Value Added Tax (VAT)


Cash Accounting Scheme

Under the CASH ACCOUNTING SCHEME, VAT is accounted for on the basis of cash amounts RECEIVED and cash amounts PAID in each period, rather than on the normal accruals basis.

The following rules apply to the CASH ACCOUNTING SCHEME:

  • TAXABLE TURNOVER – standard and zero-rated sales – (ex VAT) must NOT EXCEED £1,350,000 per annum.
  • The trader must leave the scheme once TAXABLE TURNOVER – (ex VAT) EXCEEDS £1,600,000 per annum.
  • The trader must have committed NO VAT OFFENCES in the last 12 months and be up to date with their VAT returns.

ADVANTAGES of the scheme:

  • Instant relief for IRRECOVERABLE DEBTS.
  • Improved CASHFLOW.
  • Simplified administration. Can use information from the cash book for the VAT return.

DISADVANTAGES

  • INPUT VAT cannot be recovered until the purchase invoices are paid.

Annual Accounting Scheme

The following rules apply to the ANNUAL ACCOUNTING SCHEME:

  • TAXABLE TURNOVER – standard and zero-rated sales – (ex VAT) must NOT EXCEED £1,350,000 per annum.
  • The trader must leave the scheme once TAXABLE TURNOVER – (ex VAT) EXCEEDS £1,600,000 per annum.
  • The trader must have committed NO VAT OFFENCES in the last 12 months and be up to date with their VAT returns.

Under the ANNUAL ACCOUNTING SCHEME only ONE VAT RETURN is submitted each year BUT VAT PAYMENTS are still paid regularly.

9 payments are made at the end of months 4 to 12. Each payments is 10% of last years’ VAT liability.

The 10th payment / repayment will be the balancing payment for the year and is paid at the same time as the annual return is filed which must be WITHIN 2 MONTHS of the end of the annual return period.


VAT GROUPS: a business CANNOT join the ANNUAL ACCOUNTING SCHEME if they are a member of a VAT GROUP.


Flat Rate Scheme

The following rules apply to the FLAT RATE SCHEME:

  • TAXABLE TURNOVER – standard and zero-rated sales – (ex VAT) must NOT EXCEED £150,000.
  • The trader must have committed NO VAT OFFENCES in the last 12 months and be up to date with their VAT returns.
  • The trader can stay in the scheme until TOTAL VAT-INCLUSIVE TURNOVER (IE. TAXABLE & EXEMPT SUPPLIES) of the business for the previous 12 months EXCEEDS £230,000.

Under the scheme TOTAL VAT-INCLUSIVE TURNOVER (I.E. TAXABLE & EXEMPT SUPPLIES) is multiplied by A FLAT RATE PERCENTAGE

ADVANTAGES: simplified administration

DISADVANTAGES: no INPUT VAT is recovered.


VAT GROUPS: A business cannot join the FLAT RATE SCHEME if they are a member of a VAT GROUP.


Supply of Land & Buildings

STANDARD RATEDZERO RATEDEXEMPT
SALE OF NEW FREEHOLD COMMERCIAL BUILDINGS
(LESS THAN 3 YEARS OLD)
RESIDENTIAL FREEHOLD AND
RESIDENTIAL LEASEHOLD (MORE THAN 21 YEARS)
ALL OTHER SUPPLIES
OF LAND AND BUILDINGS (UNLESS EXEMPTION WAIVED)

Opting to Tax

This is when an owner of a building that would otherwise be EXEMPT decide to waive this exemption. The landlord can then recover INPUT TAX on the purchase and running costs of the building. Tenants of a building that has an option to tax will be able to recover VAT charged on their rent as INPUT tax. Partial and exempt traders for VAT purposes would prefer to rent a property where no option to tax exists.


Partial Exemption

Traders that make BOTH TAXABLE supplies AND EXEMPT supplies are known as PARTIALLY EXEMPT. They can only recover input tax relating to their TAXABLE supplies.

INPUT TAX ON GOODS WHOLLY
USED FOR MAKING TAXABLE SUPPLIES
INPUT TAX ON GOODS WHOLLY
USED FOR MAKING EXEMPT SUPPLIES
NON-ATTRIBUTABLE INPUT TAX ON OVERHEADS
ALL INPUT TAX RECOVERABLEALL INPUT TAX IRRECOVERABLEINPUT TAX RECOVERABLE FOUND BY APPORTIONMENT

The non-attributable input tax that is recoverable is found by using the following fraction:

TOTAL TAXABLE SUPPLIES / TOTAL SUPPLIES

The PERCENTAGE is rounded up to the nearest whole percent and the PERCENTAGE used during the year is usually the ANNUAL PERCENTAGE from LAST YEAR.

A business can decide to calculate the percentage each quarter but whichever method is used it must be applied consistently throughout the year.

An ANNUAL ADJUSTMENT is made at the end of the accounting period.


De Minimis Limits

To avoid a company having to calculate a full partial exemption test, the following simplified exemption tests are available. If a company qualifies as De Minimis then ALL of the INPUT TAX can be recovered.

A company only has to satisfy one of the following tests to be classed as De Minimis.

Simplified Test 1TOTAL INPUT TAX < £625/MONTH
AND
THE VALUE OF EXEMPT SUPPLIES < 50% OF THE VALUE OF TOTAL SUPPLIES.
Simplified Test 2TOTAL INPUT TAX – INPUT TAX DIRECTLY ATTRIBUTABLE TO TAXABLE SUPPLIES < £625/MONTH
AND
THE VALUE OF EXEMPT SUPPLIES < 50% OF THE VALUE OF TOTAL SUPPLIES.
De Minimis Test INPUT TAX RE: EXEMPT SUPPLIES < £625/MONTH
AND
INPUT TAX RE: EXEMPT SUPPLIES < 50% TOTAL INPUT TAX

Rather than carry out a De Minimis test each quarter, a company can do an ANNUAL TEST.

Annual Test

An annual De Minimis test is allowed if:

  • the business was DE MINIMIS LAST YEAR
  • the test is applied CONSISTENTLY throughout the year
  • INPUT TAX is not expected to exceed £1 MILLION in the current year.

Pre-Registration Input VAT

Pre-registration INPUT VAT can be recovered on:

GOODS: if acquired for business purposes, in the last 4 years and the goods are still in hand at the date of registration.

SERVICES: if supplied for business purposes and int he SIX MONTHS prior to registration.


Transfer of Going Concern

On the sale of a business it will be necessary to charge VAT on the sale proceeds for taxable assets transferred. However, NO VAT is charged when TRANSFER OF GOING CONCERN rules apply.

ALL OF THE FOLLOWING TRANSFER OF GOING CONCERN (TOGC) RULES MUST APPLY:

  • The business is transferred as a GOING CONCERN.
  • There is NO significant BREAK IN TRADING.
  • The SAME TYPE OF TRADE is continued after the transfer.
  • The new owner is VAT registered or will be immediately after transfer. Alternatively, the new owner can take over the VAT registration.

However, if a building is sold and the vendor had OPTED TO TAX, to bring the building within the TOGC rules, the buyer would need to OPT TO TAX also, so that NO VAT is charged.

VAT Cessation of Trade

On CESSATION OF TRADE a business must notify HMRC within 30 days of ceasing to make TAXABLE SUPPLIES.

OUTPUT tax must be accounted for on ANY BUSINESS ASSETS IT STILL HOLDS AT THE DATE OF CESSATION in respect of INPUT TAX that was previously recovered. However, there is no need to account for output tax if it is less than £1,000.


Capital Goods Scheme

The CAPITAL GOODS SCHEME applies to PARTIALLY EXEMPT BUSINESSES that spend significant amounts on LAND & BUILDINGS or COMPUTERS & COMPUTER EQUIPMENT.

VALUE (VAT EXCLUSIVE)ADJUSTMENT PERIOD
LAND & BUILDINGSMORE THAN £250,00010 YEARS
COMPUTERS & COMPUTER EQUIPMENTMORE THAN £50,0005 YEARS

A partially exempt trader making 70% taxable supplies can initially recover 70% of the INPUT TAX on the item. Adjustments are made over the ADJUSTMENT PERIOD if the proportion of exempt supplies changes.

NOTE: The year of purchase counts as ADJUSTMENT PERIOD 1.

The ANNUAL ADJUSTMENT is calculated as:

(TOTAL INPUT TAX / 10 YEARS) x (% TAXABLE SUPPLIES NOW – % TAXABLE SUPPLIES ORIGINALLY)

For example, if a building is bought for £6,000,000 INCLUSIVE OF VAT. And the building is used 75% for TAXABLE SUPPLIES and 25% for EXEMPT SUPPLIES, then initially, (20/120) x £6,000,000 = £1,000,000 INPUT VAT x 75% = £750,000 can be reclaimed initially. If the proportion of taxable supplies drops to 60% in year 6 then an adjustment is needed. The adjustment will be (£1,000,000/10) x (0.6 – 0.75) = -£15,000. Therefore £15,000 must be repaid to HMRC in year 6. The same amount will be paid in each of years 7, 8, 9 and 10 if the proportions stay at 60% taxable supplies.

ADJUSTMENTS FOR SALE:

On DISPOSAL of an asset under the CAPITAL GOODS SCHEME during the adjustment period, an ADJUSTMENT is made as normal in the year of disposal (as if the asset had been used for the full year).

A further adjustment is needed for the remaining adjustment period. If the disposal was TAXABLE (eg. OPTION TO TAX EXISTS or the BUILDING WAS LESS THAN 3 YEARS OLD), then we assume 100% TAXABLE SUPPLIES for the REMAINING PERIODS. If the disposal was EXEMPT (no option to tax exists) we assume 0% TAXABLE SUPPLIES for the REMAINING PERIODS.


Overseas Aspects of VAT

EXPORTTO EUZERO RATED SUPPLY IF TO VAT REGISTERED ENTITY BUT STANDARD RATED IF TO NON REGISTERED PERSON / ENTITY
EXPORTTO NON EUZERO RATED SUPPLY AND CAN RECOVER INPUT VAT
IMPORT FROM EUEU SUPPLIER ZERO RATES SUPPLY. UK VAT REGISTERED BUSINESS THEN SELF SUPPLIES UNDER THE REVERSE CHARGE SYSTEM. ACCOUNT FOR OUTPUT TAX AND INPUT TAX WHICH CONTRAS OUT.
IMPORT FROM NON-EUVAT PAID ON ENTRY INTO THE UK (AS IF IT WERE A CUSTOMS DUTY). THE VAT PAID CAN THEN BE RECLAIMED AS INPUT VAT ON THE VAT RETURN.

Services

VAT rules for the IMPORT and EXPORT of SERVICES are similar to that of goods.

When SERVICES are provided to a business the PLACE OF SUPPLY is the PLACE WHERE THE CUSTOMERS business is established.

An IMPORTING company will be required to account for OUTPUT VAT on the SUPPLY OF SERVICES under the REVERSE CHARGE PROCEDURE. It will then be able to recover the OUTPUT VAT as INPUT VAT in the normal way.