VAT

Question 1

What is VAT?

Answer 1

VAT is a tax on taxable supplies of goods and services provided by a taxable person in the course of their business.

Question 2

Why is VAT considered an indirect tax?

Answer 2

VAT is borne by consumers but charged by the supplier, who adds it to the price of goods/services.

Question 3

What legislation governs VAT?

Answer 3

Value Added Tax Act 1994

Various regulations and EC Directives

Question 4

Who can charge VAT?

Answer 4

A ‘taxable person,’ which is a person whose turnover exceeds £85,000 in the past 12 months.

Question 5

How is VAT collected?

Answer 5

Suppliers collect VAT through a VAT return to HMRC every 3 months, calculating the net amount after deducting input tax from output tax.

Question 6

What is the difference between output tax and input tax?

Answer 6

Output tax: VAT charged by the supplier on goods/services (collected from customers).
Input tax: VAT paid by the buyer when purchasing goods/services.

Question 7

When is input tax recoverable?

Answer 7

Input tax is recoverable only if directly linked to a taxable supply.

Question 8

Which businesses make exempt supplies?

Answer 8

Insurance companies, banks, building societies. They cannot register for VAT or recover input tax.

Question 9

What is the VAT rate for standard-rated supplies?

Answer 9

The standard VAT rate is currently 20%.

Question 10

What is the reduced VAT rate of 5% applied to?

Answer 10

Domestic fuel supplies, certain construction/renovation services.

Question 11

What are zero-rated supplies?

Answer 11

Zero-rated supplies are taxable, but the VAT rate is 0%. The buyer still pays VAT, but it’s calculated at 0%.

Question 12

Are exempt supplies subject to VAT?

Answer 12

No, exempt supplies are non-VATable, although sellers of land can sometimes opt to tax.

Question 13

Do most residential transactions involve VAT?

Answer 13

No, VAT is generally not paid on residential transactions.

Question 14

What is the VAT status of a new build house?

Answer 14

New build houses are zero-rated, so the buyer does not pay VAT. Subsequent sales by private individuals are non-VATable.

Question 15

How does VAT apply to commercial properties?

Answer 15

New commercial property (within 3 years of completion) is standard-rated.
Old commercial property: Generally exempt, but seller can opt to tax to charge VAT.

Question 16

What is the ‘option to tax’?

Answer 16

The seller can choose to charge VAT on the sale of an old commercial building to recover input tax (e.g., costs of renovation).

Question 17

Why would a seller opt to tax?

Answer 17

To recover input tax on building costs and professional fees.

Question 18

What are the disadvantages of opting to tax an old building?

Answer 18

The buyer must pay VAT on the purchase price.
VAT-sensitive buyers (e.g., financial buyers) may find the property less attractive and may negotiate a lower price.

Question 19

When is it not a problem to opt to tax?

Answer 19

If the buyer makes taxable supplies and can recover the VAT paid.

Question 20

Is VAT usually charged on residential transactions?

Answer 20

No, VAT is generally not charged on residential property sales.

Question 21

How is VAT typically handled in commercial transactions?

Answer 21

VAT is charged if the property is new, or if the seller opts to tax the property.

Question 22

What are the 3 options for charging VAT in property contracts?

Answer 22

VAT exclusive: VAT added on top of the purchase price (SCPC 2).
Used for new commercial properties or when seller opts to tax.

VAT inclusive: Purchase price includes VAT (SC 1.4 or special condition).
Used for transactions where no option to tax is exercised.

Exclusive but subject to change: VAT is exclusive, but if law changes, VAT can be added later (SCPC Part 2, Condition A1).
Used when seller does not opt to tax but wants flexibility in case VAT becomes chargeable later.

Question 23

Which VAT option is popular with VAT-sensitive buyers?

Answer 23

VAT inclusive (SC 1.4), as buyers avoid upfront VAT costs.

Question 24

Why is VAT-inclusive risky for sellers?

Answer 24

The law might change, and what was an exempt supply could become standard-rated. In such cases, the seller must account for VAT out of the agreed purchase price.