ACCA F6 FA09 Study Text 2010

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Chapter 23: Value Added Tax

The main supplies that are outside the scope of VAT are as follows:

 Wages and salaries

 Dividends

 Other taxes such as stamp duty and car tax.

It is important to appreciate that no VAT is charged on exempt supplies or on

supplies outside the scope of VAT. These supplies are ignored in determining

whether a person should register for VAT.

By definition, taxable supplies are any other supply of goods and services that are

not exempt or not outside the scope of VAT. However, there are three types of

taxable supply, each taxable at a different rate of VAT.

1.4 Rates of VAT

Taxable supplies may be:

 standard rated

 charged at a reduced rate, or

 zero-rated.

Reduced-rate taxable supplies

The reduced rate of VAT is 5%. The main reduced rated supplies are as follows:

 Domestic fuel and power

 Installation of energy-saving materials

 Children’s car seats.

Zero-rated taxable supplies

The zero-rate generally applies to supplies of goods and services that are considered

to be essential requirements. The main zero-rated supplies are:

 Food for human and animal consumption, except food supplied in the course of

catering (e.g. in restaurants, hotels etc), luxury food (e.g. sweets and cakes), pet

foods and hot take-away food

 Books, pamphlets, newspapers, journals, maps, music etc but not general

stationery

 Construction of new residential buildings or those used for charitable purposes

 Transport services provided the vehicle carries more than 11 passengers (e.g.

trips in buses, coaches, ships, trains, airplanes but not taxis)

 Prescription drugs and medicines and aids for the disabled

 Gifts to charities

 Children’s clothing and footwear.

Zero-rated supplies are taxable supplies, but the VAT rate charged is 0%. Therefore

no VAT is charged. However (unlike exempt supplies or supplies outside the scope

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of VAT) zero-rated supplies are considered in determining whether a person should

be registered for VAT.

Standard rate of VAT

The standard rate applies to any other supply of goods and services not listed

above.

For supplies up to 31 December 2009, the standard rate of VAT is calculated as:

 15% of the VAT exclusive (or net) price, or

 3/23 (i.e. 15/115) of the VAT inclusive (or gross) price.

For supplies from 1 January 2010, the standard rate of VAT is calculated as:

 17½% of the VAT exclusive (or net) price, or

 7/47 (i.e. 17½/117½) of the VAT inclusive (or gross) price.

A question will not be set involving a VAT period that spans 31 December 2009.

1.5 The mechanics of VAT

VAT is a tax on the final consumer of goods and services. It is levied at the point of

sale.

HMRC could collect all the tax from the final retailer at the end of the production

and distribution process. However, rather than waiting until the final sale of the end

product or service, HMRC requires all businesses that are required to be registered

for VAT to account for VAT at each stage in the production and distribution

process.

Every business liable to charge VAT must therefore charge VAT on its supplies,

such as its sales. This is known as output VAT. It must pay the output VAT to

HMRC, usually on a quarterly basis.

However, as the business is not the final consumer of the goods and services, it can

recover any VAT that it has paid to its suppliers on its raw material purchases and

other expenses. These VAT payments are known as input VAT.

A VAT-registered business therefore only pays HMRC the difference between its

output and input VAT.

VAT-registered businesses are therefore acting as collectors of tax on behalf of

HMRC and only account for the tax on the value that they have added to the

product in that stage of the production and distribution process. (This is how the

name of the tax was derived.)

Chapter 23: Value Added Tax

VAT registration

 Compulsory registration

 Exemption from registration

 Voluntary registration

 Deregistration

 Transfer as a going concern

2 VAT registration

2.1 Compulsory registration

A person is required to register for VAT if they make taxable supplies in excess of

the VAT threshold of £68,000. This VAT registration threshold is given in the tax

rates and allowances in the examination.

Failure to register for VAT is an offence. Penalties may be payable and any

outstanding VAT that should have been accounted for from the compulsory

effective registration date will be payable to HMRC.

There are two circumstances where compulsory registration is required. These are

where the business exceeds the VAT threshold, based on:

 historical taxable supplies (known as the historic test)

 taxable supplies in the following 30 days (known as the future test).

Historical test rules

The historical test rules are as follows:

(1) A person must register for VAT if, at the end of any month, the annual

turnover of taxable supplies has exceeded the threshold of £68,000.

(2) Exception to this rule. A person is not required to register for VAT in these

circumstances if the taxable turnover in the next 12 months is not expected to

exceed the deregistration threshold of £66,000. Deregistration is explained

later.

(3) Taxable supplies are the total of all standard-rated, zero-rated and reduced-

rate supplies, but excluding supplies of capital items (for example, sales of

non-current assets of the business).

(4) HMRC must be notified within 30 days of the end of the month in which the

threshold is exceeded.

(5) The newly-registered business/person must charge VAT from the first day

after the end of the month in which notification to HMRC is required, or an

earlier agreed date.

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Example

Kim commenced trading on 1 January 2009. In the first four months of trading her

sales totalled £3,800 per month. All her sales are standard-rated supplies. Thereafter

her sales have been as follows:

2009

 2010

May 4,000

anuary 6,300

une 4,200 February 7,100

uly 4,400 March 8,900

August 4,500 April 10,200

September 4,600 May 12,800

October 4,700

une 13,500

November 4,100

December 5,800

Required

State:

(a) when it is compulsory for Kim to register for VAT

(b) when she must notify HMRC and

Answer



12monthsended



Workings

Taxable

supplies

 £

31December2009 (4×£3,800)+£4,000+£4,200+£4,400+£4,500+

£4,600+£4,700+£4,100+£5,800 51,500

31January2010 £51,500‐£3,800+£6,300 54,000

28February2010 £54,000‐£3,800+£7,100 57,300

31March2010 £57,300‐£3,800+£8,900 62,400

30April2010 £62,400‐£3,800+£1

0,200 68,800

Kim exceeded the £68,000 threshold on 30 April 2010. She is therefore required to

She must notify HMRC by 30 May 2010 (i.e. 30 days after the end of the month in

which the threshold is exceeded).

She must start to charge VAT from 1 June 2010 (i.e. the first day of the following

month after notification).

Chapter 23: Value Added Tax

Future test rules

The future test rules are as follows:

(1) A person must register for VAT if at any time there are reasonable grounds to

believe that the taxable turnover in the next 30 days in isolation will exceed

£68,000.

(2) Taxable supplies are the total of all standard-rated, zero-rated and reduced-

rate supplies, but excluding supplies of capital items (for example, sales of

non-current assets of the business).

(3) HMRC must be notified within the 30-day period in which it is thought that

the threshold will be exceeded.

(4) The newly-registered business/person must charge VAT from the first day of

the 30 day period in which it is thought that the threshold will be exceeded, or

an earlier agreed date.

This test is less likely to be satisfied than the historical test. It only applies if the

business has on average a taxable turnover of less than £5,600 per month but then

receives a large order or signs a large contract in excess of £68,000 to be completed

in the next month.

Example

Suppose that in the previous example, Kim signed a contract for £70,000 on 8

September 2009 for work to be completed by the end of the month.

Required

State:

(a) when it is compulsory for Kim to register for VAT

(b) when she must notify HMRC and

Answer

On 8 September 2009, Kim believes that she will exceed the threshold in the next 30

days, therefore she must register for VAT.

Kim must notify HMRC by 8 October 2009 (i.e. by the end of the 30 day period in

which it is thought that the threshold will be exceeded).

She must start to charge VAT from 8 September 2009 (i.e. the first day of the 30 day

period).

Note: The historical test is checked at the end of every month. The future test

should be considered every day.

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Registration certificate and VAT registration number

When a person registers for VAT, HMRC will issue a registration certificate and a

VAT registration number. This number must appear on the business invoices and

other documentation from the effective date of registration.

2.2 Exemption from registration

When a person makes taxable supplies in excess of the VAT threshold, VAT

registration is compulsory. However, where the taxable supplies are all zero-rated,

HMRC will allow the person exemption from registration.

The advantage of exemption from registration is that the business does not have to

incur the administrative burden and costs of accounting for VAT. However, the

disadvantage is that it will be unable to recover any input VAT suffered.

A taxable person is therefore only likely to claim the exemption if they do not have

significant amounts of input VAT to recover, so that the benefits of recovering the

input VAT paid are less than the administrative costs of accounting for VAT.

2.3 Voluntary registration

A person who makes taxable supplies below the VAT threshold is not required to

Advantages of voluntary registration

The main advantage of voluntary registration is that input VAT can be recovered

from HMRC on purchases and expenses. This will save money for the business by

reducing the cost of its purchases by the amount of the input VAT.

It is particularly advantageous to register if the business is zero-rated, as it can

recover input VAT but does not have to pay output VAT as it is charged at 0%.

In this situation the business will receive regular repayments of VAT from HMRC.

These will help the cash flow of the business.

A possible further advantage of voluntary registration is that being VAT-registered

may suggest to third parties that the business has a taxable turnover of at least

£68,000, giving them a perception of an enduring, sizeable and successful business.

Disadvantages of voluntary registration

Registering for VAT will mean that the business is required to maintain up-to-date

accurate accounting records. The administrative burden of accounting for VAT to

HMRC will increase the costs of running the business.

The person must charge VAT on sales, adding to the amounts payable by

customers. However, this is not a disadvantage if:

 the business is zero-rated (and so does not charge any VAT), or

Chapter 23: Value Added Tax

 all customers are VAT-registered and so can recover the VAT charged (as their

input VAT).

However, if customers are not VAT-registered (e.g. members of the general public)

they cannot recover the VAT charged and so have to suffer the VAT payable in the

prices they pay. In this situation, the business has a choice between two unwelcome

options:

 It may keep its total selling prices, by reducing the net-of-VAT sales prices. This

means in effect that it absorbs the cost of the VAT itself and reduces its profit

margins.

 Alternatively, it may add VAT to its normal selling prices. This will risk losing

customers to competitor businesses that are not VAT-registered and so can sell

at a lower price.

2.4 Deregistration

Compulsory deregistration

A person is required to deregister for VAT when it ceases to make taxable supplies.

In these circumstances, deregistration is compulsory.

Notification must be given to HMRC within 30 days of ceasing to make taxable

supplies. Deregistration is effective from the date when taxable supplies cease or an

agreed later date.

Voluntary deregistration

Voluntary deregistration is allowed if at any time:

 there are reasonable grounds for a registered person to estimate that its taxable

supplies in the next 12 months will not exceed the deregistration threshold of

£66,000, and

 the fall in value of taxable supplies is not due to a temporary reduction.

In this situation, deregistration will be effective from the date on which the request

for deregistration is made or an agreed later date.

The deregistration threshold is given in the tax rates and allowances in the

examination.

Consequences of deregistration

On deregistration there is a deemed supply of all of the business assets held by the

business on the last day of registration. VAT is therefore charged on the non-current

assets (except cars) and trading stock owned by the business on which input VAT

has been recovered in previous VAT returns.

Output VAT is charged on this deemed supply at the standard rate unless the

amount payable is less than £1,000, in which case it is ignored.

Paper F6: Taxation FA2009 (UK)

2.5 Transfer as a going concern

Where a business is transferred/sold as a going concern, no VAT is charged as long

as the following conditions are satisfied:

 The whole business (or a significant part of a business which is capable of

independent operation) is transferred as a going concern.

 There is no significant break in the normal trading pattern.

 The assets continue to be used in the same type of trade.

 The transferee business is already VAT-registered or will become registered

immediately after the transfer.

Example

HT Ltd has been registered for VAT since 1997, but intends to cease trading on 31

March 2010. On the cessation of trade, HT Ltd can either sell its non-current assets

on a piecemeal basis to individual purchasers, or it can sell its entire business as a

going concern to a single purchaser.

Required

Outline the VAT consequences of each course of action.

Answer

Sale of assets on a piecemeal basis

 HT Ltd will cease to make taxable supplies so its VAT registration will be

cancelled on 31 March 2010 or an agreed later date.

 The company will have to notify HMRC by 30 April 2010 (i.e. 30 days after the

date of cessation).

 Output VAT must be charged in respect of the non-current assets sold, unless

the VAT amounts to less than £1,000.

Sale of business as a going concern

 If the purchaser is already registered for VAT then HT Ltd’s VAT registration

will be cancelled, as above.

 If the purchaser is not registered for VAT then it can take over the VAT

registration of HT Ltd, if it wishes.

 A sale of a business as a going concern is not treated as a taxable supply for

VAT, and therefore output VAT is not due on the sale of the business assets.

Chapter 23: Value Added Tax

Accounting for VAT

 Principles of VAT accounting and payment dates

 Output VAT

 Input VAT

 Tax point

 Relief for impairment losses on trade debts

 Proforma computation: VAT accounting

 Impact of VAT on the trading income assessment

3 Accounting for VAT

3.1 Principles of VAT accounting and payment dates

For each return period, every business liable to charge VAT:

 charges output VAT on its taxable supplies

 recovers input VAT on its raw material purchases and other expenses

 completes a VAT return and submits it to HMRC

 accounts to HMRC for any VAT payable if there is excess output VAT (if output

VAT exceeds input VAT) for the return period

 claims a repayment of excess input VAT (if input VAT exceeds output VAT) for

the return period.

The VAT return must be completed and submitted to HMRC (with payment if

necessary) by the last day of the month following the end of the return period. For

example, a quarterly return to 31 July 2009 must be submitted by 31 August 2009.

Any repayment due from HMRC will normally be repaid within 14 days of the end

of the return period. However, HMRC will not refund VAT that was originally paid

more than four years earlier. (This four year time limit replaces the previous limit of

three years. However, it does not permit claims to be brought for periods prior to 1

April 2006 as these were already out of date at the time the new rules were

introduced.)

Most businesses account for VAT on a quarterly basis. However, monthly

accounting is allowed by HMRC on request. Businesses making wholly zero-rated

supplies usually prefer monthly accounting as they are in a regular repayment

situation and prefer monthly repayments to quarterly repayments.

Paper F6: Taxation FA2009 (UK)

Large businesses with an annual liability of more than £2 million must pay VAT by

instalments as follows:

Payment date Nature of the payment Amount of the payment

At the end of the second

month in a quarter

Payment on account 1/24

of the total VAT

liability for the previous

year

At the end of the last

month in a quarter

Payment on account 1/24

of the total VAT

liability for the previous

year

At the end of the first

month in next quarter

Balancing payment Balancing amount for the

quarter

3.2 Output VAT

Output VAT is charged on taxable supplies of goods and services.

The main types of taxable supply of goods are as follows:

 Sales of goods (for a consideration, usually a money payment)

 Gifts of business assets (excluding gifts to the same person that total no more

than £50 excluding VAT in any 12 month period and gifts of trade samples)

 Goods withdrawn from the business by the owner or an employee.

The main types of taxable supply of services are as follows:

 Sales of services (for consideration)

 Hiring goods to a customer

 Temporary private use of business assets by the owner or an employee

 Private use of services supplied by the business by the owner or employee

 Provision of private fuel for the owner or an employee.

Note that the gift of services and the private use of cars are not taxable supplies.

Output VAT is charged at the appropriate rate on the value of the taxable supply.

The value of taxable supplies is straightforward where there is a sale at arm’s length

for full consideration. VAT is charged at the appropriate rate on the sale price

(excluding VAT).

Special rules apply to the following supplies:

 Gifts of business assets: The value of the taxable supply is the replacement

price (i.e. the price payable by the person making the supply, at the time of the

supply, to replace the goods with identical items, taking account of the age and

condition of the goods gifted).

 Private use of business assets: The value of the taxable supply is the cost to the

taxable person providing the service.

 Private fuel: Scale rates are set by HMRC (see below).