taxable supplies, 30% exempt supplies:

• Can initially reclaim 70% of output VAT charged in respect of a building
• Adjustments are made over the next 10 (or 5) years if the proportion of exempt supplies changes

Question 16

Capital goods scheme

How is a building disposed of in the adjustment period?

Answer 16

• Normal annual adjustment
• Further adjustment:
  If disposal is for remainder of adjustment period then assume
  Taxable = 100% taxable use
  Exempt = 0% taxable use

Question 17

VAT administration

How long must VAT records be retained and what types of VAT records must be retained?

Answer 17

VAT records must be retained for 6 years

Types of records:

• copies of VAT invoices issued
• records of outputs (e.g. sales day book)
• evidence to support recovery of input VAT
• VAT account

Question 18

VAT penalties

What are the standard penalties for VAT?

Answer 18

Same penalties as for income tax, CGT and corporation tax.

Depends on the behaviour of the taxpayer

Errors in reruns can give rise to:

• Default interest, and
• Standard penalty for the submission of an incorrect VAT return

Question 19

VAT penalties

What is the specific penalty relating to VAT?

Answer 19

The default surcharge

Arises when the return is submitted late, or VAT is paid late

First default - HMRC serve a surcharge liability notice. Specifies a surcharge period: ending 12 months after the VAT period to which the default relates

Further defaults - Surcharge period extended for 12 months after the end of the VAT period in which the latest default arises
If default involves late payment of VAT - surcharge penalty levied

Question 20

VAT penalties

What are the default surcharge rates?

Answer 20

First default in surcharge period - 2% of unpaid VAT
Second default - 5%
Third - 10%
Fourth and more - 15%

Question 21

VAT penalties

What happens if HMRC find an error on your VAT return?

Answer 21

HMRC will issue assessment within 4 years of relevant VAT period (increases to 20 years if deliberate error)

Either:

• Default interest and standard penalty
• Tax payer option to request review decision by HMRC review officer and then appeal to tribunal (within 30 days)

Question 22

VAT penalties

When is default interest charged?

Answer 22

Arises when HMRC raises an assessment to collect undeclared/overclaimed VAT
or voluntary disclosure of error exceeding de minimis limit

Charged from the due date of payment to actual date of payment

Question 23

VAT penalties

What happens if you voluntarily disclose an error found on your VAT return?

Answer 23

De minimis limit of error is the greatest of:

• £10,000 and
• 1% of turnover, subject to an upper limit of £50,000

If the net error is less than de minimis limit - include on next VAT return
Standard penalty but no default interest

If the net error is more than de minimis limit - separate notification
Standard penalty and default interest

Question 24

VAT - relief for irrecoverable debts

What is the VAT treatment for irrecoverable debts?

Answer 24

Relief is available where:

• output VAT in respect of an outstanding debt has been accounted for and paid by the supplier
• the supplier has written off the debt
• 6 months have passed since the debt was due for payment

Claim the relief as input VAT on the VAT return
Customers who have not paid for goods/services within 6 months of the due date must repay the input tax they have previously claimed

Question 25

VAT - Transfer of a going concern (TOGC)

What is the VAT treatment of a TOGC?

Answer 25

Transfer of a business is not treated as a supply for VAT purposes, therefore:

• No output VAT charged on assets transferred by the seller
• No input VAT recoverable by purchaser

Question 26

VAT - Transfer of a going concern (TOGC)

What are the conditions for no VAT on TOGC?

Answer 26

(ALL conditions must be satisfied)

• Business transferred as a going concern
• No significant break in trading
• To a taxable person (VAT registered or liable to become VAT registered)
• same type of trade carried on after the transfer

A building on which has option to tax has been made cannot be part of the TOGC, unless the purchaser also opts to tax the building.

The transferee may take over VAT registration of the transferor, but also inherits all the transferor’s VAT liabilities

If the conditions are not met - VAT is payable on the individual assets transferred