VAT schemes Flashcards
Land and Buildings - Option to tax
What are the rules for VAT on land and buildings?
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.
Land and Buildings - Option to tax
What types of land and buildings fall into which VAT category?
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
Land and Buildings - Option to tax
What are the conditions?
- Election must be filed within 30 days of signing
- Can be withdrawn within initial 6 month cooling off period
- Election cannot be made for a part of a building
Land and Buildings - Option to tax
What is the impact?
- 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
What is ‘Partial exemption’ for VAT?
Traders who make both taxable and exempt supplies - only part of the input tax is recoverable
Partial exemption
What are the methods of determining the recoverable income tax?
- Standard method
- Annual adjustment
- De minimis limits
- Annual test
Partial exemption
How do we determine the recoverable income tax using the STANDARD METHOD?
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)
Partial exemption
How do we determine the recoverable income tax using the ANNUAL ADJUSTMENT?
- Recalculate recoverable % at the end of each accounting period based on actual supplies for the year
- Any under or over claim accounted for in the first VAT return next year, or can bring forward to final VAT return this period
Partial exemption
How do we determine the recoverable income tax using the DE MINIMIS LIMITS?
There are 3 tests to see whether a business is de minimis:
- 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
- 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
- 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
Partial exemption
What is meant by de minimis limits?
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%
Partial exemption
What happens if a business was in de minimis last year?
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
Partial exemption
What is the ANNUAL TEST?
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
Capital goods scheme
What is the scheme and who is it available to?
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
Capital good scheme
What assets are covered by the scheme? And how long is the adjustment period?
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
Capital goods scheme
What is the annual adjustment?
(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
Capital goods scheme
How is a building disposed of in the adjustment period?
- Normal annual adjustment
- Further adjustment:
If disposal is for remainder of adjustment period then assume
Taxable = 100% taxable use
Exempt = 0% taxable use
VAT administration
How long must VAT records be retained and what types of VAT records must be retained?
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
VAT penalties
What are the standard penalties for VAT?
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
VAT penalties
What is the specific penalty relating to VAT?
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
VAT penalties
What are the default surcharge rates?
First default in surcharge period - 2% of unpaid VAT
Second default - 5%
Third - 10%
Fourth and more - 15%
VAT penalties
What happens if HMRC find an error on your VAT return?
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)
VAT penalties
When is default interest charged?
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
VAT penalties
What happens if you voluntarily disclose an error found on your VAT return?
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
VAT - relief for irrecoverable debts
What is the VAT treatment for irrecoverable debts?
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
VAT - Transfer of a going concern (TOGC)
What is the VAT treatment of a TOGC?
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
VAT - Transfer of a going concern (TOGC)
What are the conditions for no VAT on TOGC?
(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
