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                                 value added tax
                                 relevant to CAT Scheme Paper 9 (UK)

VAT update
   This article updates the VAT article for CAT       registration rules                          GENERAL POINTS
Paper 9 (UK) that was published in student            types of supply                             VAT is administered by HM Revenue &
accountant in February 2004. The aim is to            calculations (including bad debts,          Customs (HMRC). Its legal basis is found in
remind candidates of what is included within          discounts and irrecoverable VAT)            the Value Added Tax Act of 1994 (VATA 94)
the syllabus and how it might be examined             VAT accounting (including tax point,        as amended by subsequent Finance Acts
in future. Since the introduction of VAT into         invoices and returns)                       (FA), the latest being the Finance Act 2007
the syllabus, several exam questions have             basic administration (including records     (FA 2007). Both the June and December
been set but unfortunately nearly every one           and late registration penalties).           2008 exams will use legislation up to and
has been poorly answered. VAT questions will                                                      including the FA 2007.
always be part of either Question 2 or 4, and     The more technical areas only cover the basic
will not be worth more than 10 marks.             treatment of exports and imports (both to EU    The basic principle
                                                  and non-EU countries), and special retailer     VAT is a tax on turnover and is added at every
THE SYLLABUS                                      schemes (annual accounting, cash accounting     stage of manufacture or process, based on the
The syllabus covers ‘basic VAT areas’, but also   and the flat rate schemes).                     value added at each stage. A trader nets the
includes a few more technical subjects. The             Candidates should consult the Syllabus    VAT paid on purchases (input tax) against that
basic areas cover the general aspects that a      and Study Guide (both can be found on           collected on sales (output tax) and either pays
tax technician would have to know in order to     ACCA’s website at for a     the excess output tax to HMRC or claims a
complete a VAT return. These areas include:       full list of exclusions.                        refund if there is an excess of input tax. VAT is

36          student accountant   February 2008

generally, therefore, not a cost to a registered     of the end of the relevant month. HMRC will        Deregistration
trader. The trader is, in effect, an unpaid          then register the trader from the start of the     A trader can voluntarily deregister at any time
tax collector working on behalf of HMRC by           month following the period when the £64,000        if they believe that taxable turnover in the
collecting the tax due, which is eventually          was exceeded. The trader may request an            following 12 months will not exceed £62,000.
suffered by the final user only. VAT, however,       earlier date if desired. Registration is not       Deregistration will be effective from the date
is not reclaimable on a few items – these are        required if the trader can satisfy HMRC that       of request or at a later date if preferred.
discussed later.                                     turnover in the following 12 months will not       Compulsory deregistration is also required
     A trader who is not VAT registered cannot       exceed £62,000.                                    when the trader stops making taxable supplies
reclaim input tax and therefore suffers the full          Second, a trader will also be required to     or there is a change in legal status.
cost of purchases, including the VAT element.        register if the £64,000 threshold is expected           Exam questions will expect students
This point is of vital importance when deciding      to be exceeded in any 30-day period. This          to be able to perform both registration
the amount for which capital allowances can          test of measurement is on the 30-day period        tests and to be able to advise traders of
be claimed. If the trader is registered, then the    alone and not the cumulative turnover to date.     notification and registration/deregistration
VAT exclusive figure is used. If the trader is not   Again, the trader has 30 days from the day         dates. The implications of registration are also
registered then the VAT inclusive figure should      they become aware that they may exceed             examinable. Group and divisional registration
be used, as the VAT is then a cost to the            the £64,000 to notify HMRC, but they will          is, however, outside the syllabus.
trader. In this article, the term ‘trader’ should    then be registered from the first day of the
be taken to include individuals, partnerships,       30-day period.                                     ACCOUNTING FOR VAT
and companies.                                            A trader must register using form VAT 1.      Standard, zero-rated and exempt supplies
                                                     Phone calls and letters are not accepted           Supplies are categorised as standard,
The scope of VAT                                     as methods of registration. On receipt of          zero-rated or exempt. Both standard and
VAT is charged on taxable supplies of goods          form VAT 1, HMRC will issue a certificate of       zero-rated supplies are classed as taxable and
and services made in the UK by a taxable             registration, which states the effective date      therefore must have VAT added, albeit at 0%
person in the course or furtherance of any           of registration, the VAT periods, and the VAT      for zero-rated. If a trader only makes taxable
business carried on by them. This statement is       registration number. The registration number       supplies then any input tax on the related
taken to include all supplies including trading      is to be quoted on all future invoices and         purchases may be reclaimed.
stock, utilities such as gas and electricity,        communication with the VAT authorities.                 If the trader only makes exempt supplies
and capital items. Candidates often forget to                                                           then they cannot register for VAT, must not add
include all items when calculating VAT due.          Voluntary registration                             VAT to their supplies, and, therefore, cannot
Care must be taken to include all items that         A trader who makes taxable supplies may            reclaim the input tax on related purchases.
are within the scope of VAT.                         voluntarily register at any time whatever the      The situation where a trader makes both
     Supplies are categorised into three             level of turnover. This has the advantage of       taxable and exempt supplies is called partial
areas – standard, zero-rated and exempt.             allowing the trader to claim input tax and gives   exemption but is outside the scope of the
Standard and zero-rated supplies are classed         a business more credibility.                       Paper 9 (UK) syllabus.
as taxable; the standard rate is 17.5% and
the zero rate is 0%. ‘Exempt’ simply means                                                              Inclusive versus exclusive
that there is no VAT chargeable on the supply.       A trader who is not VAT registered                 Many candidates lose easy marks either
There is a lower rate of 5% on certain items,                                                           because they do not read the question
such as domestic power, but this is not
                                                     cannot reclaim input tax and                       carefully, or because they do not understand
examinable.                                          therefore suffers the full cost of                 the difference between a VAT inclusive and a
                                                     purchases, including the VAT                       VAT exclusive price. If the question states that
Compulsory registration                                                                                 the figures given are exclusive of VAT, then
A trader must register for VAT if cumulative         element. This point is of vital                    the VAT rate of 17.5% should be applied to
taxable turnover exceeds £64,000. There              importance when deciding the                       the figure to calculate the VAT. However, if the
are two occasions when a trader needs to                                                                figure is inclusive then the fraction of 7/47
check this.
                                                     amount for which capital allowances                should be used to find out how much VAT is
     First, at the end of every month a trader       can be claimed. If the trader is not               included in the amount given.
must check cumulative turnover to date.              registered then the VAT inclusive
This cumulative period must not exceed 12                                                               EXAMPLE 1
months. When the turnover exceeds £64,000,           figure should be used, as the VAT                  A VAT exclusive figure of £100 is given. The
the trader must notify HMRC within 30 days           is then a cost to the trader.                      VAT is therefore £100 x 17.5% = £17.50.

38          student accountant   February 2008
This gives a VAT inclusive figure of £117.50      (24 March). The sale must therefore be            Candidates should assume that VAT on
(£100 + £17.50).                                  recorded in the quarter ending 31 March. If       cars is not reclaimable unless specifically
                                                  the invoice had been issued within 14 days        told in the question that one of the above
The VAT in the inclusive figure can be found      (say 3 April) then the deemed sale date would     exemptions applies.
by using the VAT fraction, ie £117.50 x 7/47      be 3 April and the sale would be recorded in
= £17.50.                                         the quarter ending 30 June.                       Entertainment
                                                                                                    VAT on expenditure for entertaining customers
Candidates must be able to perform these          Invoices                                          or suppliers is not refundable. However, if the
simple calculations.                              The VAT system is invoice driven. Usually,        expenditure is for entertaining staff then the
                                                  if there is no invoice then there is no refund    VAT can be reclaimed.
VAT periods                                       of VAT available. Invoices are not, however,
A normal VAT period is three calendar months.     required for payments up to £25 (inclusive        Private use
HMRC notifies the trader of these periods         of VAT), or for telephone calls, parking fees,    VAT cannot be reclaimed on items purchased
in the certificate of registration. The trader    or coin-operated machine purchases. A valid       for private use. If the items are used partly for
can change these periods to suit their own        invoice must contain certain information          business and partly for private purposes, then
accounting period. A return for each of these     including the details of the item sold, the tax   only a proportion of the VAT can be reclaimed
periods (along with payment of any VAT due)       point, and VAT registration number. A less        (the proportion relating to business usage).
must be completed and returned to HMRC            detailed invoice can be used for sales up to
within one month of the end of the relevant       £250 including VAT.                               Fuel
period. Those traders whose supplies are                                                            When fuel is supplied for an individual’s
zero-rated are, in the main, in a VAT refund      OTHER SPECIFIC POINTS                             private use, the full amount of input tax can
position. These traders can, if they wish, make   Bad debts                                         be reclaimed. However, the trader must then
monthly returns to improve their cash flow        VAT can be reclaimed on bad debts, providing      account for output tax using set fuel scale
position. Certain traders can also make annual    they are written-off in the books and are more    charges based on the CO2 emissions of the
returns – this is considered under the heading    than six-months-old from the date the debt        car. These scale charges will be given in
of ‘special schemes’.                             was due.                                          the exam.

The tax point                                     Discounts                                         Penalties
The tax point of each individual supply is the    VAT is calculated after all discounts             Candidates should be aware that penalties
actual deemed date of supply. The tax point       (trade, bulk or cash) are made, even if the       exist and interest is chargeable for late
is generally the earliest of three dates; the     customer does not eventually take the actual      VAT returns and payments. However, the
date the goods are taken, the invoice date,       discount available.                               calculation of these amounts is not required
or the date that cash is received. The tax                                                          by the syllabus. The default surcharge
point is important in determining the period      EXAMPLE 3                                         and the serious misdeclaration penalty are
in which the supply is made, the rate of tax      Sales have been recorded of £110 (net of VAT)     specifically excluded from the syllabus. The
to be applied, and the category (standard,        with a £10 discount if paid within 30 days.       only penalties that may be examined are
zero-rated or exempt) to be used. The 14-day      VAT is calculated as follows:                     those for late registration.
rule allows the invoice date to be used as the
deemed date of sale if the invoice is issued      (£110 - £10) x 17.5% = £17.50.                    SPECIAL SCHEMES
within 14 days of the goods being taken – this                                                      The syllabus requires candidates to have
14-day rule cannot, however, override the cash    VAT is not recalculated if payment is actually    knowledge of three optional schemes
receipt date.                                     received after the 30-day discount period.        available to smaller traders. Candidates
                                                                                                    will be expected to answer questions in the
EXAMPLE 2                                         Motor cars                                        exam on all three of the following schemes.
A trader dispatches goods to a customer on        VAT on cars is not reclaimable unless they are:   Conditions, advantages and disadvantages
24 March, issues an invoice on 15 April,             purchased exclusively for business             must be known. Note: special retailer
and receives full payment for the goods              purposes                                       schemes and the capital goods scheme are
on 30 April. The trader has return periods           purchased for resale                           not in the syllabus.
coinciding with calendar quarters.                   used in or leased to a taxi business,
     The tax point, and therefore the date           driving school or self-drive car hire          Annual accounting
of sale, is the earliest of the three dates          business.                                      This scheme is open to traders who make

                                                                                                         February 2008     student accountant     39

VAT is charged on taxable supplies of            regular payments to HMRC, but not to those         rates, as supplies made within the UK. VAT
                                                 claiming refunds. Traders with an annual tax       is charged on the full import price; it is paid
goods and services made in the UK                exclusive turnover of £1,350,000 or less           at the point of entry and claimed on the next
by a taxable person in the course or             may join the scheme. Traders whose turnover        VAT return. A trader may join the deferred
furtherance of any business carried              exceeds £1,600,000 will be required to leave       payment system whereby the amount of VAT
                                                 the scheme.                                        due is debited to the trader’s account on the
on by them. This statement is taken                   In the scheme, one return is due from         15th of the month following import.
to include all supplies including                the trader within two months of the year
                                                 end concerned. However, HMRC requires              Trading with registered traders within EU
trading stock, utilities such as gas             payments on account throughout the year.           countries
and electricity, and capital items.              A trader will usually have to pay nine             The terms ‘acquisitions’ (purchases) and
                                                 instalments starting at the end of month           ‘dispatches’ (sales) are to be used when
Candidates often forget to include all           four, each of which are equal to 10% of the        dealing with countries in the EU. Dispatches
items when calculating VAT due. Care             previous year’s VAT. A balancing payment           to registered traders are zero-rated providing
must be taken to include all items               is then due at the time the VAT return             proof of export is available, and that the VAT
                                                 is submitted.                                      registration numbers of both the supplier
that are within the scope of VAT.                                                                   and the customer are quoted on the invoice.
                                                 Cash accounting                                    Acquisitions from registered traders require
                                                 A trader with a turnover of £1,350,000 or          the UK trader to account for output tax on the
                                                 less may join the cash accounting scheme.          relevant VAT return.
                                                 This enables traders to account for VAT on              If the acquisition is used for business
                                                 a cash received and paid basis. Invoices are       purposes, then a corresponding input tax
                                                 still required to support the amounts paid,        entry is made on the same return. The overall
                                                 but the tax point is always the cash date, not     effect is, of course, to neutralise the two
                                                 the invoice or goods taken dates.                  figures, thus putting the UK trader in the
                                                       The major advantage of this scheme is        same position as if they were trading with
                                                 that of cash flow. This is because traders only    other UK traders.
                                                 pay VAT when payment is received. Another               Exam questions in this area require
                                                 advantage is the availability of automatic bad     candidates to have knowledge of the tax
                                                 debt relief. Traders are required to leave the     treatment of overseas transactions, and to
                                                 scheme at the end of the accounting period in      be able to explain the difference between
                                                 which their turnover exceeds £1,600,000.           transactions with EU and non-EU countries.
                                                                                                    The examiner will state if the country
                                                 Flat rate scheme                                   concerned is within the EU or not.
                                                 This is open to traders with a tax exclusive
                                                 annual taxable turnover of up to £150,000,         CONCLUSION
                                                 and a tax exclusive total turnover of up           Full details of the areas covered in this article
                                                 to £187,500, expected in the next 12               can be obtained from any of the books on
                                                 months. The scheme works by applying a             the recommended reading list for this paper,
                                                 flat percentage to the tax inclusive turnover      and these should be studied in full. VAT
                                                 instead of the normal netting of output and        questions will continue to be set and will
                                                 input tax. The flat rate depends on the trade      normally appear in every exam. Although this
                                                 sector, but this rate will be given in the exam.   is a relatively new topic in the CAT Paper 9
                                                                                                    (UK) syllabus, it has been disappointing to
                                                 OVERSEAS TRADING                                   see so many poor answers in recent exams.
                                                 Trading with non-EU countries                      Candidates must study this area in more
                                                 The terms ‘exports’ and ‘imports’ are used         detail – there are easy marks to be gained
                                                 when dealing with countries outside the EU.        by understanding the basic points noted in
                                                 Exports are zero-rated, provided proof of          this article.
                                                 export is available, and imports are charged
                                                 to VAT in the same way, and using the same         Keith Molson is examiner for Paper 9 (UK)

40          student accountant   February 2008

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