Introduction to Value Added Tax

Question 1

What is the current standard rate of VAT in the UK?
A) 15%
B) 20%
C) 25%
D) 17.5%

Answer 1

B) 20%
Explanation: The current standard rate of VAT is 20%.

Question 2

Which type of VAT supply allows recovery of input tax but charges 0% on outputs?
A) Exempt supply
B) Zero-rated supply
C) Standard-rated supply
D) Reduced-rated supply

Answer 2

B) Zero-rated supply
Explanation: Zero-rated supplies (like books and children’s clothes) allow businesses to recover input VAT even though they charge 0% VAT on sales.

Question 3

At what turnover threshold must a business register for VAT?
A) £85,000
B) £90,000
C) £88,000
D) £100,000

Answer 3

B) £90,000
Explanation: A business must register for VAT if its taxable turnover exceeds £90,000.

Question 4

What is the VAT fraction used to calculate VAT from a VAT-inclusive price?
A) 1/5
B) 1/4
C) 1/6
D) 1/7

Answer 4

C) 1/6
Explanation: To find VAT from a VAT-inclusive figure, you multiply the total by 1/6.

Question 5

Zoe sells books and stationary. The books are zero-rated. How does VAT apply to her sales?
A) She charges 20% VAT on all sales.
B) She charges 5% VAT on all sales.
C) She charges 0% VAT on books and 20% VAT on stationary.
D) She charges no VAT at all.

Answer 5

C) She charges 0% VAT on books and 20% VAT on stationary.
Explanation: Books are zero-rated and stationary is standard-rated at 20%.

Question 6

A company buys machinery (£6,000 + VAT) and sells goods (£10,000 + VAT). What happens to the VAT on the machinery?
A) They cannot reclaim input VAT.
B) They only reclaim half of input VAT.
C) They reclaim input VAT against output VAT.
D) They pay extra input VAT.

Answer 6

C) They reclaim input VAT against output VAT.
Explanation: Businesses can reclaim VAT on business expenses (input VAT) and offset it against their output VAT.

Question 7

Which of the following is an exempt supply for VAT purposes?
A) Sale of a new commercial building
B) Supply of children’s clothes
C) Sale of books
D) Provision of insurance services

Answer 7

D) Provision of insurance services
Explanation: Insurance services are exempt from VAT, meaning no VAT is charged and no input VAT can be reclaimed.

Question 8

Marcus operates a business with turnover of £80,000. He voluntarily registers for VAT. Why might he choose to do this?
A) To avoid VAT on supplies
B) To reduce corporation tax
C) To reclaim input VAT on business expenses
D) To deregister immediately

Answer 8

D) To reclaim input VAT on business expenses
Explanation: By registering voluntarily, he can recover input VAT even though he is below the registration threshold.

Question 8

ABC Ltd makes only exempt supplies. What is the VAT impact?
A) They must charge VAT but cannot reclaim input tax.
B) They reclaim input VAT but charge no output VAT.
C) They charge 5% VAT on supplies.
D) They cannot reclaim input VAT and do not charge VAT.

Answer 8

D) They cannot reclaim input VAT and do not charge VAT.
Explanation: Businesses making exempt supplies neither charge VAT nor recover input VAT.

Question 9

Bob charges £120 including VAT for a service. How much VAT must he pay to HMRC?
A) £20
B) £24
C) £40
D) £30

Answer 9

A) £20
Explanation: To extract VAT from a VAT-inclusive figure, £120 × 1/6 = £20.

Question 10

Susan is a VAT-registered retailer. She sells children’s car seats (reduced rate). What VAT rate applies?
A) 5%
B) 0%
C) 20%
D) 10%

Answer 10

A) 5%
Explanation: Children’s car seats are taxed at the reduced VAT rate of 5%.

Question 11

If a business only makes zero-rated supplies, what happens to its VAT status?
A) It can still register and reclaim input VAT
B) It cannot register
C) It must charge 5% VAT
D) It must pay VAT on output but not input

Answer 11

A) It can still register and reclaim input VAT
Explanation: Businesses making zero-rated supplies can register for VAT and reclaim input tax.