This two-part article is relevant to candidates sitting Paper F6 (UK) in either the June or December 2014 sittings, and is based on tax legislation as it applies to the tax year 2013-14 (Finance Act 2013).
Paper F6 (UK) will always contain a minimum of 10 marks on value added tax (VAT). These marks will normally be included within question one (focusing on income tax) or question two (focusing on corporation tax), although there might be a separate question on VAT.
The standard rate of VAT is currently 20%.
Example 1
Zoe is in the process of completing her VAT return for the quarter ended 31 March 2014. The following information is available:
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT Return – Quarter ended 31 March 2014
£ | £ | ||
---|---|---|---|
Output VAT | |||
Sales (128,000 x 20%) | 25,600 | ||
Input VAT | |||
Expenses (24,800 x 20%) | 4,960 | ||
Machinery (24,150 x 20/120) | 4,025 | ||
(8,985) | |||
16,615 |
A business making taxable supplies must register for VAT if during the previous 12 months the value of taxable supplies exceeds £79,000. However, VAT registration is not required if taxable supplies in the following 12 months will not exceed £77,000. These figures are exclusive of VAT. Remember that both standard rated and zero-rated supplies are taxable supplies.
Example 2
Albert commenced trading on 1 January 2013. His sales have been as follows:
Standard rated £ | Zero- rated £ | ||
---|---|---|---|
2013 | |||
January | 3,200 | 0 | |
February | 2,800 | 0 | |
March | 3,300 | 0 | |
April | 5,100 | 600 | |
May | 2,700 | 0 | |
June | 3,700 | 400 | |
July | 3,900 | 200 | |
August | 5,500 | 100 | |
September | 4,300 | 0 | |
October | 12,100 | 0 | |
November | 6,900 | 700 | |
December | 8,200 | 300 | |
2014 | |||
January | 8,800 | 900 | |
February | 12,500 | 1,200 |
A business must also register for VAT if there are reasonable grounds to believe that taxable supplies will exceed £79,000 during the following 30 days. Again the figure is exclusive of VAT.
Example 3
Bee commenced trading on 1 October 2013. Her sales have been as follows:
£ | |||
---|---|---|---|
2013 | October | 4,600 | |
November | 5,400 | ||
December | 23,900 | ||
2014 | January | 97,700 |
Bee’s sales are all standard rated.
On 1 January 2014 Bee realised that her sales for January 2014 were going to exceed £95,000, and therefore immediately registered for VAT.
If a business continues to trade after the date that it should have registered for VAT, then output VAT will still be due from this date.
It is important that you appreciate the distinction between making standard rated supplies, zero-rated supplies and exempt supplies. Only standard rated supplies and zero-rated supplies are taxable supplies.
Example 4
Cathy will commence trading in the near future. She operates a small aeroplane, and is considering three alternative types of business. These are (1) training, in which case all sales will be standard rated for VAT, (2) transport, in which case all sales will be zero-rated for VAT, and (3) an air ambulance service, in which case all sales will be exempt from VAT.
For each alternative Cathy’s sales will be £80,000 per month (exclusive of VAT), and standard rated expenses will be £15,000 per month (inclusive of VAT).
Standard rated supplies
Zero-rated supplies
Exempt supplies
Voluntary VAT registration
A business may decide to voluntarily register for VAT where taxable supplies are below the £79,000 registration limit, or where it is possible to apply for exemption. This will be beneficial when:
However, it will probably not be beneficial to voluntarily register for VAT where customers are members of the general public, since such customers cannot recover the output VAT charged. If selling prices cannot be increased, the output VAT will become an additional cost for the business.
Example 5
Continuing with example 3, assume that Bee’s sales are all made to VAT registered businesses, and that input VAT for the period 1 October to 31 December 2013 was £12,400. This input VAT would not be recoverable were Bee to register for VAT on 1 January 2014.
Whether or not output VAT can be passed on to customers is also an important factor when deciding whether to remain below the VAT registration limit, or whether it is beneficial to accept additional work that results in the limit being exceeded.
Example 6
Danny has been in business for several years. All of his sales are standard rated and are to members of the general public. He is not registered for VAT.
At present, Danny’s annual sales are £77,500. He is planning to put up his prices, and this will increase annual sales to £83,000. There is no further scope for any price increases. Danny’s standard rated expenses are £12,700 per year (inclusive of VAT).
The revised annual net profit will be:
£ | ||
---|---|---|
Income (83,000 x 100/120) | 69,167 | |
Expenses (12,700 x 100/120) | (10,583) | |
Net profit | 58,584 |
Input VAT incurred prior to registration can be recovered in certain circumstances.
Example 7
Elisa commenced trading on 1 January 2014, and registered for VAT on 1 April 2014. She had the following inputs for the period 1 January to 31 March 2014:
January £ | February £ | March £ | ||
---|---|---|---|---|
Goods purchased | 3,400 | 14,200 | 26,400 | |
Services incurred | 2,600 | 3,000 | 3,600 | |
Non-current assets | 64,000 | – | – |
On 1 April 2014 Elisa had an inventory of goods that had cost £13,800.
The above figures are all exclusive of VAT.
A business stops being liable to VAT registration when it ceases to make taxable supplies. HM Revenue and Customs must be notified within 30 days, and the business will then be deregistered from the date of cessation or from an agreed later date.
A business can also request voluntarily VAT deregistration.
There is a deemed supply of business assets such as plant, equipment and inventory when a business ceases to be registered for VAT.
However, the transfer of a business as a going concern does not normally give rise to any VAT implications.
Example 8
Fang is registered for VAT but intends to cease trading on 31 March 2014. On the cessation of trading Fang can either sell his non-current assets and inventory on a piecemeal basis to individual purchasers, or he can sell his entire business as a going concern to a single purchaser.
Sale of assets on a piecemeal basis:
Sale of business as a going concern:
Two or more companies can register as a group for VAT purposes if they are under common control (such as a parent company and its subsidiary companies) and each of them is resident in the UK.
A VAT group is treated for VAT purposes as if it was a single company registered for VAT on its own. Group VAT registration is made in the name of a representative member, and this company is then responsible for completing and submitting a single VAT return and paying VAT on behalf of the group. However, all the companies in the VAT group remain jointly and severally liable for any VAT liabilities.
Example 9
Yung Ltd and its two 100% subsidiaries are considering registering as a group for VAT purposes.
It is very important to correctly identify the date of supply or tax point, as this determines when output VAT will be due.
Example 10
Explain the VAT rules that determine the tax point in respect of (1) a supply of goods, and (2) a supply of services.
With the supply of services there may be more than one tax point.
Example 11
Denzil is a self-employed printer who makes standard rated supplies. For a typical printing contract he receives a 10% deposit at the time that the customer makes the order. The order normally takes 14 days to complete, and Denzil issues the sales invoice three to five days after completion. Some customers pay immediately upon receiving the sales invoice, but many do not pay for up to two months.
There are several important points regarding output VAT and input VAT that should be remembered:
Example 12
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2014 The following information is available:
Unless stated otherwise all of the above figures are exclusive of VAT.
£ | £ | ||
---|---|---|---|
Output VAT | |||
Cash sales (46,200 x 20%) | 9,240 | ||
Credit sales (128,000 x 97% (100 – 3) x 20%) | 24,832 | ||
Motor car | 0 | ||
Machinery (3,600 x 20/120) | 600 | ||
Input VAT | |||
Materials (32,400 – 600 = 31,800 x 20%) | 6,360 | ||
Expenses (24,800 – 1,200 = 23,600 x 20%) | 4,720 | ||
Motor car | 0 | ||
Machinery (21,600 x 20/120) | 3,600 | ||
Impairment losses (340 + 340) | 680 | ||
Telephone (600 x 60% (100 – 40) x 20%) | 72 | ||
_____ | (15,432) | ||
19,240 |
The refund of VAT that has been overpaid is normally subject to a four-year time limit.
Example 13
Hedge Ltd is completing its VAT return for the quarter ended 31 March 2014. The company has discovered that it has not been claiming for the input VAT of £35 that it has paid each quarter for the rental of coffee machines since 1 January 2004.
When goods are supplied free of charge then output VAT must normally be accounted for. However, there is generally no output VAT on services supplied free of charge, regardless of whether they are supplied to an employee or a customer.
Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.
Where fuel is provided then all the input VAT (for both private and business mileage) can be recovered, but the private use element is then normally accounted for by way of an output VAT scale charge. The scale charge can apply to sole traders, partners, employees or directors. The scale charge will be given to you in the exam, if required.
Example 14
Vanessa is self-employed, and has a motor car which is used 70% for business mileage. During the quarter ended 31 March 2014 Vanessa spent £1,128 on repairs to the motor car and £984 on fuel for both business and private mileage. The relevant quarterly scale charge is £455. All figures are inclusive of VAT.
Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2014:
£ | ||
---|---|---|
Output VAT Fuel scale charge (455 x 20/120) | 76 | |
Input VAT Motor repairs (1,128 x 20/120) Fuel (984 x 20/120) | 188 164 |
However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be calculated on this charge to the employee or director.
Example 15
Ivy Ltd provides one of its directors with a company motor car which is used for both business and private mileage. For the quarter ended 31 March 2014 the total cost of petrol was £720, with the director being charged £216 for the private use element. Both figures are inclusive of VAT.
Ivy Ltd will include the following entries on its VAT return for the quarter ended 31 March 2014:
£ | ||
---|---|---|
Output VAT Charge to director (216 x 20/120) | 36 | |
Input VAT Fuel (720 x 20/120) | 120 |
The second part of the article will cover VAT returns, VAT invoices, penalties, overseas aspects of VAT, and special VAT schemes, plus a test of your understanding.
Written by a member of the Paper F6 (UK) examining team