ACCA-TX (Taxation-UK) _____

V A T (Value Added Tax)

• VAT is a tax on turnover, not on profits.
• The basic principle is that the VAT should be borne by the final consumer.
• Registered traders may deduct the tax which they suffer on supplies to them from the tax
which they charge to their customers at the time this paid to HMRC.
INPUT VAT
• This is the amount of VAT paid by traders/customers on purchase of taxable supplies.
OUTPUT VAT
• This is the amount of VAT charged by the traders from customer on sale of taxable
supplies.
TYPE OF SUPPLIES
There are two major categories of taxable supplies.
Taxable supplies:
• VAT is chargeable on taxable supplies made by a taxable person. Supplies may be of goods
or services.
• There are further two types of supplies under this category:
a) Standard rated supplies:
• A standard rate on supply is charged @20% on the sale price of goods and
services.
b) Zero Rated Supplies:
• Some supplies are taxable, but the rate of tax is 0%.
• The following are items on the zero-rated list
i. Human and animal food
ii. Sewerage services and water
iii. Printed matter used for reading (books and newspaper)
iv. Construction work on new homes.
v. Transport of goods and passengers
vi. Drugs and medicines etc

Exempt Supplies:
- An exempt supply is not chargeable to VAT.
- A person making exempt supplies is unable to recover VAT on input

VAT PERIODS (Tax Period)

• The VAT period is the period covered by a VAT return.
• It is usually three calendar months.
• The return shows the total input and output tax for the tax period and must be submitted,
along with any VAT due, within one month of the end of the period.

Masood R.Abbasi (MBA, FIPA, FFA) Page 1

ACCA-TX (Taxation-UK) _____

DUE DATE
Followings are the due dates for the submission of VAT return.
• 1st quarter (Jan, Feb and March) Due Date is the month of 7th of May.
• 2nd quarter (April, May & June) Due Date is the month of 7th of August.
• 3rd quarter (July, August & September) Due Date is the month of 7th of November.
• 4th quarter (October, November & December) Due Date is the month of 7th February.
THE TAX POINT (Time of Supply)
• The tax point is the deemed date of supply.
• The basic tax point is the date on which goods are removed or made available to the
customer, or the date on which services are completed.
• If a VAT invoice is issued or payment is received before the basic tax point, the earlier of
these dates comes the tax point.
• If the earlier date rule does not apply, and the VAT invoice is issued within 14 days of the
basic tax point, the invoice date becomes the actual tax point.
THE VALUATION OF SUPPLIES
• In order to ascertain the amount of VAT on a supply, the supply must be valued.
• The value of a supply is the VAT exclusive price on which VAT is charged.
Discount on Sale:
• Where a discount is offered, VAT is chargeable on actual amount received.
• When goods are sold to staff at a discount, VAT is only due on the discounted price.
ENTERTAINING
• Generally, Input VAT on the cost of entertainment expenditure is Non-Deductible.
• Input VAT is DEDUCTABLE where it relates to the cost of entertaining overseas
customers.
MOTORING EXPENSES
• The VAT incurred on the purchase of a car not used wholly for business purposes is not
recoverable.
• If accessories are fitted after the original purchase and a separate invoice is raised, the
VAT on the accessories can be treated as input tax so long as the accessories are for
business use.
• If a car is leased, the lesser recovered the input tax when the car was purchased and the
lessee makes some private use of the car, the lessee can only recover 50% of the input tax
on the lease charges.
• If a car is used for business purposes, then any VAT charged on repair and maintenance
costs can be treated as input tax. (No apportionment has to be made for private use).

Masood R.Abbasi (MBA, FIPA, FFA) Page 2

ACCA-TX (Taxation-UK) _____

FUEL EXPENSES (Scale Charges)

• The VAT incurred on fuel used for business purposes is fully deductible as input tax.
• If fuel supplied for private purposes all input VAT incurred on the fuel is allowed but the
business must account for output VAT using a set of Scale Charges, which will be based on
Co2 emissions of the car.

BAD DEBTS (Impairment Losses)

• Where a supplier of goods or services has accounted for VAT on the supply and the
customer does not pay, the supplier may claim a refund of VAT on the amount unpaid.
• Relief is available for VAT on bad debts if the debt is over six months old (measured from
when payment is due) and has been written off in the creditor’s accounts.

REGISTRATION
There are two categories in registration.
Compulsory Registration:
There are two tests for the Compulsory registration.
a) Historical Test:
• At the end of every month a trader must calculate his cumulative turnover of taxable
supplies for the previous 12 months to date.
• The trader becomes liable to register for VAT if the value of his cumulative taxable
supplies (excluding VAT) exceeds £85,000.
• The person is required to notify HMRC within 30 days of the end of the month in which
the £85,000 limit is exceeded.
• The trader will bound to follow the law after expiry of 30 days of registration.
b) Future Test:
• A person is also liable to register at any time if there are reasonable grounds for believing
that his taxable supplies (excluding VAT) in the following 30 days will exceed £85,000.
• Only taxable turnover of that 30-day period is considered not cumulative turnover.

Voluntary Registration:
• A person may decide to become registered even though his taxable turnover falls below
the registration limit.
• Unless a person is registered, he cannot recover the input tax he pays on purchase.

Masood R.Abbasi (MBA, FIPA, FFA) Page 3

ACCA-TX (Taxation-UK) _____

PRE-REGISTRATION INPUT TAX

VAT incurred before registration can be treated as input tax and recovered from HMRC subject to
certain conditions.

Pre-Registration Goods:
If the claim is for input tax suffered on goods purchased prior to registration, then the following
conditions must be satisfied:
• The goods were acquired for the purpose of the business which either was carried on or
was to be carried on by him at the time of supply.
• The goods have not been supplied onwards or consumed before the date of registration.
• The VAT must have been incurred in the four years prior to the effective date of
registration.

Pre-registration Services:
If the claim is for input tax suffered on the supply of services prior to registration, then the
following conditions must be satisfied.
• The services were supplied for the purposes of a business which either was carried on or
was to be carried on by him at the time of supply.
• The services were supplied within the six months prior to the date of registration.

DE-REGISTRATION
• A trader may deregister voluntarily or compulsory.
• On deregistration, VAT is chargeable on all stocks and capital assets in a business on
which input tax was claimed.

Compulsory deregistration:
• A trader may be compulsorily deregistered, if HMRC is satisfied that he is no longer
making nor intending to make taxable supplies.
• The trader expects the value of his taxable supplies in the following one-year period will
not exceed £83,000.
• Failure to notify a requirement to deregister within 30 days may lead to a penalty.

Voluntary deregistration:
• A person is eligible for voluntary deregistration if HMRC are satisfied that the value of his
taxable supplies (net of VAT and excluding supplies of capital assets) in the following one-
year period will not exceed £83,000.

Masood R.Abbasi (MBA, FIPA, FFA) Page 4

ACCA-TX (Taxation-UK) _____

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.
• All the companies in the VAT group remain jointly and severally liable for any VAT
liabilities.
• Group will be considered for the limitation of cash and annual accounting schemes rather
than on an individual company basis.
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.
VAT SCHEMES

• Cash Accounting Scheme

• Annual Accounting Scheme
• Flat Rate Scheme

Transfer of going Concern:

- When the assets of a VAT registered business are sold, each asset will be subject to VAT at
the appropriate rate.
- If the whole business is sold as going concern, the supply of asset is outside the scope of
VAT and n VAT is chargeable.
Miscellaneous information:

- Where trader’s total VAT liability for the 12 months or less to the end of a VAT period
exceeds 2.3 million, the trader must start making payment on account of each quarte’s
VAT liability during each quarter.
- For VAT refund, there is a 4 years’ time limit on the right to reclaim overpaid VAT.

Masood R.Abbasi (MBA, FIPA, FFA) Page 5

ACCA-TX (Taxation-UK) _____

VAT Invoice

A taxable person making a taxable supply to another VAT registered trader must supply a VAT invoice
within 30 days of the time of supply and must keep a copy.

The invoice must show:

- The supplier’s name, address and registration number

- The date of issue, the tax point and an invoice number
- The name and address of the customer
- A description of the goods or services supplied, stating quantity, unit price, the rate of
VAT and VAT exclusive amount.
- The rate of any cash discount

Less Detailed Invoice:

A less detailed VAT invoice may be issued where the invoice is for a total including VAT of up to £250.

Less detailed invoice must show:

- The supplier’s name, address and registration number

- The date of the supply
- Description of the goods or services supplied.
- VAT rate chargeable
- Total amount chargeable including VAT.
VAT invoice is not required for payment of up to £25 including VAT.

Masood R.Abbasi (MBA, FIPA, FFA) Page 6

ACCA-TX (Taxation-UK) _____

Question 4 (June 2015)

Zim has been registered for value added tax (VAT) since 1 April 2005. The following information
is available for the year ended 31 March 2015:

(1) Sales invoices totaling £126,000 were issued, of which £115,200 were in respect of
standard rated sales and £10,800 were in respect of zero-rated sales. Zim’s customers are
all members of the general public.
(2) On 31 March 2015, Zim wrote off two impairment losses which were in respect of
standard rated sales. The first impairment loss was for £780 and was in respect of a sales
invoice which had been due for payment on 15 August 2014. The second impairment loss
was for £660 and was in respect of a sales invoice which had been due for payment on 15
September 2014.
(3) Purchase invoices totaling £49,200 were received, of which £43,200 were in respect of
standard rated purchases and £6,000 were in respect of zero-rated purchases.
(4) Rent of £1,200 is paid each month. During the year ended 31 March 2015, Zim made 13
rental payments because the invoice dated 1 April 2015 was paid early on 31 March 2015.
This invoice was in respect of the rent for April 2015.
(5) During the year ended 31 March 2015, Zim spent £2,600 on mobile telephone calls, of
which 40% related to private calls.
(6) During the year ended 31 March 2015, Zim spent £1,560 on entertaining customers, of
which £240 was in respect of overseas customers.

All of the above figures are inclusive of VAT where applicable. The expenses referred to in notes
(4), (5) and (6) are all standard rated.

Zim does not use either the cash accounting scheme or the flat rate scheme. He has forecast that
for the year ended 31 March 2016, his total sales will be the same as for the year ended 31 March
2015.
Required:
(a) Calculate the amount of value added tax (VAT) payable by Zim for the year ended
31 March 2015.
Note: You should indicate by the use of zero any items referred to in notes (1) to (6)
where there is no VAT impact.
(b) Explain why Zim will be permitted to use the VAT flat rate scheme from 1 April
2015 and state the circumstances in which he will have to leave the scheme.
(c) Explain whether or not it would have been beneficial for Zim to have used the VAT
flat rate scheme for the year ended 31 March 2015.
Notes:
1. You should assume that the relevant flat rate scheme percentage for Zim’s trade would
have been 12% throughout the whole of the year ended 31 March 2015.

Masood R.Abbasi (MBA, FIPA, FFA) Page 7