CAT/T9

Value Added Tax (VAT)

Taxes

Direct Taxes Indirect Taxes

Income tax VAT

Corporation tax
Capital gain tax

Tax payer Tax payer

Tax department Middle man

Tax department

Basic principle: It is paid by the final consumer

Purchase/inputs Business Sales/outputs

Input VAT Output VAT

Dr. Purchases $100 Dr. Debtors $ 176.25

Dr. Input VAT $ 17.5 Cr. Sales $ 150
Cr. Creditors $ 117.5 Cr. Output VAT $ 26.5

VAT payable = Output VAT – Input VAT

VAT

Input VAT $17.5 Output VAT $26.5

Payable to HMRC $9

Input VAT Business expense? No

Output VAT Business Income? No

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VAT is charged on:
– a taxable supply
– by a taxable person
Taxable Supplies

Exempt Supplies Taxable supplies

- Output VAT is not deducted on sales

- Input VAT is not recovered on purchases
Standard rated Zero Rated
Examples: (0%)
- Land
- Insurance - Output VAT is - Output VAT is not
- Education Deducted on sales Deducted on sales

- Health
- Finance
- Sports
- Input VAT is - Input VAT is not
Recoverable on purchases Recoverable on purchases

Examples: Examples:

- Supplies not falling - Food

in exempt and zero-rated - Books
- Medicines
- Children’s clothing

Although such supplies are

Zero rated but still they are
taxable supplies and will be
taken into account when
determining whether a trader
is a taxable person or not

Note: Students will be told in the examination what type has been made.

VAT Rate: The rate of VAT was temporarily reduced to 15% for periods up to 31 December 2009.
Thereafter it returned to the usual rate of 17.5%.

When answers exams question you should check the date of a transaction to ensure you use the correct rate.
You will not be expected to deal with period that span 31 December 2009.

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Taxable person:
Who is liable to get registered for VAT
Registration

Compulsory registration Voluntary registration

Two reasons to get Voluntary registered

Historical Future
Taxable Taxable
Turnover Turnover Major Sales are Customers are
Zero-rated not general public

If previous 12 months If a person forecast

Turnover exceed £68,000 that his taxable turnover
For future 30 days will
Exceed £68,000

Notify tax department Notify tax department

Within 30 days Within 30 days

Registered Registered
After Day 1 of notification
30 days

Voluntary registration:

Advantages Disadvantages
• Input tax recoverable • Output charged on sales
• If making zero-rated supplies VAT returns o If make standard rated supplies to
will show VAT repayable – can register for customers who are not VAT registered
monthly returns to aid cash flow will be an additional cost to them
o May affect competitiveness
• Avoid penalties for late registration
• VAT administration
• May give the impression of a more
substantial business

Irrecoverable Input VAT

Motor cars Business entertainment

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Penalties for late registration

Minimum penalty = £50
Maximum penalty for

Delay up to

9 months 18 months Over 18 months

5% of tax due 10% of tax due 15% of tax due

Deregistration
A trader can de-register
In the following conditions

When he ceases to make OR When he expects that

Taxable supplies his taxable turnover in
Future 12 months will
Will be less than £66,000
Terms in VAT:

VAT equation = VAT exclusive amount × 17.5%(0r 15%)

VAT exclusive amount = Sales price – trade discount – cash/early settlement discount

VAT inclusive amount = VAT exclusive amount + Amount of VAT

VAT Fraction = 7/47 or 3/23

VAT Calculation

Output VAT: is the tax charged on supplies made by a taxable person

Input VAT: is the tax paid by taxable persons on goods and services supplied to them and are recoverable
from HMRC
VAT account for the quarter ended
Input VAT £ Output VAT £
Standard rated purchases xx Standard rated sales × 17.5 % xx
Sales returns × 17.5% xx Purchases returns × 17.5 % xx
Expenses × 17.5% xx Sales omitted from previous return × 17.5% xx
Purchases of capital item xx Car scale charges xx
Purchases omitted from previous return xx Cash receivable from HMRC xx
Bad debts relief xx
Cash payment to HMRC xx

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VAT with discounts

VAT will be calculated on net of all discounts amount.

Bad debt Relief

When a customer fails to pay, the supplier may claim bad debt relief.
Relief is given where:
• A supply of goods or services has been made for consideration.
• Out put VAT has been accounted for and paid by supplier.
• The whole or part of the debt has been written off as bad in the supplier’s books.
• At least six months has been elapsed since the time the payment was due.

VAT Return
A VAT return shows the total Output VAT and total Input VAT for the VAT period to which it relates.
VAT return must be completed and returned to HMRC, together with any VAT payable, within one month of the end of
the relevant VAT period.

VAT Return for the quarter 31 March 2010

£
Output VAT xx
Less: Input VAT xx
VAT Payable xx

VAT Invoices

Records
Records must be kept for all gods and services provided

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Tax point/ Time of supply

The time at which a supply is treated as taking place.
It is a rule to record sales in relevant VAT return accurately.

For goods
The basic tax point is when the goods are treated as
• Supplied
• Delivered
• Collected
• Made available
to customer.
But can amend

Before OR After
Cash is received Invoice is issued
And within 14 days
Invoice is issued
For goods on return basis
Earlier of

Date of acceptance by 12 months after

Customer the date of dispatch

For services

The basic tax point is when the services are

• Rendered
• Completed
But can amend

Before OR After

Cash is received Invoice is issued

And within 14 days
Invoice is issued
For continuous supply of service
Earlier of

Amount received VAT Invoice issued

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Special Accounting Schemes
Three accounting schemes aimed at small business
Cash accounting scheme
Operation
VAT accounted for on cash
payments and cash receipts.
Flat rate scheme
Operation
• Flat rate of VAT applied
to total turnover
(including exempt
supplies and VAT)
• Flat rate determined by
trade sector
• Flat rate only used to
simplify preparation of
VAT return
o Still need to issue
tax invoices
Annual accounting system
Operation
• One VAT return prepared
a year
• Return due:
o 2 months after end
of VAT period
• Payment on account
(POA)
o 9 POA due in 4 –
12
o each POA is 10%
of VAT for
previous year
• Balancing payment due
with VAT return
• New business base POA
on estimated VAT
liability
CAT/T9
Conditions Advantages
• Taxable turnover ≤ • Do not pay output tax
£1,350,000 until receive payment
• VAT payments and from customer
returns must be up to date • Provides automatic bad
• Must leave the scheme if debts relief
taxable turnover >
£16,00,000
Conditions Advantages
• The taxable turnover for • Reduce administration
the next twelve months ≤ • May reduce total VAT
£150,000 payable
• Annual total turnover
(including exempt
supplies and other
income) ≤ £187,500
•
Conditions Advantages
• Taxable turnover ≤ • Reduces administration
£1,350,000 • Regular payments can
• VAT payments and help cash flow
returns must be up to date
• Must leave the scheme if
taxable turnover >
£16,00,000
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