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Business Taxation Presentation

MS 3255

OutlineIntroduction –

Definition of VATThe scope and

nature of VATTypes of supplyVAT registration

compulsory Voluntary

registration Recovery of pre

registration input

DeregistrationVAT on sale of a

businessThe time of supplyThe value of a

supply Recovery of input

VATRelief for impaired

debtsExample

What is VAT?An indirect tax

Charged on most goods and services, supplied within the UK

is borne by the final consumer

VAT is a tax that's charged on most goods and services that VAT-

registered businesses provide in the UK. It's also charged on goods and some services that are imported

from countries outside the European Union (EU), and brought into the UK

from other EU countries.

In other words….

A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.

The scope and nature of VATThree essentials needed before VAT

can be charged Taxable personTaxable supply Business

Taxable person- One who is or should be registered for

VAT

Taxable supply- Everything which is not exempt or

outside the scope of VAT

Business- It must be made in the course of

furtherance of a business carried on by a taxable person.

Input and output VAT

Input VAT Output VATBusinesses pay

input VAT on their purchases of goods and services.

Reclaimable from HMRC.

Registered businesses charge output VAT on their sales of taxable goods and services.

Payable to HMRC.

Types of supplySupplies can be taxable, exempt or

outside the scope of VAT.VAT is charged on taxable

supplies but NOT on exempt or supplies which are outside the scope of VAT.

Only taxable supplies are taken into account in determining whether a trader needs to register for VAT.

Items not covered by VAT

Exempt supplies

Outside the scope of VAT

Exempt itemsinsuranceproviding crediteducation and training, if certain conditions are

metfundraising events by charities, if certain

conditions are metmembership subscriptions, if certain conditions

are met most services provided by doctors and dentistsfinance: this includes wide range of financial

services, such as making loans, hire purchases etc.

Outside the scope of VATThere are some things that aren't in the UK

VAT system at all – (outside the scope of VAT). They are not taxable supplies and no VAT is charged on them.

Examples:non-business activities like a hobby - for

example, you might sell some stamps from your collection

fees that are fixed by law - known as 'statutory fees' - for example the congestion charge

Rates of VATTaxable supplies are charged to VAT at

onf of three rates:

- Zero rate – 0%- Standard rate - 17.5% (default rate)- Reduce rate – 5%

Examples of reduced-rated itemsdomestic fuel and powerinstalling energy-saving materialssanitary hygiene productschildren's car seats

Examples of zero-rated itemsfood - but not meals in restaurants ,

hot takeaways or classed as luxury items.

books and other printed matter. (e.g. newspapers, books and maps).

children's clothes and shoespublic transport.

The difference between exempt and zero-rated

Traders making exempt supplies cannot charge VAT to their customers.

Traders making zero-rated supplies charge VAT but at 0%.

The key difference is that traders making zero-rated supplies can reclaim the input tax they suffer, those making exempt supplies cannot.

VAT registrationcompulsory to register if taxable supplies

exceeds the registration limits.TESTS

FUTURE PROSPECT

HISTORIC TURNOVER

Cumulative total for the last 12 month exceeds the registration limits of £68,000

•Notify HMRC within 30 days when it exceeds.•Registration is effective from end of month

•Notify HMRC before the end of 30 days.•Registration is effective from the beginning of the 30 days

Taxable supplies for the next 30 days in isolation are expected to exceed £68,000.

CONSEQUENCES OF REGISTRATION

Once registered, a taxable person must start accounting on VAT:

Output tax must be charged on the taxable supplies.

Each registration trader is allocated a VAT registration number.

Each registered trader is allocated a tax period for filling returns.

Input tax is recoverable on business purchases and expenses.

Appropriate VAT records must be maintained.

NUMBER OF REGISTRATION

A person can be registered only once.Where a partnership is concerned, separate

business carried by the same partners, will have single registration.

VOLUNTARY REGISTRATION

ADVANTAGES DISADVANTAGES

Avoids penalties for late registration.

Can recover input VAT on purchases.

Can disguise the small size of the business.

Business will suffer the burden of compliance with all VAT administration rules.

Business must charge VAT. This makes their goods comparatively more expensive than other unregistered business.

RECOVERY OF PRE-REGISTRATION INPUT VAT

VAT incurred before registration cannot be accounted for as input VAT. If these conditions applied, then it can be treated as input tax and can be reclaimed.

• The goods must be acquired for business purposes and should not be sold or consumed prior to registration.• The goods have not been acquired more than three years prior to registration.

• The services must be supplied for business purposes.

• The services should not have been supplied more than six months prior to registration.

GOODS SERVICES

DeregistrationA person must deregister when he ceases to make taxable supplies:

• notify HMRC within 30 days of ceasing to make taxable supplies.

•VAT registration is cancelled from the date of cessation or a mutually agreed later date.

A person may voluntarily deregister even if the business continues and if there is evidence that taxable supplies in the next 12 months will not exceed £66,000:

• starting at any time.

•The onus is on the trader to satisfy HMRC that they qualify.

•VAT registration is cancelled from the date of request or an agreed later date.

Effect of deregistration

VAT output tax must be accounted for on the value of fixed assets and stocks held at the date of deregistration, on which a deduction for input tax has been claimed.

The final tax liability is waived if it is ≤ £1,000.

VAT on sale of Business

Sale of business

Normal taxable supply

Transfer of a going concern

Outside the scope of VAT if

conditions met

Charge output VAT

on sale price

Transfer of registration

Both the transferor and the transferee may make a joint election, for the transferor’s registration to be transferred to the transferee.

The transferee assumes all rights and obligations in respect of the registration, including the liability to pay any outstanding VAT.

The tax point it also known as time of supply

to identify the quarter in which it falls.

change in VAT standard rate or change in classification of a supply, necessary to know whether a supply had been made before or after the date of change.

Special rules for certain supplies of goods :

Goods on sale or return : when the sale is adopted by the customer, or 12

months after dispatch of the goods. Continuous supplies : the earlier of a tax invoice being issued and a

payment received. Sales under hire purchase : when the goods are collected, delivered or

made available.

The value of supply normally the price (before VAT) charged by supplier.

VAT fraction for standard – rated goods : VAT exclusive amount refer to the price of

goods before VAT. VAT is 15% or 17.5% of the VAT exclusive

amount.

VAT inclusive amount refer to the price of goods includes VAT.

VAT is (15/115) or (17.5/117.5) of the gross amount.

Discounts : VAT must be calculate as if the

maximum discount available was taken.

Goods for own use : VAT must be accounted for on

the replacement value of the supplies.

Gifts : Gifts of stock or fixed assets are

treated at replacement value.

Recovery of input VATRecoverable by taxable persons on

goods and services which are supplied to them for business purposes.

Irrecoverable under condition of:Business entertainingCars, unless they are 100% used for

business purpose.

Example: £5400 on business entertaining and

£2400 on staff entertaining

No VAT recoverable on business entertaining

VAT inclusive figure is £6210 ( £5400 + 15% of £5400)

charged against profit

staff entertaining will be recoverable of £360 ( 15% of £2400)

VAT exclusive amounted of £2400 will be charged against profit.

Motor expenses can recover input VAT incurred in the

running cost of a car examples are fuel and repairs.

Business pays for all fuel costs and can recover all input VAT

If there is some private use of the car

Driver reimburses business the full cost for fuel for private journeys

Driver does not reimburse business the full cost of fuel for private journeys.

Output VAT is payable on the amount reimbursed

Output VAT is payable on a scale charge

Scale charge depends on the with CO2 emissions of the car.

Relief for impaired debtsVAT output tax is accounted for when

an invoice is issued.

Sales irrecoverable ; Seller has paid VAT to HRMC.And never recover VAT from the

customer.Thus, sellers are able to claim VAT

bad debt relief.

Conditions:At least six months must have elapsed

since payment from the debtor was due.The debt must have been written off in

the seller’s VAT account.Relief is obtained by adding the VAT

element of the bad debt to the input tax claimed.

Claims for bad debt relief are subjected to a three- year time limit.

Comprehensive ExampleDynamo Ltd commenced trading as a

wholesaler on 1 November 2009. Its sales have been as follows:

The company’s sales are all standard-rated, and the above figures are exclusive of VAT.

£ £

2009 Nov 3,500 2010 June 4,800

Dec 4,100 Jul 4,600

2010 Jan 4,600 Aug 5,400

Feb 4,400 Sept 5,900

Mar 3,800 Oct 7,800

Apr 4,000 Nov 9,100

May 4,200 Dec 10,100

RULE: Excess £68,000 in taxable supplies during any 12-month period, will result in compulsory registration.

CALCULATION : Taxable supplies 1st January 2010 – 31st December 2010 - £68,700.

ACTIONS : Notify HMRC before 1st February 2011 (30 days after the end of the period)

The company will be registered from 1st February 2011 or an agreed earlier date.

£ £

2009 Nov 3,500 2010 June 4,800

Dec 4,100 Jul 4,600

2010 Jan 4,600 Aug 5,400

Feb 4,400 Sept 5,900

Mar 3,800 Oct 7,800

Apr 4,000 Nov 9,100

May 4,200 Dec 10,100

NO Questions?