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VAT: Outline
VAT is:
an indirect tax on consumer spending
charged on most goods and services supplied within the UK
suffered by the final consumer, and
collected by businesses on behalf of HMRC.

A taxable person is one who is or should be registered for VAT, because they make
taxable supplies. A person can be an individual or a legal person, such as a company.

A taxable supply is everything which is not exempt or outside the scope of VAT. It
includes sales and purchases of most goods or services. For VAT to apply the taxable
supply must be made in the course or furtherance of a business carried on by a taxable
person.

Input and output VAT

Businesses pay input VAT on their purchases of goods and services which is
reclaimable from HMRC.
Registered businesses charge output VAT on their sales of taxable goods
and services which is payable to HMRC.
Every month or quarter the input and output VAT is netted off and paid to or
recovered from HMRC. The business therefore accounts to HMRC for
VAT on the 'value added' to the product.
Taxable supplies are charged to VAT at one of three rates:

– zero rate: This is a tax rate of nil. No output VAT is charged but it is classed as a
taxable supply. It is therefore taken into account in determining whether a trader should
register for VAT and whether input VAT is recoverable.

– reduced rate: Some supplies, mainly for domestic or charitable use are charged at
the reduced rate. Note that the reduced rate is not important for the examination.

– standard rate: Any taxable supply which is not charged at the zero or reduced rates
is charged at the standard rate of 20%.

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Exempt supplies Zero rated supplies

Charge output VAT No Yes. @0%
Reclaim input VAT No Yes
Register for VAT no yes

Exempt Zero rated

Health: The services of registered doctors,
dentists, opticians, chemists and hospitals
(but not health farms).
Sports: Entry fees to sports competitions
used to provide prizes or charged by
non-profit-making sporting bodies.
Construction of dwellings: This includes
new buildings for residential or charitable
use, but not the reconstruction of an
existing building.
Gifts to charities

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VAT registration – compulsory

Registration threshold
If a person’s taxable supplies (excluding sales of capital assets) exceed the registration
threshold, then registration is compulsory.
There are two separate tests for compulsory registration
Historic turnover test
At the end of each month, the trader must look at the cumulative total of taxable
supplies for the last 12 months, or since commencing trade, whichever is the shorter.
If the total exceeds the registration threshold, currently £85,000, then the trader must
register as follows:
Notify HMRC within 30 days of the end of the month in which the registration
threshold is exceeded, by completing form VAT1, or via HMRC's online services.
Registration is effective from the first day of the second month after the taxable
supplies exceed the threshold.
A trader need not register if his taxable supplies for the next 12 months are expected
to be less than the deregistration threshold currently £83,000.
A trader need not register if his supplies are wholly zero rated.

Future prospects test

This test is considered at any time, when taxable supplies in the next 30 days in
isolation are expected to exceed £85,000.
HMRC must be notified before the end of the 30 days, by completing form VAT1, or
using HMRC's online services.
Registration will be effective from the beginning of the 30-day period.

Consequences of registration
Once registered, a certificate of registration is issued and the taxable person must start
accounting for VAT:
Output tax must be charged on taxable supplies.
Input tax (subject to some restrictions) is recoverable on business purchases and
expenses.
Each registered trader is allocated a VAT registration number, which must be quoted
on all invoices.
Each registered trader is allocated a tax period for filing returns, which is normally
every three months.
Appropriate VAT records must be maintained

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Voluntary registration
Actual or intending traders
Even if not required to register, a person may register voluntarily provided he is
making, or intending to make, taxable supplies.
HMRC will register the trader from the date of the request for voluntary registration, or a
mutually agreed earlier date.
Advantages Disadvantages
Avoids penalties for late Business will suffer the burden
registration. of compliance with all VAT
Can recover input VAT on administration rules.
purchases. Business must charge VAT.
Can disguise the small size of This makes their goods comparatively
more expensive than an unregistered
the business.
business, for customers who cannot
recover the VAT (i.e. final consumers).

Voluntary registration is therefore beneficial where the business is making:

zero rated supplies and has input VAT that it can recover, or
supplies to VAT registered customers as they can reclaim their input VAT.
but is probably not beneficial where the business is making:
supplies to non-VAT registered customers (e.g. the general public) as they can’t
reclaim the input VAT.
Accepting additional new work may increase the taxable supplies of the business above
the compulsory registration threshold. The VAT status of the customers of the business
is therefore very important in deciding whether or not taking on the new business is
beneficial.
If customers are VAT registered:
– they can recover the output VAT charged from the customers, and
– it will be advantageous to accept the new work.
If customers are not VAT registered:
– they cannot recover the output VAT charged from the customers, and
– if the selling price cannot be increased, the output VAT will become an
additional cost to the business

This may make the additional new work unattractive:

– it may be beneficial to decide to not accept the work, and

– maintain taxable supplies below the VAT registration threshold.

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VAT Groups
Companies that are under common control can elect for a group VAT registration,
provided that all the companies have a place of business in the UK.
A VAT group is treated as if it is a single company for the purposes of VAT.
Group registration is optional; not all members of the group have to join the VAT group.

Advantages
VAT on intra-group supplies
eliminated
Only one VAT return required by a
representative member who accounts for
all input and output VAT for the group,
which should save administration
costs
Disadvantages
All members remain jointly and
severally liable
A single return may cause
administrative difficulties collecting and
collating information.

Recovery of pre-registration input VAT

Goods (current & non-current)
The goods must be acquired for
business purposes and should not be sold
or consumed prior to registration (e.g.
should still be in inventory).
The goods have not been acquired
more than four years prior to registration.
Services
The services must be supplied for
business purposes.
The services should not have
been supplied more than six
months prior to registration.

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Deregistration

Compulsory deregistration
A person must deregister when he ceases to make taxable supplies.
HMRC should be notified within 30 days of ceasing to make taxable supplies.
VAT registration is cancelled from the date of cessation or a mutually agreed later
date.

Voluntary deregistration

A person may voluntarily deregister, even if the business continues, if there is

that taxable supplies in the next 12 months, will not exceed £83,000.
The 12 month period is measured starting at any time.
The onus is on the trader to satisfy HMRC that they qualify.
VAT registration is cancelled from the date of request or an agreed later date.

Effect of deregistration

On deregistration, VAT output tax must be accounted for on the value of noncurrent
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 £1,000 or less.
Sale of business
Transfer of a going concern is not treated as a taxable supply if all of the following
conditions have been met:

The business is transferred as a going concern.

There is no significant break in the trading.
The same type of trade is carried on after the transfer.
The new owner is or is liable to be registered for VAT, immediately after the transfer

On the sale of a business instead of a compulsory deregistration, both the transferor

and the transferee have an option to make a joint election, for the transferor’s
registration to be transferred to the transferee.

Then the transferee assumes all rights and obligations in respect of the registration,
including the liability to pay any outstanding VAT. Therefore, this may not be a good
commercial decision.
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The time of supply (the tax point)

Importance of tax point

VAT is normally accounted for to HMRC on a quarterly basis, so it is important to know

the time of a supply, to identify the quarter in which it falls.
Also, if the standard rate of VAT were to change or if the classification of a supply
altered (e.g. a zero rated supply became standard rated), it would be necessary to know
whether a supply had been made before or after the date of change.

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The basic tax point (BTP) may be overridden by the actual tax point as follows:

Supplies Tax Point

Goods on sale or return
Continuous supplies:
Supplies such as electricity and tax advice
do not have a basic tax point.
The time of supply is the earlier of:
– the date when the goods are adopted by
the customer, or
– 12 months after the despatch of the
goods.
The time of supply is the earlier of:
– a tax invoice being issued, and
– a payment received.

tax invoice issued once a year in advance, Earlier of:

showing the periodical payments and their –the due date and
due dates –the date on which payment is received.

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The value of a supply

VAT is 20% of the VAT exclusive amount.
VAT is 20/120 of the VAT inclusive amount.
If a discount(trade discount\prompt payment discount) is offered, then VAT must be
calculated on the amount that the customer actually pays.

Goods for own use

Where the trader withdraws goods which were purchased for business purposes,
input VAT can be recovered and output VAT must be accounted for on the
replacement value of the supplies.
Where the trader initially purchased the goods for private purposes, no input VAT
can be reclaimed and there is no output VAT charge. (not a taxable supply)

Gifts
Gifts of inventory or non-current assets are treated as taxable supplies at replacement
cost, except gifts of:
goods to the same person which cost the trader £50 (excluding VAT) or less in a
12-month period.
business samples, regardless of the number of same samples given to the recipient.
Gifts of services, whether to employees or customers, are not taxable supplies.

Relief for impairment losses

Normally, VAT output tax is accounted for when an invoice is issued. If the debt
becomes irrecoverable, the seller has paid VAT to HMRC and never recovers this from
the customer. This position is addressed by the seller being able to claim VAT relief for
impairment losses.
The following conditions apply:
At least six months must have elapsed from the time that payment was due (or the
date of supply if later).
The debt must have been written off in the seller’s VAT account.
Claims for relief for irrecoverable debts must be made within four years and six
months of the payment being due.

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Recovery of input VAT

Recoverable Irrecoverable
capital assets (i.e. purchase of plant and goods or services that are used for private
machinery, delivery vans, equipment, etc.) purposes.
revenue expenditure for business
purposes
staff entertaining and entertaining Business entertaining (e.g. entertaining
overseas customers suppliers and U.K. customers)
Motor cars used 100% for business Motor cars with private use
purposes (e.g. driving school cars),
running costs of a car, such as fuel and
repairs, even when there is some private
use. (no VAT on insurance and road fund
licence)

Note that where input VAT cannot be recovered on the purchase of a motor car, no
output VAT will be due on its disposal.
Input VAT on the motor cars can be recovered if leased, in which case 50% of input
VAT is recoverable where the car has some private use.

When a business pays for fuel costs for an employee, sole trader or partner and there is
some private use of the vehicle, a VAT charge will be payable:
where the full cost of the private fuel is reimbursed by the employee/owner, output
VAT is payable on the cost of fuel reimbursed.
if the employee does not reimburse the employer, output VAT is due based on a
prescribed scale charge(VAT inclusive). The scale charge depends on the CO2
emissions of the car
Relief is obtained by adding the VAT element of the irrecoverable debt to the input tax
claimed.

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