value added tax
relevant to CAT Scheme Paper 9 (UK)
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 www.accaglobal.com) 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
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