VAT

Question 1

What is VAT?

Answer 1

VAT is chargeable on the sale of taxable supplies by a taxable person

Question 2

What is a taxable supply?

Answer 2

A taxable supply is a sole trader, partnership, limited company, club or association making taxable supplies

Question 3

What is output VAT?

Answer 3

VAT that is collected by the business (on sales made to customers) and paid over to HMRC

Question 4

What is input VAT?

Answer 4

In most cases VAT paid by a VAT taxable person (on purchases) can be reclaimed from HMRC and is known as input VAT

Question 5

How do you calculate what is paid/received from HMRC?

Answer 5

VAT is a self-assessed tax: every month/quarter the input and output VAT is netted off and paid to/received from HMRC

Output VAT - Input VAT = Paid to/(received from) HMRC

Question 6

How do you treat zero-rated products? (VAT exclusive price)

Answer 6

• Add 0% to sales price on output VAT on sales

Question 7

How do you treat reduced-rate products? (VAT exclusive price)

Answer 7

• Add 5% to sales price

Question 8

How do you treat standard-rate products? (VAT exclusive price)

Answer 8

• Adds 20% to sales price

Question 9

How do you calculate VAT on standard-rated supplies when given the VAT inclusive price?

Answer 9

Times by 20/120 or 1/6

Question 10

How do you calculate VAT on reduced-rated supplies when given the VAT inclusive price?

Answer 10

Times by 5/105 or 1/21

Question 11

What happens if an error results in output VAT not being charged on a taxable supply?

Answer 11

The trader responsible for the supply has to pay the outstanding VAT to HMRC

For these purposes, the amount the trader receives on selling the product is considered to be inclusive of
VAT

Question 12

What are the turnover tests for compulsory registration?

Answer 12

Historic: Do taxable supplies in previous 12 months exceed the limit?
Future prospects: Will taxable supplies in next 30 days alone exceed the limit?

Question 13

How many registrations do sole traders have? How about companies?

Answer 13

Sole traders carrying on several businesses have a single registration, whereas each limited company has a seperate registration

Question 14

How do historic tests work?

Answer 14

A trader must register for VAT if, at the end of a calendar month, taxable supplies exceed £85,000 for the last 12 months, unless taxable supplies for the next 12 months are expected to be less than £83,000. Both of these thresholds are given in your tax tables.

Tests are performed at the end of each month

Question 15

When must the trader register with HMRC following the result of a historic test?

Answer 15

Registration will be effective from the end of the next month, and the trader must notify HMRC of the need to register within 30 days of the end of the month in which the threshold is exceeded.

Question 16

How do future prospects tests work?

Answer 16

A trader must register for VAT if there is an expectation that taxable supplies will exceed £85,000 during the next 30 days. The trader must notify HMRC of the need to register within 30 days of the start of the 30-day period.

These tests are considered constantly

Question 17

When is registration effective for future prospects tests?

Answer 17

Registration will be effective from the start of the 30-day period; i.e. the trader must start charging the VAT from the date it is realised that the test has been met

Question 18

What does taxable sales not include?

Answer 18

Taxable supplies means all sales excluding:

• VAT
• Exempt supplies
• Supplies outside the scope of VAT (e.g wages)
• Sales of capital assets

Question 19

What are the consequences of registration?

Answer 19

A taxable person must now:

• charge output tax on taxable supplies
• quote his or her trader’s allocated VAT registration number on all sales invoices
• file a VAT return for their allocated ‘tax period’ (normally every three months)
• maintain appropriate VAT records e.g. so that input tax (subject to some restrictions) can be recovered on business purchases and expenses. HMRC requires these records to be kept for 6 years

Question 20

What are the advantages to voluntary registration?

Answer 20

• Avoids penalties for late registration
• Can recover input VAT on purchases
• Can disguise the small size of the business

Question 21

What are the disadvantages of voluntary registration?

Answer 21

• Burden of compliance with VAT administration rules
• Must charge output VAT, which makes goods/services comparatively more expensive than an unregistered business, for customers who cannot recover the VAT i.e final customers

Question 22

What is compulsory deregistration?

Answer 22

• A person must deregister when the business ceases to make taxable supplies
• HMRC must be notified within 30 days (starting on the date the person becomes aware that the business will no longer make taxable supplies)
• Deregistration is effective from the date taxable supplies cease

Question 23

What is voluntary deregistration?

Answer 23

• A person may voluntarily deregister, even if the business continues, if there is evidence that taxable supplies in the next 12 month will not exceed the deregistration limit
• The 12 month period is measured starting at any time
• Deregistration is effective from the date of request or an agreed later date

Question 24

What is the effect of deregistration?

Answer 24

• On deregistration, VAT output tax must be accounted for on the value of fixed assets and inventory held at the date of deregistration on which a deduction for input tax has been claimed
• However, this final tax liability is waived if it is less than or equal to £1,000

Question 25

What is the basic tax point for taxable supplies?

Answer 25

The basic tax point for goods sold under normal terms is the date the goods are despatched. The basic tax point for a service is the date on which the service is performed. The basic tax point for goods sold on sale or return is the earlier of the date the goods are adopted by the customer and 12 months after the date of despatch.

Question 26

What is the actual tax point?

Answer 26

If payment is before despatch, the tax point moves to the actual tax point, which is the date payment is received. The invoice date will be the actual tax point if the invoice is issued before the basic tax point or within 14 days after the basic tax point. Due to this second rule, the tax point for most business expenses is usually the invoice date.

Question 27

What happens if a deposit is paid?

Answer 27

If a deposit is paid, this creates its own tax point, and there will be separate tax points for the deposit and the balancing payment.

Question 28

What else should be included in the calculation of output VAT?

Answer 28

- Goods taken for own use - Gifts of goods - Discounted sales - Private fuel for employees

Question 29

What classifies 'goods for own use and gifts'?

Answer 29

Where the trader withdraws goods for his or her own use, output VAT must be accounted for on the full replacement cost of the supplies Gifts of stock or fixed assets are treated as taxable supplies at replacement value unless the cost of total gifts made to the same person does not exceed £50 (excluding VAT) in any given 12 month period Neither trade samples nor gifts of services are taxable supplies

Question 30

When issuing prompt-payment discounts, what are the two choices a supplier has for calculating VAT?

Answer 30

- Supplier charges the full amount of VAT on the undiscounted sales price. If the customer pays within the required period and takes a prompt payment discount, supplier then issues a credit note - Supplier shows details of both discounted and non-discounted amounts on the invoice and includes a statement that the customer can only recover input VAT on the amount actually paid. If the discount is taken, the supplier must then adjust their records to account for the correct output tax

Question 31

When a business pays for fuel used by an employee/owner for both private and business purposes, what VAT can they recover?

Answer 31

- It can recover all the input VAT in respect of this fuel - Output VAT is then charged at a scale rate based on the CO2 rating of the car. This compensates for the VAT reclaimed on fue used privately

Question 32

How do you deal with questions regarding output VAT on private/business use cars?

Answer 32

The relevant VAT-inclusive quarterly scale rate will be given in the question if needed. You should multiply this by 1/6 to obtain the output VAT that will be included on the trader's VAT return

Question 33

What does the calculation of input VAT include?

Answer 33

- Standard rate expenditure at 20% - Reduced-rate expenditure at 5% - Recovery of output VAT previously paid on bad debts

Question 34

What happens if the sale becomes a bad debt?

Answer 34

Then the seller has paid output VAT to HMRC but never recovers this from the customer

Question 35

How can the seller reclaim the output VAT on bad debts from HMRC?

Answer 35

The seller can reclaim the output VAT on bad debts from HMRC as input VAT if: - the debt is at least 6 months overdue, and - the debt has been written off in the seller's books

Question 36

When can VAT incurred before registration be recovered on goods?

Answer 36

- Must be acquired for business purposes and should not be sold or consumed prior to registration, i.e. should still be in stock - Acquired less than 4 years before registration

Question 37

When can VAT incurred before registration be recovered on services?

Answer 37

- Services must be supplied for business purposes | - Supplied less than 6 months before registration

Question 38

On what goods and services can input VAT not be recovered?

Answer 38

- Cars (unless they are 100% used for business purposes e.g. driving school, taxi firm) - non-business items - VAT items for which no VAT receipt is held - Input VAT on business entertaining is also irrecoverable (two exceptions being staff entertaining and entertaining foreign customers)