Value Added Tax (Taxation)-FS Flashcards
(18 cards)
What is VAT and how is it generally applied?
VAT is a tax on the value added to goods and services. Businesses collect VAT on sales and pay VAT on purchases, remitting the difference to HMRC.
Definition: Zero-Rated vs. Exempt Supplies
- Zero-Rated: No VAT charged, but the supplier can recover input VAT (e.g. sale of residential property).
- Exempt: No VAT charged, and the supplier cannot recover input VAT (e.g. insurance services, most commercial property).
What is the VAT treatment of commercial property?
Commercial property is generally exempt from VAT, but the owner may opt to tax it and charge VAT at the standard rate (usually 20%).
Is VAT charged on the sale of residential property?
No. Residential property sales are zero-rated for VAT purposes, meaning no VAT is charged, but input VAT can be recovered.
What is the VAT treatment for new-build commercial property in the first three years after construction?
For the first 3 years after construction, new-build commercial property is not exempt from VAT. The owner must charge VAT on the sale price, rent, and lease payments.
Why might a seller opt to charge VAT on commercial property?
To allow them to recover input VAT incurred on development or renovation expenses (e.g. contractor costs).
What happens when a landlord opts to tax a lease granted to a tenant making exempt supplies (e.g. insurance company)?
The rent is subject to 20% VAT, but the tenant cannot recover that VAT if their business only makes exempt supplies.
Can a business charge VAT on exempt services?
No. A business providing exempt services (e.g. insurance) cannot charge VAT or recover input VAT on associated costs.
What does it mean to “opt to tax” a commercial property?
It means the owner chooses to charge VAT at the standard rate (usually 20%) on supplies relating to the property, allowing recovery of input VAT on expenses.
Is VAT recoverable if the buyer or tenant makes exempt supplies (e.g. an insurance company)?
No. If the buyer/tenant only provides exempt supplies, they cannot recover VAT charged on rent or purchase.
How is VAT calculated on the sale of a commercial property when the seller has opted to tax?
VAT is added to the sale price. The seller can then deduct any input VAT paid on expenses related to the property before remitting the balance to HMRC.
What is the VAT treatment of newly built commercial properties within the first 3 years?
VAT must be charged on sales or leases of new commercial buildings within 3 years of completion.
Can VAT be charged on other exempt services, like insurance?
No. Exempt supplies (e.g. insurance services) do not allow an option to charge VAT and input tax cannot be recovered.
In what situation might VAT be charged on rent paid by an exempt business?
If the landlord has opted to tax the commercial building, VAT will be added to the rent, even though the tenant cannot reclaim it.
What is the standard VAT rate used in property transactions where VAT applies?
The standard VAT rate is 20%, though this can change over time depending on government policy.
What is the effect of the option to tax on a lease granted to an exempt business?
The lease will be subject to VAT at 20%, which will be irrecoverable by the exempt business (e.g. insurance companies).
What happens if a commercial property owner does not opt to tax?
No VAT is charged on sale or lease, and the owner cannot reclaim input VAT on related expenses.
How does opting to charge VAT benefit a developer?
It allows them to reclaim input VAT (e.g. paid to contractors), which would otherwise be a cost if the property remained exempt.
