VAT & Tax Avoidance Flashcards
when does VAT need to be paid?
VAT will need to be paid when:
o There has been a supply of goods or services for consideration (inc. intangible items i.e. interest in land, supply of electricity) (NB: some supplied are exempt);
o Which was made by a taxable person in the course of business; and
o The supply was made in the UK
VAT is also charged on goods imported into the UK
what is the current standard rate of VAT?
The current standard rate of VAT is 20% on the value of the supply of goods/services
what is the general position in relation to a price and VAT?
A price is deemed to include VAT unless stated otherwise
when must a tax invoice be provided?
A person making a taxable supply to a taxable person must provide a tax invoice
what information must be included on the tax invoice?
This must include: VAT number, value of supply & rate of tax
what are the consequences for failing to comply with VAT legislation?
There are criminal and civil consequences for failure to comply with VAT legislation
who is a taxable person?
A ‘taxable person’ is a person/entity that is registered for VAT
re: VAT
what is meant by ‘in the course of business’?
‘course of business’ includes disposal of the business and/or its assets
how does a company register for VAT?
In its own name
how do partnerships register for VAT?
A partnership can register in its partnership name. HMRC will issue each person with a VAT number which applies to all of their businesses.
when must a person/entity register for VAT?
Compulsory registration - a person must register if they are making taxable supplies of over £90k per annum
can a person/entity register for VAT if they are under the threshold? Why might someone do this?
Voluntary registration - a person can choose to register for VAT if they are below this threshold
Only those who are registered can reclaim input tax they have paid, which is why a business under the threshold might register
However, they lose the advantage of being able to undercut VAT-registered competitors
who cannot register for VAT?
Someone who only makes exempt supplies
what is output tax?
the VAT that is charged to the customer when they buy goods/services from a taxable person
what is input tax?
the VAT the taxable person has incurred (i.e. when they purchased the goods from the manufacturer)
who and when must account to HMRC for VAT?
Anyone registered for VAT must submit a return to HMRC and pay the VAT it owes within one month from the end of each quarter
what is the calculation for VAT payable to HMRC?
Output tax – input tax = VAT payable to HMRC
when will someone receive a VAT rebate?
If input tax exceeds output tax, they will receive a rebate
what is the effect of a zero-rated and exempt supply?
The effect is the same i.e. the final consumer does not pay VAT.
give a simple overview of input and output tax
o Output tax = customer pays
o Input tax = business has paid
o Registered person must account for VAT to HMRC.
o Output tax - input tax = VAT payable to HMRC.
What is an exempt supply? What does it include?
Exempt supplies = someone who makes only exempt supplies is treated as if they were the final consumer (i.e. they don’t account for output tax and cannot deduct input tax).
These include:
o Land and buildings
o Insurance
o Education
o Health and welfare
o Finance
What is a zero-rated supply? What does it include?
Zero-rated supplies = the supply is taxable but it is taxed at a rate of 0%.
Examples include:
o New residential dwellings
o Children’s clothing
o Women’s sanitary products
o Books and newspapers
what is the important distinction between zero-rated supplies and exempt for input tax purposes?
o Zero-rated supplies - a taxable person can claim for input tax, even though output tax is 0%
o Exempt supplies - there is no output tax and they cannot claim for input tax
what does GAAR stand for?
general anti-avoidance rule
why was GAAR introduced?
GAAR was introduced to target abusive tax avoidance schemes
what does GAAR apply to?
GAAR applies to income tax, inheritance tax, capital gains tax, corporation tax and national insurance
what power does GAAR give?
GAAR gives HMRC the power to make adjustments to a taxpayer’s liability to recover lost revenue from a tax advantage (counteraction)
In order to make adjustments, what must HMRC do?
HMRC must prove the arrangement is abusive
what is the definition of abusive?
Abusive = if the arrangement cannot be regarded as a reasonable course of action, having regard to all the circumstances, inc.:
o Is it consistent with tax legislation policy objectives?
o Does it involve contrived or abnormal steps?
o Does it intend to exploit shortcoming or loopholes in tax legislation?
what is the definition of tax arrangement?
Tax arrangement = if, having regard to all the circumstances, it would be reasonable to conclude that the main (or one of the main purposes) of the arrangement was to obtain a tax advantage
when isa tax arrangement unlikely to be abusive?
If the arrangement accords with established practice and HMRC has previously accepted it then it is unlikely to be abusive
what is the GAAR procedure?
- HMRC notify the taxpayer of the proposed counteraction (these must be just and reasonable)
- Taxpayer has 45 days to either:
a. Send written representations about the proposed counteraction to HMRC; or
b. Take the specified counteractions set out in the notice - Referral to GAAR panel:
a. A referral must be made if the taxpayer doesn’t do either of the above
b. If the taxpayer makes representations, HMRC must consider these before making a refer to the GAAR panel - If a referral is made, the taxpayer has a further opportunity to make written representations
- The GAAR will then give their opinion to HMRC
- HMRC must then inform the taxpayer whether the tax advantage is to be counteracted and if so how
what does it mean if the tax arrangement is defeated?
it has been found to be an abusive tax arrangement
what is the penalty where a tax arrangement is found to be abusive?
the taxpayer will face a penalty of 60% of the counteracted adjustment
aside from the initial perpetrator, who else can be liable to pay penalty? What is the value of this penalty?
Individuals, companies or partnerships (NB: not employees) who, in the course of business, enable abusive tax arrangements can be required to pay a penalty
The penalty is equal to the financial value paid to the enabler
what is the definition of enabling?
Enabling = designing, managing, marketing or otherwise facilitating
can a penalty be appealed?
Yes, to the tax tribunal
