This two-part article is relevant to candidates sitting Paper F6 (UK) in either the June or December 2013 sittings, and is based on tax legislation as it applies to the tax year 2012–13 (Finance Act 2012).
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.
Standard rate of 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 2013. The following information is available:
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT return – quarter ended 31 March 2013
£ | £ | |
---|---|---|
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 | ||
______ |
VAT registration
A business making taxable supplies must register for VAT if during the previous 12 months the value of taxable supplies exceeds £77,000. However, VAT registration is not required if taxable supplies in the following 12 months will not exceed £75,000. 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 2012. His sales have been as follows:
Standard rated £ | Zero- rated £ |
|
---|---|---|
2012 | ||
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 |
2013 | ||
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 £77,000 during the following 30 days. Again the figure is exclusive of VAT.
Example 3
Bee commenced trading on 1 October 2012. Her sales have been as follows:
£ | ||
---|---|---|
2012 | October | 4,600 |
November | 5,400 | |
December | 23,900 | |
2013 | January | 97,700 |
Bee’s sales are all standard rated.
On 1 January 2013 Bee realised that her sales for January 2013 were going to exceed £95,000, and therefore immediately registered for VAT.
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 £77,000 registration limit, or where it is possible to apply for exemption from registering. 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 2012 was £12,400. This input VAT would not be recoverable were Bee to register for VAT on 1 January 2013.
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 £75,500. He is planning to put up his prices, and this will increase annual sales to £81,000. 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 (81,000 x 100/120) | 67,500 |
Expenses (12,700 x 100/120) | (10,583) |
_______ | |
Net profit | 56,917 |
_______ |
Pre-registration input VAT
Input VAT incurred prior to registration can be recovered in certain circumstances.
Example 7
Elisa commenced trading on 1 January 2013, and registered for VAT on 1 April 2013. She had the following inputs for the period 1 January to 31 March 2013:
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 2013 Elisa had an inventory of goods that had cost £13,800. The above figures are all exclusive of VAT.
VAT deregistration
A business stops being liable to VAT registration when it ceases to make taxable supplies. HM Revenue & 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 2013. 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
Group VAT registration
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.
The tax point
It is very important to correctly identify the time 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.
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.
Output VAT and input VAT
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 2013. The following information is available:
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT return – quarter ended 31 March 2013
£ | £ | |
---|---|---|
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 | ||
_______ |
Refunds
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 2013. 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 2003.
Goods supplied free of charge
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.
Motor expenses
Input VAT can be recovered where fuel is used for private mileage (either by a sole trader or an employee), but output VAT must then be accounted for. Output VAT is normally calculated according to a scale charge based on the motor car’s level of CO2 emissions. The scale charge will be given to you in the examination, if required.
Provided there is some business use, input VAT can be fully recovered in respect of repairs to a motor car. No apportionment is necessary.
Example 14
Ivy Ltd is to provide one of its directors with a company motor car which will be used for both business and private mileage.
The company will pay for all the running costs of the motor car, including petrol and repairs. The relevant VAT inclusive quarterly scale charge is £500.
The second part of the article will cover VAT returns, VAT invoices, penalties, overseas aspects of VAT, and special VAT schemes.
Written by a member of the Paper F6 examining team