18 - VAT.

VAT is charged on... by... in... in...

taxable supply | by a taxable person | in the UK | in the course or furtherance of a business.

VAT. With Exempt supply no tax is charged and trader is unable to ... and to...

to register | and reclaim input VAT.

VAT Taxable person is someone who...

who is, | or is required to be registered for VAT.

Compulsory registration for VAT is required when value of ... exceeds the registration threshold (£85,000)

taxable supplies (standard or zero-rated, excluding capital expenditure). Nota than monitoring the level of taxable supplies is relevant, not the cash receipts!

VAT Voluntary registration. Traders ... can register at any time.

making taxable supplies (standard or zero-rated)

Compulsory registration. Historic turnover test (£85 000) is performed...

at the end of each month.

Due date of informing HMRC about compulsory registration:

30 days of the end of the month in which the threshold is exceeded.

Compulsory registration is in force from ... or from...

from the first day of the second month after taxable supplier exceeded the threshold. | Or from agreed earlier date.

Compulsory registration tests:

Historic turnover test. | Future test.

VAT registration future test:

Taxable supplies in the next 30 days is expected to exceed £85 000.

VAT registration future test. HMRC must be informed by...

by the end of the 30 day period in which the threshold is expected to be exceeded.

Future test. Registration is in force from...

from the START of the 30 days period (in which it is expected to exceed the threshold).

Voluntary registration advantages:

Monthly returns registration possibility to aid cashflow - If making zero-rated supplies | Repayable VAT shown by VAT returns - If zero-rated supplies. | Penalties for late registration avoiding. | Input tax recoverable. | Substantial business impression.

Disadvantages of voluntary registration.

Administration burden. | Output charged on sales*. | Financial penalties if fails to comply with the obligations imposed by the VAT regime.

Compulsory deregistration is when...

when cease to make taxable supplies.

HMRC must be informed about compulsory deregistration within...

within 30 days of ceasing to make taxable supplies.

Compulsory deregistration from date of ... or...

cessation of making taxable supply | or an agreed earlier date.

Voluntary deregistration is possible if...

if value of expected taxable supplies in the next 12 months will not be greater than £83000. Any time when this test is satisfied.

Voluntary deregistration date:

Date of request for deregistration. | or an agreed later date.

Consequences of VAT deregistration - Final VAT charge on deregistration:

Output charge must be accounted for on REPLACEMENT VALUE of inventory and capital assets on hand at the date of deregistration. | Exclude items if no input tax reclaimed on them.* | No output charge if VAT liability on deemed supply is up to £1000**.

How often VAT returns are filed?

Normally quarterly, but if entity receives VAT repayments, then can elect for monthly returns.

VAT payable formula:

VAT payable = Total output tax − TIT

Return filing and payment VAT methods:

Business must file the return online | and pay electronically.

VAT return filing and payment due date:

within 1 month and 7 days of the end of the VAT period.

VAT-inclusive amounts:

VAT = Gross amount × 20/120 (or 1/6). | Net amount = Gross amount × 100/120 (or 5/6).

Output VAT. Value of supply when consideration in money formula:

Trader's VAT-exclusive selling price − the trade or bulk discounts amount.*

Output VAT. Determination of Value of supply when consideration NOT in money, or money and something other than money:

open market value

Output VAT valuing - Gifts of inventory and non-current assets:

replacement value

Output VAT valuing - Gift type that are NOT taxable supplies:

Goods up £50 per customer, per year. | Any number of business samples. | Gifts of service (to employees and customers).

Output VAT valuing - Goods for own use:

Replacement value if purchased for business purposes | (no output VAT if purchased for private purposes).

Output VAT relief for irrecoverable debts is available where:

OUTPUT tax in respect of an outstanding debt has been accounted for and paid by the supplier. | The supplier has written the debt off in the accounts as irrecoverable. | 6 months has elapsed since the debt was due.

Output VAT relief for irrecoverable debts. What is the form of this claim?

Claim the relief as input VAT on the VAT return.

Irrecoverable debts and VAT. Customers who have not paid for goods and services within ... must REPAY the input tax they have previously claimed.

within 6 months of the due date

Transfer of a going concern (TOGC). Transfer of a business is not treated as a supply for VAT purposes, therefore:

No output VAT is charged on asset transferred by seller. | No input VAT recoverable by purchaser.

All conditions that must be satisfied for Transfer of a going concern:

No significant Break in trading. | To a taxable person.* | The same type of trade carried on after the transfer.

What item cannot be part as Transfer of a going concern?

A building with option to tax | unless the purchaser also opts to tax building.

TOGC and VAT registration. Transferee may Take over VAT registration of the transferor, but...

but also inherits the transferor's VAT liabilities.

Conduct where a business does not meet the VAT TOGC conditions:

VAT is payable on the individual assets transferred.

Conditions to reclaim input VAT:

Goods and services must be used for BUSINESS purposes. | Supply must be properly supported, normally by VAT INVOICE. | Must be TAXABLE PERSON when incurred.* | Supply must have been to the SAME person that making the claim.

Input VAT. Capital and revenue expenditure:

There is no distinction between capital and revenue expenditure. Input VAT is recoverable on the purchase of capital assets as well as revenue expenditure.

Categories of VAT non-deductible items:

Fuel. | Own use goods. | Private use. | Entertainment for business purposes. | Motor cars.

Non-deductible input VAT - business entertainment rules:

hospitality of any kind (food, drink, accommodation). | Excludes staff entertainment | and entertaining overseas customers.

Recoverability of input VAT - motor cars rules:

Purchase- only recoverable if used 100% for business.| Leasing- if PARTLY used for private purposes, 50% of VAT on leasing charge is recoverable. | motor Expenses - provided SOME business use - 100% recoverable.

Deductibility of input VAT for fuel:

Input tax 100% deductible even if private fuel provided.

Fuel. Output VAT is chargeable on:

Fuel reimbursed in full (amount reimbursed). | Not reimbursed in full: fuel scale charge (CO2 based).

Deductibility of VAT - private use.

Input VAT cannot be claimed on goods or services not used for business purposes. | An apportionment is made for partial private use.

Recoverability of VAT - goods for own use:

Input VAT not recoverable if purchased for private purposes.

Where VAT is not recoverable on capital expenditure (e.g. purchase of a car) capital allowance are claimed on ... cost.

the VAT-inclusive cost.

Pre-registration input VAT - condition to reclaim it:

Goods acquired in the 4 years before registration | and still held at date of registration. | Services supplied in the 6 months before registration.

Cash accounting scheme - operation:

VAT accounted for on cash payments and cash receipts.

Cash accounting scheme conditions:

TAXABLE* turnover up to £1,350,000. | VAT payments and returns must be up to date. | Must leave the scheme if taxable turnover exceeds £1,600,000.

Advantages of Cash accounting scheme:

Do not pay output tax until receive payment from customer. | Provides automatic relief for irrecoverable debts. | Administration burden reduction.

Flat rate scheme - operation:

Flat rate applied to total turnover (including exempt supplies and VAT). | Flat rate determined by trade sector. | Flat rate only used to simplify preparation of VAT returns (still need to issue tax invoices).

Flat rate scheme - conditions:

TAXABLE SUPPLIES (excluding VAT) for the next 12 months will not exceed £150,000. | Businesses are eligible to stay in the scheme until their TOTAL TURNOVER exceeds £230,000 (including exempt supplies and VAT).

Flat rate scheme - advantages:

Reduces administration - do not need to account for VAT on individual purchases. | May reduce total VAT payable.

Annual accounting scheme - essence:

One VAT return prepared a year.

Annual accounting scheme - Return date due:

2 months after end of annual VAT period.

Annual accounting scheme - operation:

Payments on account (POA)*. | Balancing payment due with the VAT return on the same date. | New business base POA on estimated VAT liability.

Annual accounting scheme - conditions:

Taxable* turnover not more than £1,350,000. | VAT payments and returns must be up to date. | Must leave the scheme if taxable turnover exceeds £1,600,000.

Annual accounting scheme - advantages:

Reduces administration. | Regular payments can help cashflow.

When Land and buildings are VAT zero-rated?

Residential and charitable buildings if | freehold sales | or leases longer than 21 years.

When Land and buildings are compulsory VAT standard-rated?

Sales of new freehold commercial buildings | (that is within 3 years of their constructions).

When Land and buildings are VAT exempt?

All other* supplies unless exemption is waived ('opting to tax').

VAT, land and buildings - option to tax election conditions:

Election must be filed within 30 days of signing. | Can be withdraw within initial 6 months cooling off period or after 20 years.* | Election cannot be made for part of a building, although the election can be made separately for each property owned.

VAT, land and buildings - option to tax impact:

Future supplies (sales or rents) must be standard-rated. | Input tax can be recovered. | New owners aren’t bound by a previous owner’s election, except for transfers within a VAT group. | Supply becomes a taxable supply.

Traders who make both taxable and exempt supplies recoverability:

only part of the input tax is recoverable (partial exemption).

Input tax is analysed into 3 categories:

Taxable supplies. | Exempt supplies. | The reminder (for example non-attributable input tax on overheads)

Recoverability of input tax on goods and services wholly used for the purpose of making TAXABLE SUPPLIES:

Wholly available for credit.

Recoverability of input tax on goods and services used wholly for making EXEMPT SUPPLIES:

Wholly disallowed.

Non-attributable input VAT reclaimable formula:

Total taxable supplies (excluding VAT) ÷ Total supplies. | [Exclude supplies of CAPITAL GOODS].

VAT reclaimable. Recalculate recoverable % at the end of each accounting period based on actual supplies for the year. When any under- or over-payment (ANNUAL ADJUSTMENT) is accounted for?

in final VAT return for the year, | or first VAT return after the end of the year.

All input tax (including that relating wholly or partly to exempt supplies) may be recovered if the business is below the...

de minimis limits.

3 tests to see whether a business is de minimis:

TIT⩽ £625 per month on average and value of exempt supplies ⩽50% of value of total supplies. | TIT − input tax DIRECTLY attributable to taxable supplies ⩽ £625 on average and value of exempt supplies ⩽50% of value of total supplies.

If business was de minimis last year, it can..., unless...

can provisionally recover all VAT this year, | unless input tax expected to be more than £ 1 million.

Annual test*. The business can apply the minimis tests once a year rather than every return period if:

The business was de minimis in the previous year | and the annual test is applied consistently throughout the current year | and the TIT for the current year is not expected to exceed £ 1 million.

Capital goods scheme applies to..., who...

to partially exempt traders | who spend large sums on land and buildings or computer equipment.

Assets cover by the Capital Goods Scheme, their respective thresholds and adjustment periods:

Land and buildings from £ 250,000; adjustment period is 10 years*. | Computer equipment from £ 50 000; 5 years.

How Capital goods scheme operation? A trader making say 70% taxable supplies and 30% exempt supplies can initially... Adjustments are made over the next 10 or 5 years if...

reclaim 70% of the input VAT charged in respect of a building. | if the proportion of exempt supplies changes.

Capital goods scheme. The annual adjustment formula:

(TIT ÷ 10 or 5 years) × (% now − % in the original year)

Capital goods scheme. Disposal of building in adjustment period means normal annual adjustment. Further adjustment for remainder of adjustment period:

If disposal taxable: 100% taxable use. | If disposal exempt: 0% taxable use.

How long VAT records must be kept?

6 years

Type of VAT records that business must keep for 6 years:

VAT Accounts. | evidence to support Recovery of input tax. | copies of Invoices issued. | Output records (e.g. sales day book).

Errors in VAT returns can give rise to...

Default interest. | and Standard penalty for the submission of an incorrect VAT return.

Default surcharge arises if:

Return submitted late | or VAT paid late.

Consequences of VAT first default:

HMRC serves a surcharge liability notice. | Specifies a surcharge period: ending 12 months after the end of the VAT period to which the defaults relates.

Consequences of VAT NON-first default:

Surcharge period extended to 12 months after the end of the VAT period in which the latest default relates. | If default involves late payment of VAT - SURCHARGE PENALTY levied.

Surcharge rates:

If default in 1st surcharge period - 2% of VAT unpaid.| Second - 5% |Third - 10%. | Fourth and more - 15%.

Error on VAT returns. De minimis LIMIT of error if found by trader and disclosed voluntary formula:

greater of | £10,000 | and 1% of turnover | subject to an upper limit £ 50,000.

Error on VAT returns - if found BY TRADER consequences If net error UP TO minimis limit:

Include on next VAT return. | Standard penalty | no default interest.

Error on VAT returns - if found BY TRADER consequences If net error OVER minimis limit:

Separate notification*. | Standard penalty | and default interest*.

Error on VAT returns found by HMRC - periods of assessment:

Within 4 years of relevant VAT period. | 20 years if deliberate error.

Error on VAT returns found by HMRC. Options of defence for tax payer:

Option to request review of decision by HMRC review officer. | 2nd level: Appeal to tribunal within 30 days.

VAT default interest arises when:

HMRC raise an assessment to collect undeclared or overclaimed VAT. | Voluntary disclosure of error exceeding de minimis limit.

VAT default interest is charged from ... to...

form due date of payment | to actual date of payment.

VAT annual adjustment example and state when it must be reported to HMRC:

Input tax recovered on the four quarterly returns was £23,000. Actual recoverable input tax is £24,114. So annual adjustment is £914 additional input tax recoverable. | In final VAT return for the year, or first VAT return after the end of the year.

Taxable supply is £1,190,000 and exempt supply is £430,000. What is the relevant percentage of Recoverable unattributed input tax?

74% (it must be rounded up to next full percentage point).

Late VAT registration consequences:

Company is required to charge output tax on the sales it has made after the date on which it should have been registered*. | Interest in respect of late VAT paid. | Penalty - % of potential lost revenue; % depends on the reason for the late registration.

Company purchased 2 years old commercial building. Would be financially beneficial to opt to tax?

Company spent a lot of for input VAT. So it will be beneficial - at least in the short term - to opt to tax in order to to reclaim this tax. | It will also enable the company to recover the input tax in respect of the building’s RUNNING COSTS.

Calculate input tax recoverable form or payable to HMRC for each of the three years ending 31 March 2022 under capital goods scheme:

44,800 recoverable from HMRC. | 960 repayable. | 1,280 repayable and 13,440 recoverable.

Can VAT registration number can be transferred from unincorporated business to a new company?

The change in legal status of a business means that an individual is required to cancel the business’s VAT registration. The VAT registration number may be transferred, in which case the incorporated company will take over the VAT rights and liabilities.