- an indirect tax on consumer spending - charged on most goods and services supplied within the UK - suffered by the final consumer - collected by businesses on behalf of HMRC

VAT Outline Flashcards by Simon Adams

What is VAT?

an indirect tax on consumer spending
charged on most goods and services supplied within the UK
suffered by the final consumer
collected by businesses on behalf of HMRC

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Who is a taxable person?

is one who is or should be registered for VAT, because they make taxable supplies
it could be individual or a legal person, such as a company

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What is a taxable supply?

is everything which is not exempt or outside the scope of VAT
includes sales and purchases of most goods or services
for VAT to apply the taxable supply must be made in the course or furtherance of a business carried on by a taxable person

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It is important to distinguish between input and output VAT:

business pay input VAT on their purchases of goods and services
input VAT is reclaimable from HMRC
registered businesses charge output VAT on their sales of taxable goods and services
output VAT is payable to HMRC
every moth or quarter the input and output VAT is netted off and paid to or recover from HMRC. The business therefore accounts to HMRC for VAT on the ‘value added’ to the product

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Taxable supplies are charged to VAT at one of three rates:

Zero rate
- tax rate of nil
- no VAT charged but it is classed as a taxable supply
Reduced rate
- some supplies, mainly domestic or charitable use are charged at the reduced rate
Standard rate
- any taxable supply which is not charged at the zero or reduced rates is charge at the standard rate of 20%

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Exempt supplies compared to zero-rated supplies

Exempt supplies
- not charge a VAT
- cannot reclaim input VAT
- cannot register for VAT
Zero-rated supplies
- can charge a VAT 0%
- can reclaim input VAT
- can register for VAT

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Zero-rated items:

Food: used for human consumption apart from supply of catering , or luxury item such as alcohol
Books and other printed matter
Construction of dwellings - new residential building
Transport - by road, rail, sea or air but not taxi
Drugs, medicines and appliances
Charities - gifts
Clothing and footwear - children

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Exempt supplies examples:

Land: transfers and rights, not buildings
Insurance: premium
Financial services: making loans, hire purchase, share dealing and banking services
Education: if provided by schools and universities
Health: the services of registered doctors, dentists, opticians, chemists, hospital
Sports: entry fees

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There are two separate tests for compulsory registration

historic turnover test
future prospects test

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Historic turnover test - at the end of each month, the trader must look at the cumulative total of taxable supplies for the last 12 months, or since commencing trade, whichever is the shorter. If the total exceeds the registration threshold, currently £85,000, then the trader must register as follows:

notify HMRC within 30 days of the end of the month in which the registration threshold is exceeded, by completing form VAT1, or via HMRC’s online services
registration is effective form the first day of the second month after the taxable supplies exceed the threshold
a trader need not register if taxable supplies for the next 12 months are expected to be less than the deregistration threshold currently £83,000
a trader need not register if supplier are wholly zero-rated

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Future prospects test

this test is considered at any time, when taxable supplies in the next 30 days in isolation are expected to exceed £85,000
# HMRC must be notified before the end of the 30 days, by completing form VAT1, or using HMRC’s online services
# registration will be effective from the beginning of the 30 day period

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Once registered, a certificate of registration is issued and the taxable person must start accounting for VAT:

output tax must be charged on taxable supplies
each registered trader is allocated a VAT registration number, which must be quoted on all invoices
each registered trader is allocated a tax period for filing returns, which is normally every three months
input tax (subject to some restrictions) is recoverable on business purchases and expenses
appropriate VAT records must be maintained

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Advantages of voluntary registration:

avoids penalties for late registration
can recover input VAT on purchases
can disguise the small size of the business

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Disadvantages of voluntary registration:

business will suffer the burden of compliance with all VAT administration rules
business must charge VAT. This makes their goods comparatively more expensive than an unregistered business, for customers who cannot recover the VAT

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Voluntary registration is beneficial for:

zero-rated supplies and has input VAT that it can recover, or
supplies to VAT registered customers

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Voluntary registration is not beneficial for:

supplies to non-VAT registered customers (general public)

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Accepting additional new business

If customers are VAT registered:
- they can recover the output VAT charged
- it will be advantageous to accept the new work
If customers are not VAT registered:
- they cannot recover the output VAT charged
- if the selling price cannot be increased, the output VAT will become an additional cost to the business

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Advantages of group VAT registration

VAT on intra-group supplies eliminated
only one VAT return required, which should save administration costs

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Disadvantages of group VAT registration

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all members remain jointly and severally liable
a single return may cause administrative difficulties collecting and collating information

Recovery of pre-registration input VAT/ goods

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the goods must be acquired for business purposes and should not be sold or consumed prior to registration
the good have not been acquired more than four years prior to registration

Recovery of pre-registration input VAT/ services

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the services must be supplied for business purposes
the services should not have been supplied more than six months prior to registration

Compulsory deregistration
A person must deregister when they cease to make taxable supplies

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HMRC should be notified within 30 days of ceasing to make taxable supplies
VAT registration is cancelled form the date of cessation

Voluntary deregistration
A person may voluntarily deregister , even if the business continues, if there is evidence that taxable supplies in the next 12 months, will not exceed £83,000

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the 12 month period is measured starting at any time
the onus is on the trader to satisfy HMRC that they qualify
VAT registration is cancelled from the date of request or an agreed later date

Effect of deregistration

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VAT output tax must be accounted for on the value of non-current assets and inventory held at the date of deregistration, on which a deduction for input tax has been claimed
this final tax liability is waived if it is £1,000 or less

The sale of the business may be treated in one of two ways:

Normal taxable supply - charge output VAT on assets transferred Transfer of a going concern - not treated as a supply for VAT if conditions met

If certain conditions are satisfied, then the sale/transfer:

- is not treated as a taxable supply - no output tax is therefore charged on the assets transferred by the seller - no input tax is recoverable by the purchaser

Conditions for transfer of business as a going concern:

- the business is transferred as a going concern - there is no significant break in the trading - the same type of trade is carried on after the transfer - the new owner is or is liable to be registered for VAT, immediately after the transfer All conditions must be met

Basic tax point for goods

- when they are collected, delivered or made available to a customer

Basic tax point for services

- when they are performed

Tax point - special rules for goods on sale or return:

The time of supply is the earlier of: - the date when the goods are adopted by the customer, or - 12 months after the despatch of the goods

Tax point - special rules for continuous supplies:

Supplies such as electricity and tax advice do not have a basic tax point. The time of supply is the earlier of: - a tax invoice being issued - a payment received

Tax point - special rules for sales under hire purchase:

The goods are taxed as normal at the standard or zero rate. The interest charge is an exempt supply, provided it is disclosed as a separate amount

VAT fraction for standard-rated goods

- VAT is 20% of the VAT-exclusive amount - VAT-inclusive amount given, then the VAT element is 20/120 of the gross amount or fraction 1/6

What if discount is offered to customers?

- VAT must be calculated on the amount that the customer actually pays Trade discounts - a reduced price for being a loyal customer or for buying large quantities of goods Prompt payment discounts - a reduced price for paying within an agreed timescale

Goods for own use

- where the trader withdraws goods which were purchased for business purposes, input VAT can be recovered and output VAT must be accounted for on the replacement value of the supplies - where the trader initially purchased the goods for private purposes, no input VAT can be reclaimed and there is no output VAT charge

Gifts of inventory or non-current assets are treated as taxable supplies at replacement cost, except gifts of:

- goods to the same person which cost the trader £50 excluding VAT or less in a 12 month period - business samples, regardless of the number of same samples given to the recipient

Conditions for recovery of input VAT

- input VAT is recoverable by taxable persons on goods and services that are supplied to them for business purposes - a VAT invoice is needed to support the claim

Capital and revenue expenditure regarding VAT

- no distinction between capital and revenue expenditure for VAT - if capital assets are subsequently sold, output VAT must be charged as a taxable supply of goods

Irrecoverable input VAT

Business entertaining - although VAT incurred on staff entertaining and entertaining overseas customers is recoverable Cars, unless they are: - used 100% for business purposes - leased, in which case 50% of input VAT is recoverable where the car has some private use

Private use, claiming of VAT?

Car expenses recovering VAT

- can recover all input VAT incurred on the running costs of a car, such as fuel and repairs, even when there is some private use -VAT is not charged on the insurance and road fund licence

When a business pays for fuel costs for an employee, sole trader or partner and there is sole private use of the vehicle, a VAT charge will be payable:

- where the full cost of the private fuel is reimbursed by the employee/owner, output VAT is payable on the cost of fuel reimbursed - if the employee does not reimburse the employer, output VAT is due based on a prescribed scale charge

When seller has paid VAT to HMRC and never recovers this from the customer. Seller is being able to claim VAT relief for impairment losses. Conditions apply:

- at least six months must have elapsed form the time that payment was due - the debt must have been written off in the seller's VAT account - claims for relief for irrecoverable debts must be made within four years and six months of the payment being due

If there is some private use of the car, driver reimburses business the full cost for fuel for private journeys, what is the VAT payable?

Output VAT is payable on the amount reimbursed

If there is some private use of the car, driver does not reimburse business with any of fuel for private journeys, what is the VAT payable?

Output VAT is payable on a scale charge

Recovery of input VAT on goods and services purchased prior to registration

- the goods must be acquired for business purposes, and not be sold or consumed prior to registration - the goods were not acquired more than four years prior to registration - the services must be supplied for business purposes - the services were not supplied more than six months prior to registration

Determine the tax point in respect of a supply of goods

- the basic tax point is the date goods are made available to the customer - if an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point - if an invoice is issued within 14 days of the basic tax point, the invoice date will replace the basic tax point date provided an actual tax point has not already arisen as above

VAT Outline Flashcards

(47 cards)