VAT & Tax Avoidance

Question 1

when does VAT need to be paid?

Answer 1

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

Question 2

what is the current standard rate of VAT?

Answer 2

The current standard rate of VAT is 20% on the value of the supply of goods/services

Question 3

what is the general position in relation to a price and VAT?

Answer 3

A price is deemed to include VAT unless stated otherwise

Question 3

when must a tax invoice be provided?

Answer 3

A person making a taxable supply to a taxable person must provide a tax invoice

Question 4

what information must be included on the tax invoice?

Answer 4

This must include: VAT number, value of supply & rate of tax

Question 5

what are the consequences for failing to comply with VAT legislation?

Answer 5

There are criminal and civil consequences for failure to comply with VAT legislation

Question 6

who is a taxable person?

Answer 6

A ‘taxable person’ is a person/entity that is registered for VAT

Question 7

re: VAT

what is meant by ‘in the course of business’?

Answer 7

‘course of business’ includes disposal of the business and/or its assets

Question 8

how does a company register for VAT?

Answer 8

In its own name

Question 9

how do partnerships register for VAT?

Answer 9

A partnership can register in its partnership name. HMRC will issue each person with a VAT number which applies to all of their businesses.

Question 10

when must a person/entity register for VAT?

Answer 10

Compulsory registration - a person must register if they are making taxable supplies of over £90k per annum

Question 11

can a person/entity register for VAT if they are under the threshold? Why might someone do this?

Answer 11

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

Question 12

who cannot register for VAT?

Answer 12

Someone who only makes exempt supplies

Question 12

what is output tax?

Answer 12

the VAT that is charged to the customer when they buy goods/services from a taxable person

Question 13

what is input tax?

Answer 13

the VAT the taxable person has incurred (i.e. when they purchased the goods from the manufacturer)

Question 14

who and when must account to HMRC for VAT?

Answer 14

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

Question 15

what is the calculation for VAT payable to HMRC?

Answer 15

Output tax – input tax = VAT payable to HMRC

Question 16

when will someone receive a VAT rebate?

Answer 16

If input tax exceeds output tax, they will receive a rebate

Question 17

what is the effect of a zero-rated and exempt supply?

Answer 17

The effect is the same i.e. the final consumer does not pay VAT.

Question 18

give a simple overview of input and output tax

Answer 18

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.

Question 19

What is an exempt supply? What does it include?

Answer 19

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

Question 20

What is a zero-rated supply? What does it include?

Answer 20

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

Question 21

what is the important distinction between zero-rated supplies and exempt for input tax purposes?

Answer 21

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

Question 21

what does GAAR stand for?

Answer 21

general anti-avoidance rule

Question 22

why was GAAR introduced?

Answer 22

GAAR was introduced to target abusive tax avoidance schemes

Question 23

what does GAAR apply to?

Answer 23

GAAR applies to income tax, inheritance tax, capital gains tax, corporation tax and national insurance

Question 24

what power does GAAR give?

Answer 24

GAAR gives HMRC the power to make adjustments to a taxpayer’s liability to recover lost revenue from a tax advantage (counteraction)

Question 25

In order to make adjustments, what must HMRC do?

Answer 25

HMRC must prove the arrangement is abusive

Question 26

what is the definition of abusive?

Answer 26

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?

Question 27

what is the definition of tax arrangement?

Answer 27

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

Question 28

when isa tax arrangement unlikely to be abusive?

Answer 28

If the arrangement accords with established practice and HMRC has previously accepted it then it is unlikely to be abusive

Question 29

what is the GAAR procedure?

Answer 29

1. HMRC notify the taxpayer of the proposed counteraction (these must be just and reasonable)
2. 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
3. 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
4. If a referral is made, the taxpayer has a further opportunity to make written representations
5. The GAAR will then give their opinion to HMRC
6. HMRC must then inform the taxpayer whether the tax advantage is to be counteracted and if so how

Question 30

what does it mean if the tax arrangement is defeated?

Answer 30

it has been found to be an abusive tax arrangement

Question 31

what is the penalty where a tax arrangement is found to be abusive?

Answer 31

the taxpayer will face a penalty of 60% of the counteracted adjustment

Question 32

aside from the initial perpetrator, who else can be liable to pay penalty? What is the value of this penalty?

Answer 32

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

Question 33

what is the definition of enabling?

Answer 33

Enabling = designing, managing, marketing or otherwise facilitating

Question 34

can a penalty be appealed?

Answer 34

Yes, to the tax tribunal