3. Inputs Outputs & Special Schemes

Question 1

Businesses that are ‘partially exempt’

Ie supply some exempt and some taxable supplies…

Answer 1

Cannot reclaim input tax on the purchases that RELATE to the EXEMPT supplies. (It will have to calculate)

Unless …
if the amount of Vat incurred relating to exempt supplies is below the ‘DE MINIMUS’ limit then input VAT can be recovered in FULL
(There are HMRC tests relating to this eg. Under 625 p/m and under 50% of goods supplies are exempt)

Question 2

Business entertaining

Answer 2

Prohibited (except for overseas customers) under a special legal provision.

Provision of food & drink.
Provision of accommodation.
Tickets theatre sport nightclubs.
Use of facilities such as yachts & aircraft for purpose of entertaining.

Question 3

Employee entertainment is ok.
Seasonal staff parties.
Staff outings.

Answer 3

.

Question 4

Cars … rules for reclaiming vat on purchase..

Answer 4

Can reclaim vat on car if…

1. Will be used exclusively for biz purpose and not available for private use EVEN for driving to work.
2. The biz is a taxi business, driving school or self-drive rental biz.
3. The biz is a car dealer and car will be part of inventory that intends to sell within 12 months.

Question 5

Cars … rules for repairs and maintenance

Answer 5

Can reclaim all vat as long as…

1. Biz pays for work
2. There is some biz use of vehicle.

Question 6

Rules on commercial vehicles

Answer 6

Vans lorries tractors etc (and range rovers in some cases!)

Reclaim vat in normal way.

Question 7

Car and van sale rule…

Answer 7

If biz wasn’t able to reclaim input tax on original purchase price OF A CAR WHICH WAS BOUGHT NEW, it will not have to charge VAT when sold.

Question 8

If a biz buys or sells second hand cars it may choose to use what scheme.

Answer 8

VAT margin scheme.
(Eligibility definition in VAT (Cars) Order 1992)

Account for VAT on the profit (or margin)

Cannot be used if the biz was charged vat when it originally bought the vehicle.

Question 9

Reclaiming VAT on road fuel

Answer 9

1) Don’t reclaim any tax.
Useful if mileage is very low and fuel is for both biz & private.
If chosen must apply to ALL vehicles including commercial vehicles.

2) If all fuel only for biz purpose (which doesn’t include driving to work)
Biz can reclaim all.

3) If fuel is split use biz can keep records and reclaim tax on biz use fuel.
4) If fuel is split can reclaim all and pay a separate ‘Fuel Scale Charge’.

Question 10

The Fuel Scale Charge is

Answer 10

A quarterly charge on the CO2 emissions of vehicles.

This charge has a political agenda.. gov seen as enviro friendly by taxing atmospheric pollution. Tends to go up every year. Gas guzzling 3x low emission vehicle.

There is a calc tool on HMRC for fuel scale chg..
Need:
CO2 emission fig for the vehicle (in the logbook).

Once the charge has been calculated the VAT on this charge must be included in the businesses VAT account.
The VAT exclusive amount must be included box 6.
The VAT amount must be included box 1.

Question 11

VAT accounting for ADVANCE PAYMENTS / DEPOSITS

Answer 11

If a biz asks for an advance payment or deposit the tax point is the EARLIER of:

1. The date a VAT invoice is issued for the advance payment or deposit.
2. The date the business receives the advance payment or deposit.

If the customer then pays the remaining balance before delivery another tax point is created which is the EARLIER of

1. The date a VAT invoice is issued for the balance.
2. The date the business receives payment of the balance.

Question 12

VAT accounting for INSTALMENTS

Answer 12

Goods remain property of seller until full price paid.

This is known as a “Conditional sale”

Basic tax point is created when goods are handed over.
On that date a business should account for the VAT on the FULL VALUE

Question 13

Imports and Exports (EU and Non)

Answer 13

Basic principle (applies to imports and exports)…

…Is that VAT is a tax on IMPORTED goods and some services - it is paid where appropriate by the importer and is treated as an input tax

Question 14

Goods imported from outside EUROPE

Answer 14

VAT normally due at same rate the would apply to a supply of those goods within the UK

It is treated the same way s input tax (but charged by HMRC instead of the supplier) and will normally have to be paid before release of goods by HMRC. VAT registered companies can then reclaim but ordinary ppl can’t.

Question 15

Goods exported from UK outside EU

Answer 15

Can be zero-rated as long as documentary evidence of export is obtained and retained.

Question 16

VAT and EU (single market) … terminology?

Answer 16

Since 1993 EU has become area in which movements of goods are no longer called Imports and Exports but instead ‘Acquisitions’ and ‘dispatches’.

Question 17

How is EU VAT collected (not by HMRC as with Imports)

Answer 17

VAT is collected from the buyer.

If buyer is VAT registered:

Goods are zero-rated and VAT is collected from the buyer at the local rate (Box 2 “VAT due on EU acquisitions”

It is then reclaimed in Box 4 “VAT reclaimed on purchases (including EC acquisitions)”

If buyer is not VAT registered the goods will normally be charged by the supplier at the VAT rate in the suppliers country.

Question 18

Conditions for zero-rating of EU supplies…

Answer 18

1. Buyers (valid) VAT number must be quoted on invoice (incl CC)
2. Goods are sent to destination in another EU member state.
3. Supplier holds documentary evidence that the goods have been sent.

Question 19

Tax point for goods supplied to EU?

Answer 19

The EARLIER of:

1. The date on the invoice covering the goods.
2. The 15th of the month following month of supply.

Question 20

Tax treatment for goods sent from EU suppliers to UK

Answer 20

Tax point same rules:

The earlier of the invoice date or the 15th of the month following the supply.

Question 21

What are free zones and warehousing

Answer 21

Storage facilities for goods, normally near ports and airports;
They can be used for storage of goods received from overseas.

No VAT is due on these goods until released to the UK buyer.

Question 22

Place of supply of goods and services.

It is important to know this why?

Answer 22

It’s the place where VAT will be charged and paid.

Question 23

PLACE OF SUPPLY for goods is straightforward but for SERVICES it’s complicated… what is the rule called and explain…

Answer 23

The ‘general rule’

Business customer:
The place where the customer belongs.

Non-business customer:
The place where the supplier belongs

If the supplier is in the UK and place of supply is to another EU country the supplier doesn’t have to charge UK VAT but may have to register and account for VAT in the country of supply.

If the place of supply is not in the EU the supplier doesn’t have to charge UK VAT but should include the sale in BOX 6. “Total value of sales and all other outputs excluding VAT”

Question 24

What are the Special schemes

Answer 24

Annual accounting scheme
Flat rate scheme
Cash accounting scheme

Question 25

What is the annual accounting scheme.

Answer 25

Enables businesses to make annual returns.
Details are in the ‘annual accounting’ guide available on HMRC website as Notice 732.

• available to traders with estimated annual taxable turnover of no more than £1.35M during next 12 months. (All rates, ex vat)
• can be operated in conjunction with either Flat Rate or Cash Accounting scheme (but not both).
• if turnover goes over 1.35M can continue this scheme until estimated reaches 1.6M
• trader must pay 90% of estimated VAT, by 9 equal monthly instalments starting in 4th month of the VAT year.
• alternatively trader can pay 3 interim payments of 25% last years liability (or 25% of likely liability if registered for <12 months). Months 4,7,10 of annual accounting period.
• trader must pay balance or claim repayment with the annual return due 2 months after end of VAT year.

Question 26

Annual accounting scheme pros and cons

Answer 26

Pros

1. Smooth out cash flow by paying set amount each month or quarter.
2. Submit only 1 vat return.
3. Get 2 months to complete online annual vat return instead of 1.

Con

1. If you regularly reclaim VAT (eg. Book supplier) you only get one repayment each year.
2. If turnover decreases then interim payments are higher than need be.

Question 27

What is the flat rate scheme

Answer 27

Designed for small businesses whose annual taxable turnover doesn’t exceed £150k

• biz does not need to identify and record every single vat transaction in order to calculate vat due.
• instead a flat rate is charged on total sales.

* varies with trade sectors eg.
Bookkeeping services 14.5%
Pubs 6.5%
Photography 11%
Sports facilities 8.5%
Entertainment 12.5%
Retailers of food and newspapers 4%

Remember you still charge proper vat rate on invoices.
Remember this rate includes allowance for input tax so you don’t do that.

Question 28

Remember about the flat rate scheme

Answer 28

You wouldn’t use it if you supply zero-rated goods!

If you purchase a Capital Asset of £2K or more you can claim the VAT on that. (But if you sell it you must charge vat and pay that to HMRC on top of the flat rate)

This extra vat will be recorded on the Vat return (due quarterly unless also using Annual accounting scheme)

Question 29

Records to keep for the flat rate scheme.

Answer 29

The flat rate turnover for the accounting period.

The flat rate % used.

The VAT calculated as due.

A VAT account recording vat paid under the scheme and any VAT involved in purchase or sale of a capital asset.

Question 30

The growing number of self employed businesses providing services but with minimal costs has lead to a new flat rate of?
And what is the name of this class ?

Answer 30

16.5%

Limited cost business

Question 31

A biz is classed as a limited cost business in what rules

Answer 31

If it’s expenditure on goods INCLUDING Vat is LESS than EITHER

1) £1k a year
2) 2% of its VAT INCLUSIVE turnover.

Question 32

Remember about the ‘limited cost business’ flat rate scheme.

Answer 32

It applies to ANY sector (the other flat rates are per sector)

Question 33

Can the flat rate scheme be operated with another scheme.

Answer 33

Yes Annual accounting scheme.

Question 34

If a biz operating flat rate scheme is taken over as a going concern what happens?

Answer 34

Acquiring biz must assess use of FRS in context of combined turnover.

If expected to exceed £230K must cease immediately to use scheme.

Question 35

Cash accounting scheme explained and what situation it would be beneficial.

Answer 35

Allows businesses to account for VAT on basis of date of payment rather than tax point on invoice.

Good if you have to pay suppliers immediately but wait a long time for payments from customers.

Question 36

Cash accounting scheme to qualify…

Answer 36

• anticipate annual taxable turnover of £1.35M or less.
• have a clean VAT record. (Returns on time; no assessment for vat evasion; no convictions for vat fraud)
• if start using scheme when turnover under 1.35 can continue until reach 1.6 (same as annual accounting scheme.)

Question 37

Cash accounting scheme records

Answer 37

continue to issue vat invoices but need to keep accounting records in specific way.

• tax point for payments is always transaction date.
• cash book must be maintained summarising payments/receipts with vat in separate column, suitable for providing data for the vat return.
• invoices issued or received for any payments made in cash must be receipted and dated.

Cannot be operated in conjunction with flat rate scheme.

If taken over new biz must assess combined turnover and cease scheme if over 1.6M

Question 38

What is residual input tax

Answer 38

For a partially exempt business it is the tax on purchases that can’t definitely be attributed to standard rated or exempt supplies

Eg electricity

Question 39

Annual accounting scheme can be used in conjunction with…

Answer 39

Flat or cash but not both

Question 40

Specific meaning of the term ‘business entertaining’

Answer 40

Entertainment is ‘business entertainment’ when it is provided to people who are not employees of the business and it is provided free.
Eg meals, accommodation.
Theatre tickets.
Entry to sporting events and facilities
Clubs and nightclubs
Use of facilities eg yachts and aircraft for purpose of entertaining.

Question 41

What is employee entertaining and is vat reclaimable

Answer 41

Entertaining staff to Reward or improve moral it is considered a biz expense and is reclaimable.
Eg seasonal parties and outings.

DIRECTORS are NOT employees !!!!

Question 42

Biz can recover vat on entertaining overseas clients … what to note?

Answer 42

Overseas means outside EU countries

Question 43

Accounting schemes - which 2 cant be used together?

Answer 43

Flat and Cash.

Annual can be used with one or other but not both …

Question 44

Annual accounting scheme payment instalments?

Answer 44

Either:
9 interim from month 4-12 and balancing month 14.
3 interim months 4; 7 ; 10 and balancing month 14