VALUE ADDED TAX (VAT)

VAT is:

• an indirect tax on consumer spending

• charged on most goods and services supplied within the UK

• suffered by the final consumer, and

• collected by businesses on behalf of HM Revenue and Customs (HMRC).

VAT is only charged

• by taxable persons

• when they make taxable supplies in the course of their business.

Input and output VAT

It is important to distinguish between input and output VAT:

• Input VAT is paid by businesses on their purchases and imports of goods and services.

• Input VAT is reclaimable from HMRC.

• Registered businesses charge output VAT on the supply of taxable goods and services.

• Output VAT is payable to HMRC.

Types of supply
VAT registration

Pre-registration input VAT

Pre-registration input VAT can be recovered on the following:

• Goods (e.g. inventory and non-current assets):

– if acquired for business purposes

– in the last four years, and
– goods are still in hand at the date of registration.

• Services:

– if supplied for business purposes

– in the six months prior to registration.
Place of Supply
The general rule for place of supply is:

 for goods, the country in which the trader making the supply is registered for VAT;
 for services, the country where the business customer receiving the supply is based.

Irrecoverable Input VAT

Input VAT on certain expenditure made by a registered taxable trader can never be
reclaimed. This is referred to as blocked, or irrecoverable, input VAT.

Irrecoverable input VAT expenditure includes:

 The value of goods or services withdrawn from the business for non-business
purposes unless output VAT is accounted for on the private use.
 New cars (and extra equipment purchased with the car) unless the cars are either used for
a car-based business (e.g. driving schools, car hire) or otherwise used wholly for business
purposes (e.g. a pool car used by various employees for business only).
 Where a new car is leased and also used partly for private purposes, 50% of the input
VAT on the lease charge is irrecoverable.
 Entertaining, except that relating to staff and overseas customers.

Impairment Losses
If a business makes credit sales (and is not in the cash accounting scheme), VAT impairment
losses are given in respect of an impairment cost if:

 the debt has been written off in the accounts;

 at least six months has elapsed since the later of the date of supply and the due date for
payment; and
 the tax on the supply has been accounted for and paid.
Relief is obtained by adding the VAT element of the debt that cannot be recovered, to the
input tax, claimed in the quarter that the loss is being claimed.

Motor expenses – private fuel supplied by business

The fuel scale charge is based on the CO2 emissions of the car.

The treatment of the scale charge is as follows:

• The VAT scale charge must be added to outputs in the VAT return, and the output VAT is
borne by the business.
• The output VAT can be avoided
– if no input VAT is recovered on the fuel, or
– no private fuel is supplied

Gifts of Goods and Services

Where a gift of goods or services is made for non-business or personal reasons the supply is a
taxable supply (i.e. output VAT must be paid) unless one of the following exceptions applies:
1. The gift is a business free sample.
2. The gift is of goods and the value is small. Small means that the cost did not exceed £50
per person (excluding VAT) in a 12 month period.

All these exceptions are treated as "outside the scope" of VAT, so no output VAT is paid but
input VAT is recoverable.

Where goods and business services are removed from the business for personal use and a
taxable supply arises, the tax values for output VAT purposes are as follows:

 for goods, the tax value is the cost of the (replacement) goods
 for business services, the tax value is the cost of the service to the business.
Deregistration
Deregistration is compulsory when a business:
• ceases to make taxable supplies, or
• is sold

although it is possible, by joint election, to transfer a registration to a new owner who

assumes all rights and obligations in respect of the registration.
VAT groups
Companies that are under common control can elect for a group VAT registration, provided
that all the companies have a UK trade or a UK place of business.

Consequences of a VAT group

A VAT group is treated as if it were a single company for the purposes of VAT. Group
registration is optional and not all members under common control have to join.

The effect of a group VAT registration is as follows:

• Goods and services supplied by one group company to another within the group registration
are disregarded for the purposes of VAT. Therefore, there is no need to account for VAT on
intra-group supplies.

• The VAT group appoints one company as a representative member which is responsible for
accounting for all input and output VAT for the group.

• The representative member submits a single VAT return covering all group members, but
all companies are jointly and severally liable for the group VAT payable.

• The normal time limits apply for submission of VAT returns.

• An application for group VAT registration has immediate effect, although HMRC has 90
days during which it can refuse the application.

VAT Returns
The completed online return and related VAT amount (submitted electronically) is due one
month and seven days after the end of the VAT period.
The Time of Supply (Tax Point)

VAT is normally accounted for to HMRC on a quarterly basis, so it is important to know the
time of a supply, to identify the quarter in which it falls.

 The basic tax point is the date the goods are made available to the customers or the date
that the services are completed.
 If an invoice is issued or payment received before the basic tax point, then this becomes
the actual tax point
 If an invoice is issued within 14 days of the basic tax point, the invoice date will usually
become the actual tax point.

Special accounting schemes

• Cash accounting scheme

• Annual accounting scheme
• Flat rate scheme.

POINT OF CASH ANNUAL FLAT RATE

DIFFERENCE ACCOUNTING ACCOUNTING SCHEME
SCHEME SCHEME
Speciality Vat is accounted Vat has to be filed Financial benefits
only for the cash yearly only once (we can keep the
receipts and the cash difference between
expenses Output VAT and
Input VAT)
Joining / Leaving Join - £1.35 million Same as cash Join - £150,000
Criteria Leave - £1.6 million accounting scheme Leave - £230,000
(VAT inclusive)
 Advantages / Advantage: Not Advantage: Need to Advantage:
Disadvantages affected by file VAT only once Businesses can
impairment loss retain the difference
Disadvantage: Can Disadvantage: Have between the VAT
only claim input to make nine they charge
VAT if we actually payments + 1 customers and the
incurred the expense balancing payment fixed rate they pay
to HMRC
Disadvantage:
Cannot reclaim VAT
paid on purchases
Extra Conditions Must be up to date Must be up to date VAT payable =
with VAT returns with VAT payments %*VAT inclusive
and payments turnover

Exports of Goods and Services to Countries Outside the UK

When goods are exported from the UK by a registered UK taxable supplier, this is a zero-
rated supply made in the UK.

Services supplied to an overseas business are generally treated as being supplied in the
country where the customer is situated. No VAT is charged on the export
of services delivered outside of the UK because the place of supply is in the country where
the customer receives the service (i.e. the service falls outside the scope of UK VAT).

VAT registered exporters can recover UK input VAT attributable to the exported goods and
services.
Import of Goods From Outside the UK and Postponed
Accounting
Output VAT is charged on imported goods. Payment of VAT is immediate (i.e. on
importation) unless postponed accounting is used. The VAT paid is treated as recoverable
input VAT by the VAT registered importer.

A system of postponed accounting has been introduced so that VAT does not have to be paid
at the time of importation. Instead, the import VAT is declared on the VAT return as output
VAT, but can be reclaimed as input VAT on the same VAT return. This is a reverse charge
procedure.

Import of Services From Outside the UK – International Services

Services are generally treated as being supplied in the country where the customer is situated.
However, the place of supply depends on whether the customer is a business or a non-
business customer.

For business customers (B2B) the place of supply is where the customer is established.

For non-business customers (B2C) the place of supply is where the supplier is established.

Same reverse charge procedure applies to import of services.

Transfer of a Business as a Going Concern

Compulsory deregistration applies where a business is sold or otherwise transferred as a

going concern to new owners.
Such transfers will inevitably involve assets falling within the scope of VAT. However,
provided certain conditions are met, this transaction will be treated as a supply outside the
scope of VAT (i.e. no output VAT applies to the assets transferred by the vendor which in
turn denies input VAT recovery to the purchaser).

The conditions are:

 the business is transferred as a going concern;

 there is no significant break in trading;
 the same type of trade is carried on after transfer; and
 the new owner is, or will be, registered for VAT.

Land and buildings

Types of supply
Supplies of land and buildings in the UK can be either be zero-rated, standard rated or
exempt.
Opting to tax
A VAT registered vendor or lessor of a building can opt to waive the exemption of the
building. This is usually referred to as ‘opting to tax.’

Partial exemption
Traders who make both taxable and exempt supplies are given credit for only part of the input
tax they incur. This section deals with the calculation of the recoverable input tax credit.

Recoverable input VAT

= Input VAT on indirect cost x (Total Taxable Supplies / Total Supplies)

The ratio is computed as a percentage and, if not a whole number, it is rounded up to the next
whole number.
The percentage used during the year is generally the annual percentage from the previous
year.

Alternatively, the business can choose to calculate the percentage each quarter based on
supplies for that quarter.

Whichever method is used, it must be used consistently throughout the year.

In either case, an annual adjustment will be made at the end of the accounting period.

Annual adjustment

At the end of the accounting period, an annual adjustment calculation must be performed to
ensure that the correct amount of input VAT is claimed for the year as a whole.

• Any under or over-declaration is then accounted for to HMRC, or reclaimed from them, on
the first VAT return of the next year.

• Alternatively, the business can opt to bring forward the annual adjustment calculation to
the last VAT return of the year

De minimis limits

All input tax (including that relating wholly or partly to exempt supplies) may be recovered if
the business is below the de minimis limits. There are three tests to check whether a business
is de minimis:
Annual test

The business can apply the de minimis tests once a year rather than every return period if:

– the business was de minimis in the previous year, and

– the annual test is applied consistently throughout the current year, and
– the input VAT for the current year is not expected to exceed £1 million.

The capital goods scheme

The capital goods scheme applies to partially exempt businesses that spend large sums on
land and buildings or computers and computer equipment.

Where the scheme applies, the initial deduction of input tax is made in the ordinary way and
then reviewed over a set adjustment period.

The annual adjustment is:

(Total original input tax / 10 (or 5) years) × (% now – % in the original year)

The adjustment is made in the second VAT return following the end of the VAT year the
adjustment is for.