1. A guide to the fundamental principles of VAT
Chris Siddle
Tolley Exam Training

2. Contents 1 The fundamental principles of VAT 2 Types of Supply 3
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Contents 1
The fundamental principles of VAT 2
Types of Supply 3
Taxable Person / Registration 4
The VAT Return (VAT 100) 5
Time of Supply – The Tax Point 6
Bad Debt Relief 7
Alternative VAT Return schemes

3. The fundamental principles of VAT
Although VAT is ultimately suffered by the final consumer in a chain of transactions the way that the VAT system works is that VAT is collected piecemeal at every stage in that long chain.
At each point in the chain the supplier charges the appropriate output tax (on sales
going out) to the next person in the chain and recovers any input tax (incurred on
purchases coming in) he paid to the previous person in the chain.
Therefore the supplier accounts for VAT as follows:
Output tax on sales going out X
Less: Input tax on purchases coming in (X)
VAT due to/(from) HMRC X
This series of output tax less input tax accounting of VAT will occur right up until the final sale to the member of the public or the ultimate consumer.
However, although VAT is collected piece by piece along the chain of transactions
ultimately it is the final consumer who bears the full cost of the VAT being collected

4. Basic conditions required to charge VAT
There are five basic conditions to determine whether a supply merits a charge to VAT:
1. The supply must amount to a supply of goods or services.
2. The supply must have been made in the United Kingdom.
3. The supply must have been made in the course or furtherance of business.
4. It must be a taxable supply.
5. The supply must be made by a taxable person.

5. Types of Supply There are two types of supply:
Exempt – no VAT is added
Taxable – VAT is added but at what rate?
Certain supplies are exempt supplies, these include:
supplies of land (sales, leases, rent);
insurance and finance;
betting, gaming and lotteries;
health, welfare and education.
A business NEVER adds VAT to an exempt supply

6. Taxable Supplies VAT is added to a taxable supply – but what rate?
There are three types of taxable supply:
• zero-rated – 0%
Food, Books, Transport, Children’s Clothes
• reduced rate – 5%
Domestic electricity & gas, Cycle helmets, Children’s car seats
• standard-rated – 20%
Everything else!!!

7. Taxable Person / Registration
The VAT registration limit (threshold) is £83,000.
For compulsory registration there are two tests which can be considered:
the historic test; or
ii. the future test.
The historic test looks at past taxable supplies, but we never look back more than the preceding 12 months. This historic test is carried out at the end of every calendar month.
If taxable supplies exceed the VAT registration limit, HMRC must be notified within the next 30 days. The business will be registered from and VAT is charged on supplies from the start of the following month.4

8. Example question
A business started trading on 1 April and its first year end is 31 March 2017.
All supplies are standard-rated. Sales for the first 18 months are:
2016
2017
April 2016
7,000
January 2017
6,000
May 2016
2,000
February 2017
June 2016
4,000
March 2017
July 2016
8,000
April 2017
August 2016
10,000
May 2017
September 2016
5,000
June 2017
October 2016
July 2017
17,000
November 2016
11,000
August 2017
December 2016
September 2017
By what date must the business apply to register for VAT?
a) 30 May 2016
b) 30 April 2017
c) 30 May 2017
d) 30 August 2017

9. Taxable person (cont.)
The future test looks only at taxable supplies in the next 30 days alone. If the registration limit is exceeded, HMRC must be notified before that 30 day period expires. The business will then be registered from and VAT will be charged from the start of the 30 day period.
Taxable supplies for the purposes of the registration threshold are:
i. VAT exclusive standard rated sales
ii. VAT exclusive reduced rate sales
iii. Zero rated sales
Exempt supplies do not count towards the registration threshold.

10. Voluntary registration
Voluntary registration allows a business to register for VAT even if its taxable supplies do not exceed the VAT registration threshold. Voluntary registration is also available for intending traders who have not yet started to make taxable supplies but are intending to do so in the near future.
Dis-advantages: Add vat to sales price??
Administration with HMRC
Advantages: Claim back input VAT on purchases & expenses

11. Example question
A business makes mixed supplies of standard-rated and exempt items. The business started to trade in January and the sales to date have been spaced evenly throughout the year at £20,000 per month, with 30% of them being exempt.
The business must apply to register for VAT by:
a) 31 May
b) 30 June
c) 30 July
d) 31 July

12. The VAT Return (VAT 100) Output tax on sales (Box 1) X
A VAT return (VAT 100) is submitted periodically (usually quarterly) by VAT registered businesses outlining output VAT, input VAT and net VAT payable or repayable for the period.
Output tax on sales (Box 1) X
Less: Input tax on purchases & expenses (Box 4) (X)
VAT due to/(from) HMRC (Box 6) X

13. VAT 100 (cont.)
The quarterly returns fall into the 3 VAT stagger groups:
• Group 1: 30 June, 30 September, 31 December and 31 March
• Group 2: 31 July, 31 October, 31 January and 30 April
• Group 3: 31 August, 30 November, 28 February and 31 May
Most VAT registered traders are required to file and pay online.
The online return must be submitted within 7 days of the end of the month following the quarter. So a return for the 3 months to 31 October 2017 should be submitted by 7 December 2017.
Electronic payment must be made by the same date. Traders paying by direct debit will get an extra three days to pay.

14. Time of Supply – The Tax Point
The basic tax point for goods is the date the goods are delivered, made available or collected .
The basic tax point for services is the date the service is performed.
The basic tax point is overridden in two situations:
1 – Early tax point
If there is receipt of a payment or a tax invoice is issued on a date before the basic tax point date, the earlier date becomes the actual tax point date used.
2 – Later tax point
If an earlier tax point does not apply and an invoice is issued within 14 days after the basic tax point, then the invoice issue date becomes the tax point.

15. Example question
A customer pays for goods on 2 July and the supplier sends the goods to the customer on 9 July. On 15 July the supplier issues an invoice to the customer. The tax point for this supply is:
a) 2 July
b) 9 July
c) 15 July

16. Bad debt relief
Bad debt relief is available to traders where the following conditions are met:
– Goods or services were actually supplied.
– VAT must have been accounted for and the output VAT paid over to HMRC
– The whole or part of the consideration was written off in the trader's accounts as a bad debt.
– Six months must have elapsed since the due date of the invoice. A claim can be made on the return in which that six month point falls.
– The claim must be made within 4 years and 6.
If part payments are made these must be allocated to the earliest invoices first.

17. Alternative VAT Return schemes
There are three schemes available to reduce the amount of administration required in relation to VAT.
These are:
Annual Accounting Scheme
Cash Accounting Scheme
Flat Rate Scheme

18. Annual Accounting Scheme
Annual Accounting allows small and medium sized businesses to pay VAT on an annual basis. There is one annual return to be made two months after the VAT year end. The normal 7 day extension does not apply to traders on Annual Accounting.
During the year:
– 90% of the estimated VAT liability is paid by direct debit on the last day of months 4, 5, 6, 7, 8, 9, 10, 11 and 12.
– When the VAT return is submitted the balance of VAT actually due is paid at the same time.
The Annual Accounting Scheme is only available to traders with taxable supplies not exceeding £1.35 million per annum. Traders must leave the scheme when turnover exceeds £1.6 million per annum.

19. Cash Accounting Scheme
The Cash Accounting Scheme allows traders to dispense with the normal tax point rules to decide which VAT return to account for input tax and output tax on.
Instead movements through the cash book – i.e. cash received from customers and cash paid to suppliers determine which VAT return items are accounted for on.
The major benefit of the Cash Accounting Scheme is the cash-flow improvement that it gives to businesses but they would also benefit from automatic bad debt relief.
The Cash Accounting Scheme is only available to traders with taxable supplies not exceeding £1.35 million per annum. Traders must leave the scheme when turnover exceeds £1.6 million per annum.

20. Flat Rate Scheme
A trader can join the scheme if there are reasonable grounds to believe that taxable turnover in the next year will be £150,000 or less.
The trader must leave the scheme if total vat inclusive turnover exceeds £230,000. That test is done on every anniversary date of joining the scheme.
HMRC have estimated the percentage of VAT due for different types of businesses. Once a trader has established which category he falls into, the relevant percentage is applied to tax inclusive turnover to arrive at the amount of VAT due.
A 1% reduction applies to newly registered businesses using the flat-rate scheme for its first12 month period
Generally input tax is not deductible under the flat-rate scheme although an exception is made for purchases of a capital asset with a VAT inclusive value of £2,000 or more.

21. Example question
A business uses the cash accounting scheme for VAT. The business makes a part-payment in advance to a supplier on 25 March. The business received the goods and invoice on 4 April and paid the remaining balance on 3 July. In which of the business's VAT periods must input tax be included in the VAT return:
a) VAT period ending 31 March only
b) VAT period ending 30 June only
c) VAT period ending 30 September only
d) VAT periods ending 31 March and 30 September
e) VAT periods ending 30 June and 30 September

22. Any questions ?

23. Questions?