Tax Processes for Businesses (UNIT 2)

Question 1

VAT

Answer 1

-Indirect Tax
-VAT can be claimed back by VAT registered businesses

Question 2

Who can be a VAT registered business?

Answer 2

-Individual, partnership or limited company that make taxable supplies.

Question 3

Businesses that make solely exempt supplies cannot register for VAT purposes:

Answer 3

Some examples of this can be
- Postage
- Insurance
- Burial and cremation services
- Financial services
- Betting and gaming
- Sports activities and physical education

Question 4

What are the rates of VAT?

Answer 4

20% - all other supplies not classified as reduced standard rate, zero rated or exempt
5% - Domestic fuels, children’s car seats/booster seats
0% - books, children’s clothing and shoes, public transport

Question 5

What is the standard rate of the invoice with the net value if 321.98

Answer 5

This would be rounded to £64 unless you are specifically advised to round down .

Question 6

How will a HMRC representative contact a VAT registered business to inspect the records?

Answer 6

-They will let the business know 7 days in advance
-And will be confirmed in writing:
which records are to be inspected
to whom they wish to speak to
and the date and time of when they
are coming.

Question 7

How long must records be kept?

Answer 7

Businesses must keep appropriate records for 6 years to support the VAT returns submitted.

Question 8

What are some VAT records that need to be maintained?

Answer 8

• VAT control account
• Records of all taxable supplies and exempt supplies bought and sold
• Records of goods and services with irrecoverable input VAT
• Purchase and Sales invoices (copies)
• Credit and Debit notes
• Import and export documents

Question 9

Do all business have to register for VAT?

Answer 9

No, this is based on thresholds for taxable supplies.
To determine if a business must register for VAT its taxable turnover must be calculated.

Question 10

How do you calculate the taxable turnover for a business?

Answer 10

Include:
- Standard rate supplies (20%)
- Reduced standard rate supplies (5%)
- Zero rated supplies (0%)
Exclude:
- Exempt supplies
- Sales of capital items

Question 11

When should a business register for VAT?

Answer 11

Voluntary registration :
- can choose to register for VAT even if their taxable supplies do not exceed thresholds
Compulsory registration :
- if taxable supplies exceed £85,000 = must register = Historic turnover method
- if taxable supplies are expected to exceed £85,000 in the next 30 days alone = must register = Future turnover method

Question 12

Important note about VAT registration

Answer 12

Vat is due to HMRC on all taxable supplies made form the date registration becomes effective, even if the business doesn’t charge VAT on their taxable supplies the VAT remains due and will still have to be paid by the business.

Question 13

How does a business register for VAT?

Answer 13

Online :
- Vat registration number should be received within 3 working days
Post :
- If you can’t register online for whatever reason, HMRC will consider your application via post, VAT registration number should be received within 15 days.

Question 14

What is MTD (Making tax digital)?

Answer 14

Digital VAT records that a business must keep and submit VAT returns using a MTD compatible software.

Question 15

Why must a business deregister for VAT?

Answer 15

• If taxable supplies are lower than £83,000 in the next 12 months
• If the business is sold
• If business status changes (sole trader to limited company)

Question 16

What is taxable turnover?

Answer 16

This consists of standard rated and zero rated supplies only

Question 17

When must VAT returns be submitted?

Answer 17

-Must be submitted every quarter
-The return is due 1 month and 7 days after the quarter ends

Question 18

When is payment due for VAT returns?

Answer 18

-1 month and 7 days
-7days don’t apply to trader using annual accounting scheme or trader making monthly payments which are compulsory for large businesses.

Question 19

What is the annual accounting scheme?

Answer 19

Only 1 VAT report is required throughout the year rather than 4 under the standard scheme.

Question 20

What are things to consider for the annual accounting scheme?

Answer 20

Conditions:
-Taxable turnover must be lower than £1,350,000
-Returns must be up to date
-Must leave the scheme if expected to rise over £1,600,000 in the next 12 months

Question 21

What are some advantages and disadvantages of the annual accounting scheme?

Answer 21

Advantages:
- Reduced administrative workload for small businesses
- Provides a known VAT value on a monthly basis to aid cash flow
Disadvantages:
- Only receive 1 rebate per year
- If sales are declining payments on the account will exceed liability therefore negative cashflow

Question 22

What is the cash accounting scheme?

Answer 22

• Businesses account for the VAT when cash is paid in and out of a business rather than when invoices are raised.
• Can also be used along side the annual accounting scheme

Question 23

What are some advantages and disadvantages of the cash accounting scheme?

Answer 23

Advantages:
- If VAT is made on credit terms then its not due until the customer receives it.
- Avoids issues created by bad debts where VAT has already been paid to HMRC
Disadvantages:
- If sales are on a cash basis then the reclaim of VAT input is delayed.
- If sales are largely zero rated then the reclaim of VAT input is delayed.

Question 24

What is the flat rate scheme?

Answer 24

• This is determined by HMRC and can help small businesses calculate their VAT.
• Business does not reclaim any input VAT

Question 25

What are the Advantages and Disadvantages to the flat rate scheme?

Answer 25

Advantages:
- Reduces administrative burden of recording VAT transactions on individual transactions.
- Reduced risk of errors
Disadvantages:
- Not suitable for businesses that make zero rated supplies in the main
- Businesses that purchase high value standard rated items.

Question 26

What are things to consider for the flat rate scheme?

Answer 26

Conditions:
- Taxable turnover should not be expected to exceed £150,000 in the next 12 month period.
- Businesses must leave the scheme is businesses expect to exceed £230,000 in the next 12 month period.

Question 27

What is the formula for working out the flat rate scheme?

Answer 27

Flat rate (%) x Gross total turnover

Question 28

What are some consequences to late registration?

Answer 28

-Businesses must register for VAT in line with the threshold advised by
HMRC
- HMRC has the power to administer penalties and fines to businesses that do not comply with VAT legislation

Question 29

What are the 2 consequences to a business if they fail to register for VAT?

Answer 29

• The trader can either treat the sales as VAT inclusive and suffer the VAT element themselves, or they can liaise with they customers and send a VAT only invoice.
• A penalty can be charged which is a percentage of the VAT due, this is known as the potential lost revenue (PLR). (Reference material for (% will be in the assessment)).

Question 30

What are the consequences of submitting a late VAT return?

Answer 30

• For every late VAT filing a penalty point is issued
  ( Annually = 2 points threshold
  Quarterly = 4 points threshold)
  £200 fine which applies for all subsequent VAT returns that are filed late.
• Individual points expire after 2 years as long as the taxpayer hasn’t reached the penalty threshold

Question 31

What are the consequences of late payment?

Answer 31

• ## The penalty will be based on a percentage of the outstanding VAT due for payment

Question 32

T/F If the taxpayer has a reasonable excuse for paying late which HMRC are satisfied with there will be no penalty.

Answer 32

True

Question 33

What is a personalized payment plan?

Answer 33

• If taxpayer is having financial difficulties then a time to pay arrangement can be requested from HMRC.

Question 34

What is late payment interest?

Answer 34

• Interest is charged at 2.5% above the Bank of England rate i.e. if 4% then 6.5%
• Interest will continue to be charged on amounts included in a time to pay agreement.

Question 35

What happens if errors made are not corrected?

Answer 35

• HMRC issue a discovery assessment which is a demand to collect any VAT due.

Question 36

What penalties can arise when tax is underdeclared ?

Answer 36

• Showing insufficient tax due on the VAT return
• Claiming a repayment which is too large on the VAT return.
• Failing to inform HMRC within 30 days that an assessment of tax due is too low.

Question 37

What are legal and ethical consequences of tax evasion?

Answer 37

Legal :
- This will be addressed by penalties and charges rather than through legal cases
Ethical :
- Threat to the integrity and professional behaviour of participating colleagues.

Question 38

VAT invoices :

Answer 38

• A VAT invoice must be produced as evidence that VAT has been charged.
• This must be done within 30 days of the supply of goods or services or receipt of the payment.

Question 39

What are the main contents of a VAT invoice?

Answer 39

• VAT registration number
• Rate of VAT charged per item
• Total amount excluding VAT
• Total amount of VAT
• Customer name and address
• Description of goods and services

Question 40

What is a simplified VAT invoice?

Answer 40

• This type of invoice is issued when the value of supply is less than £250

Question 41

What is a modified VAT invoice?

Answer 41

-Shows same details as a full invoice
-Only issued if total is more than £250.

Question 42

What are e-invoices?

Answer 42

• All e-invoices must contain same information as a normal invoice
• Must be signed electronically
• Invoice must not be altered
• It must be readable and legible

Question 43

What are benefits of an e-invoice:

Answer 43

• Reduced paper storage and associated cost
• Improved cash flow
• Rapid retrieval of documents

Question 44

What is Tax point ?

Answer 44

Tax point date :
- The date the invoice when the VAT applies
Basic tax point :
- The date the goods/services are supplied
Actual Tax point:
- If payment was received before basic tax point
- Or invoice raised within 14 days of tax point