Tax Processes - Chapter 3 - Inputs and Outputs and special schemes

Question 1

Definition of input tax?

Answer 1

VAT a business charged on purchases and expenses

Question 2

Definition of output tax?

Answer 2

VAT due to HMRC on supplies of goods or services made by a business

Question 3

What is the calculation on the VAT return?

Answer 3

Output tax less input tax

Question 4

What is a partially exempt business?

Answer 4

A business VAT registered that has some exempt and some taxable supplies

Question 5

What does ‘de minimis’ mean?

Answer 5

So small it’s nothing worth bothering over

Question 6

What is the de minimis test?

Answer 6

It allows a business to recover all the input VAT charged on taxable and exempt purchases

Question 7

What conditions does the de minimis test have?

Answer 7

The exempt supplies must be:

• no more than £625 per month
• less than 50% of total input VAT for the period

Question 8

What are blocked expenses?

Answer 8

Expenses that a business cannot reclaim input VAT on

Question 9

A business cannot recover input tax on business entertainment. What are examples?

Answer 9

• Provision for food and drink
• Provision for accommodation
• Theatre and concert tickets
• Entry to sporting events
• Use of facilities with the purpose to entertain

Question 10

What is the exception for business entertainment?

Answer 10

When you are entertaining overseas customers

Question 11

Can VAT be reclaimed on employee entertainment?

Answer 11

Yes

Question 12

When can a business reclaim VAT on a car?

Answer 12

• Only for business purposes not even driving to work
• Taxi business
• Car dealer, intends to sell in next 12 months

Question 13

Can you claim VAT on a lease car?

Answer 13

Can usually claim 50% of the VAT back

Question 14

If a business pays for fuel used by employees how can they deal with the VAT?

Answer 14

• If used only for business can claim all
• If they don’t claim on one they can’t claim on any
• Can keep record of what used for and only claim business miles
• Can claim all and pay a separate fuel scale charge

Question 15

What is the fuel scale charge based on?

Answer 15

CO2 emissions, higher emissions mean higher fuel scale charge

Question 16

How should business reclaim VAT on assets?

Answer 16

Reclaim the VAT based on percentage of use for business

Question 17

How is VAT on imports paid?

Answer 17

It is paid by the importer and treated as input tax

Question 18

How do most businesses account for import VAT?

Answer 18

They use postponed VAT accounting

Question 19

What does postpones VAT accounting allow?

Answer 19

It allows the business to declare import VAT and reclaim it as input tax on the same VAT return

Question 20

What happens with VAT on most exports?

Answer 20

They are normally zero rated as long as all laws are obeyed and as long as the overseas customer does not ask for them to a UK address

Question 21

Why is VAT for services more complicated?

Answer 21

Deciding where the place of supply is tricky

Question 22

Where is the place of supply for a business customer?

Answer 22

Where the customer is located and this is what outside scope for UK VAT however the net sales should be included in the VAT return

Question 23

Where is the place of supply for a non-business customer?

Answer 23

Where the supplier is located they should be charged VAT as if they were a customer in the UK

Question 24

What might a business have to do if they buy services from a supplier in another country?

Answer 24

Reverse charge the VAT to themselves and on the VAT return include it as input and output tax

Question 25

What is the annual accounting scheme?

Answer 25

Enables businesses to make one annual VAT return

Question 26

What is the maximum taxable turnover to be in the annual accounting scheme?

Answer 26

£1.35m and you must leave if you will exceed £1.6m in the next accounting year

Question 27

How must you pay VAT under this scheme?

Answer 27

- Pay 90% based on previous VAT return over 9 equal months starting in month 4 of VAT year - Three interim payments each equal to 25% of previous VAT liability in months 4, 7 and 10

Question 28

What are advantages of annual accounting scheme?

Answer 28

- Smooth out cash flow with equal payments - Only one VAT return needed each year - Allowed 2 months instead of 1 to submit VAT return - Can align VAT and business tax year

Question 29

What are disadvantages of annual accounting scheme?

Answer 29

- If VAT is regularly reclaimed you only get one repayment each year - If turnover decreases interim payments will be higher as for last year

Question 30

What is the flat rate scheme?

Answer 30

Business will apply a flat percentage rate to its total turnover for the VAT period

Question 31

What is the expected turnover to join the flat rate scheme?

Answer 31

Less than £150,000 and they must leave if they are to exceed £230,000 in the next 12 months

Question 32

What is a limited cost business?

Answer 32

A business that provides services but incur minimal costs and might be labour only businesses

Question 33

What is the flat rate for limited cost businesses?

Answer 33

16.5%

Question 34

A business is classed as limited cost if there expenditure is less than either…

Answer 34

- 2% of its VAT inclusive turnover - £1,000 a year

Question 35

What is the cash accounting scheme?

Answer 35

This allows businesses to account for VAT when the payments are received or made rather than on the tax point for invoices issued and received

Question 36

How can the cash accounting scheme be beneficial to a business?

Answer 36

- If they have to pay suppliers promptly but have to wait some time before receiving payment. - Also helps with bad debts as no adjustment needed for claiming VAT - Reclaim VAT on purchases when suppliers are paid

Question 37

What’s the requirements for the cash accounting scheme?

Answer 37

- Annual turnover of less than £1.35m - Have a clean VAT record with no convictions or late returns

Question 38

What’s a disadvantage of the Cash Accounting Scheme?

Answer 38

VAT liability can vary according to amounts received and paid.

Question 39

What are advantages of the Flat Rate Scheme?

Answer 39

- Simplified record keeping - Saves small businesses a lot of time - VAT liability is easy to calculate

Question 40

What’s the disadvantage of the Flat Rate Scheme?

Answer 40

VAT liability is based solely on income with no adjustment if spend is more than usual