Indirect Tax Flashcards
(93 cards)
1
Q
What is output tax?
A
Collecting VAT by charging their customers VAT on their sales
2
Q
What is input VAT?
A
Reclaiming VAT that the company has suffered on its purchases
3
Q
What is VAT chargeable on?
A
Taxable supplies
4
Q
What are the 3 types of taxable supplies?
A
Standard Rated
Zero Rated
Reduced Rated
5
Q
What is VAT not charged on?
A
Exempt supplies
6
Q
How do you calculate VAT reclaimable/payable?
A
Output - Input
7
Q
What are the 2 tests for justifying VAT registration?
A
Historic Test
Future test
8
Q
What is the historic test?
A
Check at the end of each month that the total taxable turnover over the previous 12 months exceeds the threshold of £85,000.
9
Q
What is the future test?
A
Each day check that the total taxable turnover for the next 30 days is likely to exceed the limit of £85000
10
Q
When should you notify HMRC to register if either test is met?
A
Within 30 days
11
Q
When will registration be effective from?
A
Start of the months following the end of the 30day notification period (historic test)
Start of the 30-day period (future test)
12
Q
What are the exemptions from compulsory registration?
A
If the business can satisfy HMRC that taxable supplies in the following 12 months will be less than the deregistration threshold of £83,000
If the business makes only (or mainly) zero rated supplies
13
Q
What are the advantages to voluntary registration?
A
Recover input VAT
Discipline
Avoid late registration penalty
14
Q
What are the disadvantages of voluntary registration?
A
Administration burden
Risk of penalties on errors
Prices go up for non VAT registered customers as they cannot reclaim the input VAT on purchases.
15
Q
What is the deregistration threshold?
A
£83,000
16
Q
What circumstances can a business voluntarily deregister?
A
If in the next 12 month period the VAT exclusive value of taxable supplies will be below £83000
17
Q
If a business fails to register for VAT on time, how can they calculate the amount that they owe HMRC?
A
Treat it’s sales as VAT inclusive and pay the VAT out of profits
Treat it’s sales and VAT exclusive and try to get the extra money owed for the VAT from customers
18
Q
How to calculate VAT from a VAT inclusive amount (standard rated)?
A
20/120
1/6
19
Q
How to calculate VAT amount from a VAT inclusive price (reduced rated)?
A
5/105
20
Q
How should VAT be rounded?
A
VAT calculations should be rounded down to the nearest penny.
21
Q
How is VAT payable / reclaimable calculated?
A
Output VAT - Input VAT
22
Q
Who is included in VAT recoverabikity in business entertaining?
A
Staff entertaining
Entertaining on Non-UK customers
23
Q
When can a car / vehicle be VAT reclaimable?
A
Exclusively for business purposes
Within taxi business
For driving instruction
Within self drive hire business
24
Q
What options does a taxable person have when using a vehicle for private usage?
A
Ensure sufficient mileage record are kept so input VAT can be recovered
Reclaim all input VAT suffered on fuel but then account for some output VAT using fuel scale charge per quarter.
Agree not to reclaim anything
25
What can partially exempt traders do?
Only charge VAT on their taxable supplies
Can reclaim input VAT on all purchased directly related to taxable supplies
Can reclaim a portion of input VAT which is not directly attributable to taxable or exempt supplies.
26
What is the calculation for the reclaim ability not directly related to taxable or exempt supplies?
Input VAT (not directly attributable) X value of taxable supplies/total supplies made
27
Where are goods deemed to be supplied?
Where they originate - eg made in the UK = supplied in the UK
28
Where are services deemed to be supplied?
If supply is to registered business - supplied where the customer is located.
If not registered - supplied in the sellers country.
29
What are supplied dog goods to EU countries referred to as?
Despatches
30
When are despatches zero rated?
If the trader obtains the customers VAT number and can prove the goods left the UK. (If not 20%)
31
What are goods purchased outside the EU known as?
Acquisitions
32
How does VAT work on acquisitions?
No VAT is charged by supplier. UK purchaser has to charge themselves output VAT on VAT return, this is then offset by equal amount of input VAT - VAT Neutral for fully taxable trader.
33
What are goods supplied to countries outside of the EU known as?
Exports
34
What VAT is on exports?
Always zero rated if trader obtains evidence of export within 3 months.
35
What are goods purchased from countries outside of the EU known as?
Imports
36
What VAT is charged on imports?
No VAT charged by supplier, when goods enter UK, purchaser needs to pay the applicable rate of UK VAT.
37
What information must VATregisteres businesses keep?
Business and accounting records
Invoices issued and received within UK, all 4 types
Credit / Debit notes issued and received
VAT account summarising output and input VAT
38
What accounting records are kept for sales?
Sales day book - record of all invoices sent to credit customers
Sales returns day book - all credit notes sent out or debit notes received
Cash receipts book - records receipts from credit customers as well as other receipts from cash sales
Orders and delivery notes
39
What account records kept for purchases?
Purchases day book - record of all invoices received.
Purchases returns day book - all credit notes received and all debit notes issued
Cash and petty cash payments book - all cash payments made by the business
40
How long do these records need to be kept?
Minimum 6 years
41
How soon does a VaT invoice need to be raised after supply?
Within 30 days of supply
42
When can a business issue a simplified invoice?
For transactions less than £250 inclusive of VAT
43
Can a proforma invoice be used to reclaim input VAT?
No
44
What is a trade discount?
Given at the time of sale / purchase. They reduce the selling price to encourage purchase.
Usually for regular customers or bulk buyers
45
What is a settlement discount?
A reduced price to encourage early payment for credit customers.
46
Two ways to record settlement discount?
Issue an invoice for the full amount, then a credit note if the discount is taken up.
Issue one invoice with both possible prices and VAT amounts specified with CLEAR INSTRUCTIONS, on the recoverability of input VAT.
47
How can you alter invoice amounts?
By creating additional documents. YOU CANNOT EDIT AN INCVOICE = indicative of fraud.
48
How to reduce VAT?
Credit note to customer.
Credit note will decrease output VAT and reduce the amount payable to HMRC.
OR DEBIT NOTE FROM CUSTOMER
49
What is the tax point?
The earliest of the following;
Despatch/goods made available/service completed
Invoice issued
Payment received
50
When does the invoice date override the basic tax point?
If the invoice was issued within 14 days of that date - if it was, the invoice date overrides the basic tax point and becomes the actual tax point.
51
What if a deposit is paid separately from the balance?
Two tax points must be identified
52
What conditions must be met for bad debt relief?
Debt is over 6months old and less than 4.5years old
Debt has been written off in traders books
VAT must have been paid to HMRC
53
What impacts input VAT?
Purchase invoices and purchased returns (debit notes or credit notes from suppliers)
54
What impacts output vat?
Sales invoices and sales returns (credit notes to customers)
55
How to double entry record a bad debt?
Debit - bad debt expense
Credit - trade receivables
56
Double entry to reclaim the bad debt?
Debit - VAT account
Credit - bad debt expense
57
Exemptions to quarterly VAT returns?
Annual accounting schemes if eligible
Repayment traders complete monthly vat return
58
What are the 4 accounting schemes to be aware of?
The standard scheme
The cash accounting scheme
The annual accounting scheme
The flat rate scheme
59
What is the standard scheme?
The scheme that the business is automatically entered into when it registers for VAT.
60
What are the standard accounting scheme principles?
VAT Returns are completed quarterly
Repayment traders may opt to complete a VAT return each month.
Payments are made one month and 7 days from the end of the VAT Period, if still paper this is reduced to 1 month
61
What is the purpose of the cash accounting scheme?
Enables the business to ignore the tax point rules and account for VAT only when it is paid and received.
62
What are the conditions for the cash accounting scheme?
- business’ VAT exclusive taxable turnover is not expected to exceed £1,350,000 in next 12 months
- only eligible if not a member of flat rate scheme
- a taxable person can join the scheme only if all Vat returns and payments are up to date or arrangements have been made, this person must not have been convicted of a VAT offence or penalty in last 12 months
63
When must a business exit the cash accounting scheme?
If VAT exclusive supplies exceed 1.6mil in previous 12 months or future forecasted 12months. Notice must be given to HMRC within 30 days and the business must exit the scheme.
64
What are submission deadlines for cash accounting scheme?
Same as for the standard scheme unless they also use the annual accounting scheme.
65
What are the advantages of the cash accounting scheme?
Output VAT is not paid to HMRC until it has been collected from the customer = CASH FLOW ADVANTAGE.
Scheme gives automatic bad debt relief as the output VAT is only paid over to HMRC when it is received from the customer.
66
What is the annual accounting scheme?
Allows a business to submit only one VAT return each year, still required to make payments throughout the year despite this.
67
Return and payment submission deadlines for annual accounting scheme?
The trader pays 90% of the prior year VAT LIABILITY in 9 instalments across months 4 to 12 of the year, payment is due at the end of the relevant month and must be made by direct debit.
Any remaining balance is settled 2 months after the year end and submitted with a VAT return form.
68
What are the conditions for the annual accounting scheme?
Vat-exclusive turnover not expected to exceed £1.35mil in the next 12 months.
All returns and VAT payments are up to date- or arrangements been made to pay outstandings.
If taxable supplies exceeds £1.6mil in previous 12 months, notice must be given to HMRC within 30 days and the business must leave the scheme.
69
What are the advantages of the annual accounting scheme?
Submitting only one VAT return reduced administrative burden of VAT.
Businesses have an extra month between the end of the VAT period and the return submission date.
Paying a fixed amount on each instalment improves cash flow management.
70
What are the disadvantages of the annual accounting scheme?
If turnover decreases, the interim payments may be higher than they need to be.
The business will have to wait until the end of the year when it submits it’s VAT return for a refund.
71
What is the flat rate scheme?
The flat rate scheme makes the calculation of the VAT liability simpler, by calculating the amount of VAT payable as a flat (industry specific) percentage of total VAT-INCLUSIVE turnover.
72
What is the limited costs % and how to qualify as a limited costs trader?
16.5%.
A limited costs trader is one whose purchases of good are less than either:
2% of turnover
OR
£1000 Per Year
73
Conditions for the Flat Rate Scheme?
A businesses VAT-Exclusive turnover not expected to exceed £150,000 in next 12months.
The business is not a member of the cash accounting scheme.
IF VAT INCLUSIVE total supplies exceed £230k in the previous 12 months then notice must be given to HMRC within 30days and the business must leave the scheme.
74
What are the return and payment submission dates for the flat rate scheme?
Due dates are the same as for the standard scheme unless they also enter into annual accounting scheme.
VAT payable is calculated in a completely different way to usual, by applying the flat rate % to the total VAT-Inclusive turnover of all supplies, so no VAT is reclaimable.
Output VAT is charged as normal to customers.
75
What are the advantages of the flat rate scheme?
VAT Payable is normally less than the amount payable under the standard accounting scheme.
There will be sinplified admin and the VAT does not need to be accounted for on each individual sales or purchase invoice.
Cash flow can be managed as the VAT payable is a % of turnover.
76
How are deliberate errors reported to HMRC?
Separately, this is done by contacting the HMRC VAT Error Correction Team in Writing and preferably using the VAT652 form.
77
What is the error correction threshold?
The GREATER of:
- £10,000
- 1% of turnover (box 6) subject to an overall limit of £50,000
78
What happens if the net error is more than the error correction threshold?
Then HMRC will need to be contacted in writing preferably using the form VAT652
79
What if the error is within the threshold?
Then this can be corrected o the next VAT return. A single adjustment is made for the net of all the errors
80
What are the 5 wrongdoings liable to penalties?
Careless and deliberate errors
Inaccurate VAT returns
Late VAT return or payment
Failure to register for VAT
Failure to keep and retain records
81
What is the penalty for careless and deliberate errors?
Will be a percentage of the potential lost revenue (ie the VAT underpaid to HMRC).
There will be a charge on an error whether it was adjusted in the VAT Return or adjusted separately.
These penalties can be minimised by making unprompted disclosures to HMRC about these errors
82
What is the penalty for inaccurate VAT returns?
These penalties can be reduced to zero if the trader makes an unprompted disclosure to HMRC on the inaccuracies.
If the return cannot be completed on time because some info is missing, HMRC will usually permit some of the figures to the estimated and corrected in the next return.
83
What is the penalty for late VAT returns or payments?
First time - trader is said to be in default.
A 12-month surcharge liability notice period is started.
If a late payment occurs again within these 12 months the 12 month period starts again, and a penalty is issued.
This will be a % of the unpaid VAT to HMRC.
84
What is the penalty for failing to register for VAT?
Traders need to ensure they are completing the historic and future tests regularly.
Once the need to register has been identified, they must notify HMRC within 30 days of the test.
The penalty will be based in the % of VAT due from the date registration was supposed to occur.
85
What is the penalty for failing to keep and retain records?
All records must be kept for at least 6 years, unless permission for shorter time period is granted.
Where records have not been kept. There is a max penalty of £3000, per accounting period.
86
What is evasion of VAT?
Misleading HMRC by suppressing information or deliberately providing false information.
Illegal
87
What is avoidance of VAT?
Using legislation to minimise your tax burden
Legal
88
When in need of advice, where should taxpayers look?
Check the HMRC website
Telephone the VAT helpline - with a VAT registration number and postcode
Write to HMRC - preferably by email.
89
What is permitted / expected at an HMRC Control Visit?
How much notice of the visit must be given?
Questioning the business owner, or the person responsible for keeping the VAT records.
Examine business records
Check the VAT return is accurate
Watch business activty
- 7 DAYS
90
Where can legislation changes be found?
On the HMRC and Government websites
In direct communications with HMRC
In technical circulars within accountancy firms
In specialist journals.
91
Where can changes in practice be found?
By attending continual professional development (CPD) meetings
Reading relevant journals
Meeting other professionals
92
Who will VAT changes impact most?
Non-VAT registered businesses
May need to increase price for the customer or cover the extra costs themselves
93
What are the 5 fundamental ethical principles?
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
