Value added tax, part 2

Updated on May 24, 2022

Candidates who plan to take the TX (UK) exam between June 1, 2019 and March 31, 2020, are encouraged to read this two-part essay, which is based on tax legislation that pertains to the 2018-19 tax year (Finance Act 2018).

Value added tax (VAT) returns

In most cases, VAT returns are completed quarterly. Total production and total input VAT for the quarter are included in each report.

Within one month and seven days of the end of the quarter, VAT returns must be filed electronically. VAT must also be paid electronically at the same time.

In this case, EXAMPLE 17
Jet’s VAT output for the quarter ending 31 March 2019 was £12,400, while its VAT input was £7,100.

This quarter’s VAT return must be submitted online by 7 May 2019, one month and seven days following the quarter’s close.
To be paid online, a VAT of £5,300 (£12,400 – £7,100) must be received on or before 7 May 2019.

HM Revenue and Customs can conduct audits of VAT-registered businesses because VAT is a self-assessed tax. For HM Revenue and Customs, a control visit is an opportunity to verify the accuracy of VAT returns.

VAT invoices

Standard rated supplies may necessitate a VAT invoice from a VAT-registered business. Certain data must be included on VAT invoices.

On March 1, 2019, EXAMPLE 18 Keen Ltd became a VAT-registered business.

The company exclusively sells items and currently issues sales invoices that include (1) the invoice date and invoice number, (2) the type of supply, (3) the quantity and a description of the goods delivered, (4) Keen Ltd’s name and address, and (5) the name and address of the customer.. Fast payment is not rewarded at Keen Ltd.

In order to ensure that its sales invoices are valid for VAT purposes, the company wants to know when it is required to issue a VAT invoice, how long it has to do so, and what additional information it needs to include on those invoices.

Issue of VAT invoices

Keen Ltd is required to issue a VAT invoice if it provides a standard rated service to an individual who is registered for VAT.
If the supply is exempt, zero-rated, or made to a non-VAT registered customer, a VAT invoice is not necessary.
An invoice for VAT must be provided within 30 days of when a transaction is considered to have taken place.

Additional information

You must provide the following details:

The VAT number for Keen Ltd.
The supply date (the tax point).
The VAT rate that applies to each supply.
Each supply’s VAT-exempt price.
The amount excluding VAT.
Amount owed in VAT.

Simplified VAT invoices

A simplified VAT invoice can be produced if the VAT inclusive amount of the invoice falls below £250.

It’s EXAMPLE 19.
Only a few of Jude’s customers require a VAT invoice, but she is VAT-registered. Jude’s sales are all under the £250 mark.

When a customer asks a VAT invoice, a streamlined invoice should be sent. The following details must be displayed:

Name and location of Jude.
This is Jude’s VAT number.
The supply date (the tax point).
It’s a description of what you’re getting from them.
The final sum, including VAT.
Rate of VAT taxation.

The default surcharge

VAT returns that are not filed on time or that are paid late are considered to be in default. A surcharge may be applied if the default concerns the late payment of VAT.

EXAMPLE 20
Li has submitted her VAT returns as follows:

Quarter ended VAT paid
£
Submitted
30 September 2017 6,200 Two months late
31 December 2017 28,600 One month late
31 March 2018 4,300 On time
30 June 2018 7,600 On time
30 September 2018 1,900 On time
31 December 2018 3,200 On time
31 March 2019 6,900 Two months late

At the time of submitting a VAT return, Li always pays any owed VAT.

HM Revenue and Customs will have issued a surcharge liability notice indicating a surcharge period extending from 30 September 2018 to 30 September 2017 as a result of the late filing of the VAT return for the quarter ended 30 September 2017.
Due to the fact that VAT was not paid on time for the quarter that concluded on December 31st, 2017, a penalty of £572 has been assessed (28,600 x 2 percent ).
As a result, the surcharge period will be prolonged until December 31, 2018.
Li then completed and submitted four VAT returns on schedule.

For the quarter ending March 31, 2019, late submission of the VAT return will only result in a surcharge responsibility notification (specifying a surcharge period running to 31 March 2020).

Errors in a VAT return

In the event that a VAT-registered business submits an inaccurate VAT return or fails to pay the correct amount of VAT, penalties and interest may be levied.

EXAMPLE 21

While submitting its VAT return for the three-month period ending on the 31st of December 2018, Zoo Ltd realised that it had wrongly claimed input VAT on the acquisition of three automobiles.

By entering the error on Zoo Ltd’s quarterly VAT return for the quarter ending 31 March 2019, the error can be voluntarily revealed if it is less than the higher of £10,000 or 1% of Zoo Ltd’s quarterly revenue.
A voluntary disclosure can be made if the error is greater than the limit, but it must be made separately to HM Revenue and Customs.
A penalty for filing a false return may be applied regardless of whether or not a separate disclosure is necessary.

There are penalties based on how much tax is underpaid, but the fines are actually determined by a taxpayer’s actions.

EXAMPLE 22

Next, let’s look at example 21.

However, HM Revenue and Customs would not penalise Zoo Ltd, if the company has taken reasonable care to notify them of the inaccuracy.
It’s more likely that Zoo Ltd will be considered as reckless if it claims input VAT on the acquisition of a motor vehicle, as the company should have known that such input VAT is not recoverable.
There will be a penalty of 30 percent of the wrongly declared VAT, however this penalty could be eliminated if HMRC receives an unprompted disclosure.

Imports and exports

Importing goods from outside the European Union into the United Kingdom necessitates the payment of VAT. This VAT can therefore be reclaimed as input VAT on the VAT return for the period in which the imported items were purchased. ”

EXAMPLE 23

UK VAT registration for Yung Ltd. Either a UK-based supplier or a supplier outside the EU can supply the company with items worth £1,000 (exclusive of VAT).

A UK supplier will charge Yung Ltd £1,200 (1,000 plus VAT of 200 (1,000 x 20%)), and Yung Ltd will then reclaim input VAT of £200.
Yung Ltd will pay £1,000 to the supplier, £200 to HM Revenue and Customs, and will be entitled to reclaim input VAT of £200 if the items are obtained from a supplier outside the European Union.
Yung Ltd has paid £1,200 and recouped £200 in each case.

HM Revenue and Customs allows regular importers to delay the payment of VAT by opening an account. Providing a bank guarantee is required, however VAT is then tracked weekly.

The supply is zero-rated when a UK VAT-registered business exports items outside of the EU.

Trading within the European Union

A UK VAT-registered business must account for VAT on items purchased from within the European Union based on the date of purchase. If a VAT invoice is submitted prior to the 15th day of the month following the month the goods entered the UK, the date of acquisition is that date.

It is reported as output VAT on the VAT return, but can be reclaimed as input VAT on the same return. As a result, the output VAT and the equivalent input VAT are zero for the majority of firms. Since exempt businesses cannot claim any input VAT, only when they make exempt supplies do they incur a VAT cost.

EXAMPLE 24

Let’s move on to example 23.

Yung Ltd can also buy products from a European Union-based supplier.

It is agreed that Yung Ltd will pay the supplier £1,000 in compensation. The company will therefore report output VAT of £200 and input VAT of £200 on its VAT returnVAT .’s return
The ultimate outcome is the same as with an import from outside the European Union, but there is no need to pay VAT after it is recovered as input VAT with an acquisition from the European Union..

As long as the recipient of the products is a member of the European Union, they are not subject to VAT.

International services

Generally, services provided to a VAT-registered firm are treated as if they were provided in the nation where the customer resides. This means that when an international service is received by a UK VAT-registered entity, the place of supply is the UK.

EXAMPLE 25

Wing Ltd. is a UK VAT-registered business. Suppliers of standard rated services located outside of the European Union supply the corporation. These services are considered to be provided in the United Kingdom because they are provided between businesses.

The earlier of the date the service is performed or the date it is paid for, VAT will be accounted for.
Although Wing Ltd. must record the output VAT it charges at the UK rate, this input VAT will be reclaimed by Wing Ltd. on its tax return (this is known as the reverse charge procedure).

An international service provided by a UK VAT registered business is usually exempt from UK VAT because of the location of the supplier outside of the United Kingdom.

The cash accounting, annual accounting and flat rate schemes

Small enterprises have the option of using cash accounting, annual accounting, and flat-rate plans. Make sure you don’t get the two schemes mixed up, as they are completely distinct.

In order for a business to properly account for VAT, it must use a cash basis. Customers will typically benefit from the plan if they are provided a period of credit. As a result, impairment losses are automatically compensated. Due to this, it is not possible to collect input VAT until purchases and costs are paid.

EXAMPLE 26

Ming has a VAT number. She generates an average of £800,000 in annual sales. VAT is included in this figure. Ming pays all of her bills in cash, but she gives her customers a three-month grace period before they have to pay for any purchases they make. Debt collectors for some of her clients have recently failed on their payments.

If Ming’s anticipated taxable revenue for the upcoming year does not exceed £1,350,000 exclusive of VAT, she is eligible to adopt the cash accounting method.
Her VAT returns and VAT payments must also be current.
Due to the new method, the tax point will be the day on which consumers actually pay their invoices, rather than the current three-month delay.
Due to the fact that expenses are paid in cash, input VAT will not be affected.
If a consumer fails to make a payment on a debt, the system will automatically compensate for the resulting loss.

The advantage of the annual accounting plan, on the other hand, is primarily administrative, as a business only needs to submit one VAT return each year.

EXAMPLE 27

Newt Ltd is VAT-registered. – The company’s yearly standard rated sales are approximately £950,000. VAT is included in this figure. Newt Ltd’s latest VAT returns were submitted late due to bookkeeping issues.

In order to apply for the yearly accounting scheme, Newt Ltd must have a taxable turnover of less than £1,350,000, excluding VAT, for the next 12 months.
In addition, the business must make all of its VAT payments on time.
Only one VAT return is required to be filed each year under the programme. Within two months of the conclusion of the annual VAT period, this must be paid in full.
As a result of the decreased administrative burden, late VAT return default surcharges should be avoided.
Month four of the 12-month period for filing an annual VAT return marks the beginning of the first of nine instalments to cover VAT. The VAT refund is used to make any remaining payments.
Ten percent of the previous year’s VAT will be deducted from each payment on account. Budgeting and maybe cash flow will improve as a result of this.

Small businesses may find it easier to calculate their VAT obligations if they use the flat rate system.

Flat-rate VAT is calculated by applying a flat rate percentage to the whole amount of revenue generated by a business. This eliminates the need to calculate and record both output VAT and input VAT, which saves time and money.

Input VAT is not recouped when the flat rate % is applied to gross total income (including exempt supplies). Examinees will be assigned a percentage based on the type of business they’re in.

EXAMPLE 28

On January 1, 2019, Omah became a VAT-registered company. As a standard-rated seller, he makes £100,000 each year from the general public. Every year, Omah spends almost £16,000 on her standard-rated costs. VAT is not included in either of the figures. Omah’s transaction is subject to a flat charge of 13 percent.

Because he expects his taxable revenue (without VAT) for the next 12 months to be no more than £150,000, Omah is eligible to join the flat rate programme.
As long as his previous year’s total revenue (including VAT, but excluding sales of capital assets) does not exceed £230,000, he can continue to use the plan.
The most significant benefit of the plan is the reduction in the amount of time needed to administer VAT. So there will be no need for Omah to issue VAT bills to its clients.
When computing Omah’s annual VAT liability, the standard method yields a figure of £16,800 (i.e., 20% of £100,000).
He will save £1,200 year (16,800 – 15,600) by using the flat rate system instead of paying VAT of £15,600 ((100,000 + 20,000 x 20% (output VAT of 100,000)) x 13%).

For enterprises that do not or only acquire a small amount of goods, a flat charge of 16.5 percent has been implemented.

However, it is possible that a question could be asked about whether the flat rate of 16.5 percent is relevant.

Since it’s similar to a rate of 19.8% on net turnover compared to a standard VAT rate of 20%, employing the flat rate plan has very little benefit if the 16.5% rate is used. There is no benefit to the flat rate scheme for businesses with large amounts of input VAT if the 16.5 percent rate is applied.

EXAMPLE 29

Consider that the flat rate scheme percentage for Omah’s trade is actually 16.5%.

A total of £19.800 in VAT is due if Omah opts for the flat-rate method (i.e., $100,000 plus $20,000).
The VAT liability is increased by £3,000 (19,800 – 16,800) from the standard method.

Conclusion

When it comes to VAT, there is a lot to remember, despite the fact that the issue itself is not difficult. A longer-style VAT question will usually include multiple different areas, therefore it’s critical that you cover the entire subject area.

A member of the TX (UK) QA team wrote this article.