9 Flashcards
(22 cards)
List the four main forms of indirect taxes.
Value Added Tax (VAT)
Stamp Duty
Customs Duties
Excise Duties
What is the difference between formal incidence and effective (actual) incidence of a tax?
Formal incidence: The party that deals directly with the tax authority—e.g., a VAT-registered retailer that remits VAT it has collected.
Effective (actual) incidence: The party that ultimately bears the economic burden because the tax cannot be passed on—often the non-VAT-registered customer.
Sometimes both coincide if a business absorbs the tax instead of raising prices, blurring the distinction.
What is VAT?
It is an indirect tax which is chargeable on the taxable supplies of goods and services which are made by a a taxable person. Charged on turnover not profits.
What is the basic principle of VAT along the production-and-distribution chain?
VAT is added (charged) at each stage of production and distribution on the value created, but the economic burden is ultimately borne by the final consumer. VAT-registered traders collect the tax on their sales (output tax) and offset the VAT they paid on their purchases (input tax) before paying or reclaiming the balance from HMRC.
Explain the terms output VAT and input VAT, and state what happens when one exceeds the other.
Output VAT: VAT a registered business charges customers on its taxable sales.
Input VAT: VAT the business pays on purchases and expenses for the business.
Settlement:
If output VAT > input VAT, the net difference is paid to HMRC.
If input VAT > output VAT, the excess is reclaimed from HMRC.
These calculations are reported on the business’s periodic VAT return.
Define a taxable person for VAT purposes and state the 2024/25 turnover threshold that triggers mandatory registration.
Mandatory registration is required when taxable supplies exceed £90,000 in a 12-month period (threshold for 2024/25).
What qualifies as a taxable supply for UK VAT purposes, and what VAT rates can apply if the supply is not exempt?
Taxable supply: Any sale of goods or services to UK or overseas customers unless the item is specifically exempt.
If not exempt, VAT is charged at one of three rates:
Standard rate – 20 %
Reduced (special) rate – 5 % (e.g., domestic fuel & power)
Zero rate – 0 %
For VAT purposes, when is a transaction treated as a supply of goods and when is it treated as a supply of services?
Supply of goods:
Occurs when ownership of tangible goods passes from one person to another for consideration (money).
Supply of services:
Applies to any transaction made for consideration that cannot be classified as a supply of goods; such transactions are automatically deemed to be supplies of services.
What is an exempt supply for UK VAT purposes, what are the consequences for a business that makes only exempt supplies, and give some common examples.
Definition: A sale of goods or services that falls within one of the exemption groups listed in VAT legislation—so no VAT can be charged on it.
Consequences if you make only exempt supplies:
You are not a taxable person and cannot register for VAT.
You cannot charge output VAT on sales.
You cannot reclaim input VAT on costs.
Typical exempt supplies:
Insurance
Royal Mail postal services
Betting, gaming & lotteries
Financial services
Certain education
Health & welfare services
Burial & cremation services
For businesses making zero-rated supplies, when must they register for VAT and what options do they have?
Registration duty:
If taxable turnover (including zero-rated sales) exceeds the VAT threshold, the business must register—unless HMRC grants an exemption.
Exemption option:
A business can ask HMRC to be exempt from registration if it mainly makes zero-rated sales and has little input VAT to reclaim (to avoid admin burden).
Voluntary registration:
They may register at any time, even below the threshold, to reclaim input VAT (e.g., they charge 0 % on sales but pay 20 % on purchases).
What is meant by the “value of a supply” versus the “consideration”?
What VAT fraction lets you pull VAT out of a VAT-inclusive price?
How does a prompt-payment (cash) discount affect the amount on which VAT is calculated?
Value of a supply = the net price before VAT (e.g., £200).
Consideration = the amount the customer actually pays, including VAT (e.g., £240).
At a 20 % rate, the VAT fraction is 1⁄6.
To find the VAT inside a VAT-inclusive amount, divide that amount by 6 ( £240 ÷ 6 = £40 VAT).
Prompt-payment discount rule
If the customer takes the discount, VAT is charged on the discounted net price.
If the customer doesn’t take the discount, VAT is charged on the full original net price.
Under what two circumstances is UK VAT registration compulsory, and how is taxable turnover defined?
Historical test – Your taxable turnover in the previous 12 months has already exceeded the registration threshold.
Future test – You expect your taxable turnover in the next 30 days alone to exceed the threshold.
Taxable turnover = the total value of your taxable supplies (standard-, reduced-, or zero-rated, but not exempt) in the relevant period.
What is voluntary VAT registration in the UK, and in which situations can it be advantageous for a small business below the threshold?
Voluntary registration: A business with taxable turnover below the compulsory threshold chooses to register for VAT.
When it may help:
Business-to-business sales – customers are VAT-registered and can reclaim the VAT you charge.
Mainly zero-rated sales – you charge 0 % but can reclaim input VAT on purchases.
Pre-trading or low-sales phase – register early to recover input VAT before taxable supplies ramp up.
Perception reasons – registration can make a micro-business appear larger or more established.
Trade-off: Recovering input VAT must outweigh the extra admin and compliance costs of being “in the system.”
When can a UK-registered business deregister from VAT, and what are the two routes to cancellation?
Voluntary deregistration
Allowed if you expect your taxable turnover in the next 12 months to stay below £88,000 (2024/25 limit).
Compulsory deregistration
Must cancel within 30 days of ceasing all taxable supplies; or
When your legal status changes (e.g., sole trader to company).
How must a UK VAT-registered business account for VAT each period?
Complete an online VAT Return, usually every quarter.
Report output VAT charged on sales and input VAT on purchases; pay or reclaim the net amount.
Each VAT quarter ends on set months (commonly Nov, Feb, May, Aug).
The return (and any payment) is due 1 month + 7 days after the quarter-end date.
What is a VAT “tax point”, and how can the actual tax point differ from the basic tax point for goods and services?
Tax point = the date a supply is treated as made — the moment VAT must be accounted for.
Basic tax point
Goods: when the goods are removed or made available to the customer.
Services: the day the service is performed.
Actual tax point overrides the basic one when:
Earlier event: The supplier issues an invoice or receives payment before the basic tax point → that earlier date becomes the tax point.
14-day rule: If no earlier invoice/payment, but the supplier issues the invoice within 14 days after the basic tax point, the invoice date becomes the tax point
Under the UK VAT rules (outside the cash-accounting scheme), when can a business reclaim the VAT it has already paid over on a bad debt, and what four conditions must be met for Bad Debt Relief?
A business may claim Bad Debt Relief (BDR) when a customer never pays an invoice on which the supplier has already accounted for output VAT.
To reclaim that VAT, all of the following must apply:
Supply for consideration – VAT was properly charged and declared on the sale.
Debt written off – the unpaid amount has been formally written off in the books.
Six-month rule – at least 6 months have passed since the later of the supply date or the due-payment date.
Four-year claim window – the BDR claim is submitted within 4 years of the debt becoming eligible.
When can a UK business reclaim input VAT on cars, and what are the key rules for purchase versus maintenance?
Purchase of a car:
No input VAT recovery if the car will have any private use.
Input VAT is recoverable only if the car is used 100 % for business (e.g., pool cars with strict controls, driving-school or taxi vehicles, or a dealer’s stock-in-trade).
Running costs (servicing, repairs, fuel):
VAT on these costs is recoverable even when the purchase VAT was blocked, provided the car is used in the business.
Bottom line: reclaim VAT on the purchase only for wholly business cars; you may still reclaim VAT on maintenance of mixed-use cars.
What triggers a VAT default surcharge in the UK, what can it lead to, and how might a trader avoid it?
Trigger: Filing a VAT return after the due date or paying VAT late (i.e., being “in default”).
Consequences: HMRC may impose fines, penalties, and interest. Similar penalties apply to under-declared VAT or failure to register when required.
Avoidance: Penalties can be cancelled if the trader demonstrates a “reasonable excuse” for the late return or payment (e.g., serious illness, HMRC system failure).
Outline the VAT Annual Accounting Scheme:
Who can join (eligibility & conditions)?
How does the payment pattern work?
What are the main advantages and disadvantages?
Must exit if turnover rises above £1.6 million.
How it works
Submit one VAT return per year instead of four.
Make instalment payments on account (by Direct Debit) based on the previous year’s VAT liability—either quarterly or over a nine-month schedule.
Pay / reclaim the balance when the annual return is filed.
Advantages
Less admin (only one return).
Fewer default-surcharge risks.
Instalments aid budgeting and cash-flow planning.
Disadvantages
Instalments may mis-match current trading if turnover changes, potentially straining cash flow.
Must monitor turnover; exceeding £1.6 m forces withdrawal from the scheme.
Describe the VAT Flat Rate Scheme:
Who can join and when must they leave?
How is the VAT due to HMRC calculated?
What key limitation applies to input VAT?
What rate applies to a “limited-cost trader”?
Eligibility: Join if annual taxable supplies ≤ £150,000 (VAT-exclusive).
Exit: Must leave once VAT-exclusive income exceeds £230,000.
VAT calculation: Pay HMRC flat-rate % × total gross turnover (all supplies, even zero- or exempt-rated).
Input VAT: No separate input-VAT recovery is allowed (records not required), except on certain capital assets > £2,000.
Limited-cost trader rule: Since April 2017 a flat rate of 16.5 % applies if the business buys little or no goods, making the scheme less attractive.
How does the VAT Cash Accounting Scheme work, who can use it, and what are its main pros & cons?
How it works
Output VAT is paid and input VAT reclaimed when cash is actually received or paid, not when invoices are issued.
Because VAT follows the cash, the usual tax-point rules don’t apply.
Eligibility
Same turnover limits as the Annual Accounting Scheme:
May join if expected taxable turnover ≤ £1.35 million.
Must leave if it later exceeds £1.6 million.
Business must be up-to-date on VAT returns and have no serious VAT offences.
Advantages
Immediate bad-debt relief (no VAT payable on unpaid invoices).
Smoother cash flow for businesses whose customers pay slowly.
Disadvantages
Delayed input-VAT recovery on purchases, so it can hurt cash flow for firms with heavy costs or large zero-rated sales.
