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). Read part 1 here
Paper F6 (UK) will always contain a minimum of 10 marks on value added tax (VAT). These marks will normally be included within Question 1 (focusing on income tax) or Question 2 (focusing on corporation tax), although there might be a separate question on VAT.
VAT returns
VAT returns are normally completed on a quarterly basis. Each return shows the total output VAT and total input VAT for the quarter to which it relates.
VAT returns have to be filed online within one month and seven days of the end of the relevant quarter. Any VAT payable is due at the same time, and must be paid electronically.
Example 1
For the VAT quarter ended 31 March 2013 Jet has output VAT of £12,400 and input VAT of £7,100.
Because VAT is a self-assessed tax, HM Revenue & Customs can make control visits to VAT registered companies. The purpose of a control visit is to provide an opportunity for HM Revenue & Customs to check the accuracy of VAT returns.
VAT invoices
A VAT registered business will usually have to issue VAT invoices in respect of standard rated supplies. VAT invoices must contain certain information.
Example 2
Keen Ltd registered for VAT on 1 March 2013.
The company only sells goods, and at present issues sales invoices that show (1) the invoice date and invoice number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Keen Ltd’s name and address, and (5) the name and address of the customer. Keen Ltd does not offer any discount for prompt payment.
The company wants to know the circumstances in which it is and is not required to issue a VAT invoice, the period during which such an invoice should be issued, and the additional information that it will have to show on its sales invoices in order that these are valid for VAT purposes.
Issue of VAT invoices
Additional information
The following information is required:
The default surcharge
A default occurs if a VAT return is not submitted on time or if VAT is paid late. If the default involves the late payment of VAT then a surcharge may be incurred.
Example 3
Li has submitted her VAT returns as follows:
Quarter ended | VAT paid £ | Submitted |
---|---|---|
30 September 2011 | 6,200 | Two months late |
31 December 2011 | 28,600 | One month late |
31 March 2012 | 4,300 | On time |
30 June 2012 | 7,600 | On time |
30 September 2012 | 1,900 | On time |
31 December 2012 | 3,200 | On time |
31 March 2013 | 6,900 | Two months late |
Li always pays any VAT that is due at the same time that the related VAT return is submitted.
Errors in a VAT return
A VAT registered business that makes an error in a VAT return that results in the underpayment of VAT can be subject to both a penalty for an incorrect return and penalty interest.
Example 4
During March 2013 Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three motor cars when completing its VAT return for the quarter ended 31 December 2012.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a taxpayer’s behaviour.
Example 5
Continuing with Example 4:
Imports and exports
When a UK VAT registered business imports goods into the UK from outside the European Union, then VAT has to be paid at the time of importation. This VAT can then be reclaimed as input VAT on the VAT return for the period during which the goods were imported.
Example 6
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing £1,000 (exclusive of VAT) from either a UK supplier or from a supplier situated outside the European Union.
Regular importers can defer the payment of VAT on importation by setting up an account with HM Revenue & Customs. It is necessary to provide a bank guarantee, but VAT is then accounted for on a monthly basis.
When a UK VAT registered business exports goods outside of the European Union then the supply is zero-rated.
Trading within the European Union
When a UK VAT registered business acquires goods from within the European Union, then VAT has to be accounted for according to the date of acquisition. The date of acquisition is the earlier of the date that a VAT invoice is issued or the 15th day of the month following the month in which the goods come into the UK.
This VAT charge is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT return (this is known as the reverse charge procedure). Therefore for most businesses there is no VAT cost as the output VAT and the corresponding input VAT contra out. The only time that there is a VAT cost is if a business makes exempt supplies, since an exempt business cannot reclaim any input VAT.
Example 7
Continuing with Example 6:
Yung Ltd also has the option of purchasing goods from a supplier situated in the European Union.
When a UK VAT registered business supplies goods to another VAT registered business within the European Union then the supply is zero-rated.
International services
Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated. Therefore, where a UK VAT registered business receives international services the place of supply will be the UK.
Example 8
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT registered businesses situated elsewhere within the European Union. As business to business services these are treated as being supplied in the UK.
The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK.
The cash accounting, annual accounting and flat rate schemes
The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful that the schemes are not confused, as they are completely different from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.
Example 9
Ming is registered for VAT. She has annual standard rated sales of £800,000. This figure is inclusive of VAT. Ming pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her customers have recently defaulted on the payment of their debts.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to submit one VAT return each year.
Example 10
Newt Ltd is registered for VAT. The company has annual standard rated sales of £950,000. This figure is inclusive of VAT. Because of bookkeeping problems Newt Ltd has been late in submitting its recent VAT returns.
The flat rate scheme can simplify the way in which small businesses calculate their VAT liability. Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total income. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the gross total income figure (including exempt supplies) with no input VAT being recovered. The percentage varies according to the type of trade that the business is involved in, and will be given to you in the exam.
Example 11
Omah registered for VAT on 1 January 2013. He has annual standard rated sales of £80,000, and these are all made to the general public. Omah has annual standard rated expenses of £12,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for Omah’s trade is 13%.
Conclusion
There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. You will normally find that several different topics are covered within each VAT question, and so it is important that you cover the whole subject area.
Written by a member of the Paper F6 examining team