What is an indirect tax?
A tax levied by the state on goods and services.
What is the basic mechanism by which the government takes possession of indirect taxation?
Indirect taxes are collected by intermediaries (the merchant), usually in the form of higher prices, and passed on to the government. This way, only the final consumer is actually taxed.
Give examples of indirect taxes in the UK.
Taxes on alcohol, tobacco and petrol; stamp duty (certain documents especially land sale) and VAT.
What is the current European Union range of VAT charge (2019)?
What's the UK rate?
17% to 27%
The UK rate is 20%
Which government department in the UK deals with the collection of VAT?
Her Majesty's Revenue and Customs (HMRC)
Which laws govern the collection of VAT in the UK?
Value-Added Tax Act (1994) and the annual Finance Acts (set out every year in the budget).
VAT legislation in European Union Countries must comply with Directive 2006/112/EC
Who can register for VAT?
What are the 4 HMRC definitions of a business?
1 - earning income by carrying on trade, vocation or profession (by being self-employed or otherwise);
2 - provision of benefits as a club, association or similar body in return for a subscription or other form of payment;
3 - provision of certain other activities as a club or other recreational body, charity or other non-profit making body;
4 - they charge admission to a premise.
Who can register for VAT?
Businesses that are one of the following:
any other org or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc.
What is a taxable person? Which activities are covered by the registration?
A taxable person is either an individual or a legal entity that is in business.
The business is not registered, the individual or entity is.
Each registration covers all business activities of the registered person.
Who cannot register for VAT even if they meet the criteria to be considered a business?
Persons who carry activity only sporadically.
Exemples are recreational, avocational or sporadiacal activities are not VAT 'registerable'.
Regular activity is, however considered VAT 'registerable'.
What is the threshold for VAT registration in the UK?
On what income is it calculated?
The threshold is £85,000 turnover over the previous 12 months rolling (not accounting or calendar year)
The turnover value is calculated from taxable sales, whether full, reduced or zero rates. VAT exempt sales are not recognised in the calculation.
When can a business deregister for VAT?
When turnover is £81,000 or less for the previous 12 months rolling.
When can a business charge and/or reclaim VAT?
When it is VAT registered.
If a taxable person runs more than one business, how is VAT liability treated?
The turnover of all the separate businesses under the person are added together. However, if the businesses are separate legal entities there may be no need to add up the revenues.
What is the VAT procedure in the event of the takeover of a "going concern" business?
The transaction is outside the scope of VAT; however, if the sum of the last 12 months' turnover of both companies exceeds the registration threshold and the acquired company is VAT-registered then the acquiring company must be registered for VAT on the day of the transfer.
What practices may be deemed by the HMRC as VAT evasion?
Give 3 examples.
When persons artificially separate one business into smaller parts:
1 - Separate entities selling to registered and non-registered customers; one entity registered for VAT selling to registered customers and the other unregistered selling to unregistered customers;
2 - The same equipment or premises being used by different entities on a regular basis. The asset is owned by one of the parties, who charges rent to others. Takeaway food operations, launderettes and barber shops;
3 - Splitting up what is usually a single sale. Bed and breakfast.
What are the penalties for failure to register for VAT?
All the VAT due from the moment in which registration should have occurred up to the present moment; and a fine (a percentage of the VAT due) dependent on the degree of lateness:
up to 9 months late - 5%
10 to 18 months late - 10%
over 18 months late - 15%
the minimum penalty of £50.
in serious cases, there may be criminal liability
When registered for VAT, what must a business do?
It must charge VAT on all qualifying transactions.
What are the rules for reclaiming pre-registration VAT?
4 years back for goods, which must still be in use upon registration;
6 months for services.
Pre-registration VAT claims are only allowed on expenses directly related to setting up the business.
What is output tax?
VAT charged on sales.
what is input tax?
VAT paid on all purchases.
How often will the difference between output and input taxes be calculated by businesses?
what will happen then?
Every 3 months.
Explain how VAT works.
Only the final consumer pays, and whatever the final consumer pays is what HMRC collects from the sellers.
How far back can VAT officer peruse? What records should be kept?
How often will the average business be visited?
6 years plus the current.
Sales Day Book;
Sales Return Day Book;
Purchase Day Book;
Purchase Returns Day Book;
Sales and Purchase Invoices;
VAT Control Account.
Once every 5 years.
What will the VAT officer do at the end of the visit?
1 - review with the owner the work carried out;
2 - explain any concerns, discuss them with the owner and agree any future action needed;
3 - explain any adjustments needed on the VAT payable and agree on them with the owner as far as possible and explain how it will be made;
4 - tell the owner if they've underpaid or overpaid.
Zero rate VAT vs Exempt VAT;
what is the difference?
Businesses who sell zero-rated items can claim and charge VAT.
Business who sell exempt items cannot charge nor claim any VAT.
What types of goods and services will carry a 5% VAT rate?
1 - Energy saving materials for residential properties. This includes the installation of central heating controls, insulation and solar panels (if you do it yourself then the goods are charged at standard rate;
2 - Smocking cessation goods as nicotine patches and gum;
3 - Women's sanitary products;
4 - Fuel for domestic premises (fuel for businesses is standard rate);
5 - Renovating or converting a residential building;
6 - Children's car seats.
What types of goods carry a zero-rate VAT?
1 - Equipment for the blind and disabled;
2 - Prescriptions from a registered pharmacist;
3 - The construction of new residential buildings;
4 - Transport in a bus, aeroplane or any vehicle as long as it is designed to carry 10 or more people;
5 - Caravans more than 7 metres long;
6 - Books, magazines, and newspapers;
7 - Children's clothing;
8 - Cycle and motorcycle helmets;
9 - Food and drink, but not alcoholic drinks, confectionary, savoury snacks, hot takeaways or food catering.
Which types of items are exempt from VAT?
1 - Many sporting activities, but not admission charges for spectators;
2 - betting and gaming;
3 - Some admission charges to cultural events;
4 - Antiques and works of art sold to public collections;
5 - urial and cremation;
6 - Medical treatment and health services;
7 - Education carried out by schools and colleges
8 - The sale or leasing of land and buildings in most circumstances;
9 - Postal services provided by the Royal Mail;
10 - The supply of loans or credit;
11 - Insurance;
12 - Charges associated with a current, deposit or savings account offered by a bank.