1. Introduction to Value Added Tax (VAT)

2. Indirect Tax (Value Added Tax) Learning Outcomes LO1 Understand VAT regulations. LO2 Complete VAT returns accurately and in a timely manner. LO3 Understand VAT penalties and make adjustments for previous errors. LO4 Communicate VAT information. ExamsMock 28/7/2015Actual 31/7/2015 2013 Standards (Finance Act 2014) Computer based 1.5 hours 8 Tasks, 5 short and 3 longer Scheme of work

3. Define Value Added Tax. Correctly define input and output tax. Correctly extract tax data from financial records. Identify the criteria for a business that needs to register for VAT. Discuss the relationship between the business & HMRC. List 3 pieces of information which must be included on the documentation of a VAT registered business Session Objectives

4. AAT Reference Material Available in the exam – but you must revise it prior to the exam so you know where to find the information you need! Glossary

5. What do we know already? 1 minute to write down anything you know about VAT SocrativeTimer

6. What do we know already? Feedback

7. What do we know already? Answer on Socrative

8. What is VAT?  Collected by businesses on behalf of HM Revenue and Customs  VAT is an indirect tax (as it is paid when you buy goods/services and not collected from your salary)  Charged on most goods and services supplied within the UK  Borne by the final consumer

9. Which government department is responsible for administering VAT? HM Revenue & Customs (HMRC) Contact by Telephone, letter or via HMRC website Name, address, VAT registration number & telephone number

10. What powers do HMRC have to help them administer the tax? Inspect premises Examine records Make assessments for underpaid tax Charge penalties of VAT rules Determine whether certain supplies are liable for VAT

11. Films https://www.youtube.com/watch?v=fm AbBu7VQjQ https://www.youtube.com/watch?v=cH M0CaBEb0w

12. Taxable person A business which is VAT registered

13. The VAT process Financial Transactions VAT Registered Business Accounting System Day Books Cash Book Petty Cash Book VAT Control Account VAT Return Payment/ Refund HMRC Output Tax less Input Tax

14. How it works £50 + VAT £10 £60 VAT £10 £120 + VAT £24 £144 VAT £24-£10 = £14 £240 (including VAT) VAT £40-£24 = £16 Assume VAT at 20% VAT£10 £14 £16 £40

15. Supplier of materials Sells materials Net £200 + VAT £40 VAT due to HMRC £40 Manufacturer Adds profit & sells computer £440 VAT £88 VAT due to HMRC £48 (£88 - £ 40) Shop Adds profit & sells computer £600 VAT £120 VAT due to HMRC £32 (£120 - £88) Final Consumer Buys computer for £720 (£600 + £120 VAT) HMRC £40 £48 £32 £0 Total £120 Skip

16. Question 1 Answer on next slide

17. Bee Ltd sells Materials to Aye Ltd £150 + £30 VAT VAT due to HMRC £30 Aye Ltd Adds profit & sells item £400 VAT £80 VAT due to HMRC £50 (£80 - £30) Shop Cee Ltd Adds profit & sells item £1000 VAT £200 VAT due to HMRC £120 (£200 - £80) Final Consumer Buys item for £1200 (£1000 + £200 VAT) HMRC £30 £50 £120 £0 Total £200

18. Question 1 1.How much VAT is due to HMRC? £1000 x 20% = £200 2. Which party in the process will ‘suffer’ the cost of the VAT? The final unregistered party 3. If Cee Ltd was not VAT registered which party would ‘suffer’ the cost of the VAT? CEE Ltd

19. Bee Ltd sells Materials to Aye Ltd £150 + £30 VAT VAT due to HMRC £30 Aye Ltd Adds profit & sells item £400 VAT £80 VAT due to HMRC £50 (£80 - £30) Shop Cee Ltd Adds profit & sells item £1000 VAT £200 VAT due to HMRC £120 (£200 - £80) Final Consumer Buys item for £1200 HMRC £30 £120 £0 Total £80 £50

20. When should a business register for VAT? See AAT e-learning module Reference material page ? Historic Test Future Test

21. Historic Test Sam started a business on July 2014. Taxable turnover is £8,850 per month. In Feb 2015 after 8 months, taxable turnover is £8,850 x 8 = £70,800 In March taxable turnover for the year to date is £83,650 so will need to register

22. Future Test Anna has been in business for many years with a taxable turnover of £6,000 per month. She is not registered for VAT. She wins a contract for an additional £79,500 per month so her taxable supplies will exceed the threshold in the next 30 days.

23. Liable to register for VAT Notify nowMonitor & notify later ABC has made sales from 1 st January – 31 st December 2014 totalling £83000. Today is the 5 th January 2015 ACB has made sales from 1 st July 2014 – 28 th June 2015 totalling £71752. Today is 7 th July 2015. CBA commenced trading on 16 th August 2014. They have now secured a contract with Alpha Ltd to provide services to them on the 31 st October 2014 totalling £92000. This will be their first contract. Today is 30 th October. Activity 2

24. Liable to register for VAT Notify nowMonitor & notify later ABC has made sales from 1 st January – 31 st December 2014 totalling £83000. Today is the 5 th January 2015 Yes ACB has made sales from 1 st July 2014 – 28 th June 2015 totalling £71752. Today is 7 th July 2015. CBA commenced trading on 16 th August 2014. They have now secured a contract with Alpha Ltd to provide services to them on the 31 st October 2014 totalling £92000. This will be their first contract. Today is 30 th October. Activity 2

25. Liable to register for VAT Notify nowMonitor & notify later ABC has made sales from 1 st January – 31 st December 2014 totalling £83000. Today is the 5 th January 2015 Yes ACB has made sales from 1 st July 2014 – 28 th June 2015 totalling £71752. Today is 7 th July 2015. Yes CBA commenced trading on 16 th August 2014. They have now secured a contract with Alpha Ltd to provide services to them on the 31 st October 2014 totalling £92000. This will be their first contract. Today is 30 th October. Activity 2

26. Liable to register for VAT Notify nowMonitor & notify later ABC has made sales from 1 st January – 31 st December 2014 totalling £83000. Today is the 5 th January 2015 Yes ACB has made sales from 1 st July 2014 – 28 th June 2015 totalling £71752. Today is 7 th July 2015. Yes CBA commenced trading on 16 th August 2014. They have now secured a contract with Alpha Ltd to provide services to them on the 31 st October 2014 totalling £92000. This will be their first contract. Today is 30 th October. Yes Activity 2

27. Business Responsibilities 1.They must charge VAT at the relevant rate on their supplies 2.They must provide relevant invoices 3.They must account for VAT on their sales at the correct time 4.They must submit correctly completed VAT documents by stipulated dates (this includes VAT returns) 5.They must keep all accounting records for 6 years

28. Exempt/Zero rated Items Insurance, finance & credit Education and training Fundraising by charities Membership subscriptions Selling leasing and letting of commercial land buildings – can be waived. Children's clothing Some food Business which supplies exempt items cannot register for VAT Business which supplies zero rated items can register for VAT

29. Partial Exemption If you supply both Vatable and exempt supplies generally you cannot reclaim VAT on supplies bought to provide exempt items. You may need to adjust you VAT returns to take account of exempt supplies. De minimus level Detailed knowledge of De minimus is NOT assessed De minimus example input tax is less that £625 per month AND the exempt supplies do not make up > 50% of inputs

30. Question 3

31. Question 4 NameScenario Note: Assume that all fees are received at the end of the month Liable to register for VAT Yes/No Notify HMRC now Notify HMRC at a later date a)FlorenceStarted in business on 1 st October 2014 with contracted accountancy fees of £12,000 per month. Today is 1 st December 2014. a)ZeberdieCommenced trading on 1 st July 2014 as an insurance broker with expected sales of £150,000 per month. Today is 31 st January 2015. a)DougalDougal commences business on 28 th June 2014 as a dog beauty parlour. He has contracts for sales of £25,000 per month. Today is 30 th September 2014. a)BrianOpened a French Restaurant on 2 nd September 2014 with expected sales of £45,000 per month. Today is 30 th September 2014.

32. Now try question 5

33. Question 6 Complete for homework ready to share next week

34. Question 6 Complete for homework ready to share next week

35. Question 7 Calculate: 1.How much VAT is due to HMRC 2.Which party in the process will ‘suffer’ the cost of the VAT? Answer

37. Calculating VAT When adding VAT always round DOWN Example Goods cost £97.63 BEFORE VAT VAT @ 20%£19.526 Becomes£19.52

38. Calculating VAT from gross amount VAT inclusive amount (gross) e.g. £450.00 450 ÷ 120 x 20 = 75.00 Work out the VAT part first (Remembering to round down) Gross = £1474.12 Calculate the VAT £245.68

39. Calculating VAT Question 8 & 9

40. Calculating VAT with settlement discounts Net £950.00 5% settlement discount is offered 950 – (950.00 x 5%) = 902.50 VAT is 902.50 x 20% = 180.50 £950.00 + £180.50 = £1130.50 Remember!! Add VAT to the ORIGINAL NET AMOUNT Net £475.85 with a 2.5% settlement discount What will the gross amount of the invoice be?

41. Calculating VAT Question 10 - 12

42. VAT Control Account Collects together all the out put and input tax

43. What would be included in the VAT account? Dr VAT Account Cr Draw this ‘T’ account in your note books

44. What would be included in the VAT account? Dr VAT Account Cr

45. What would be included in the VAT account? VAT Account VAT on purchases (PDB) VAT on cash purchases (CB/PCB)

46. What would be included in the VAT account? VAT Account VAT on purchases (PDB)VAT on sales (SDB) VAT on cash purchases (CB/PCB)VAT on cash sales (CB)

47. What would be included in the VAT account? VAT Account VAT on purchases (PDB)VAT on sales (SDB) VAT on cash purchases (CB/PCB)VAT on cash sales (CB) (VAT on purchase returns (PRDB)(VAT on sales returns (SRDB)

48. What would be included in the VAT account? VAT Account VAT on purchases (PDB)VAT on sales (SDB) VAT on cash purchases (CB/PCB)VAT on cash sales (CB) VAT on bad debts (Journal) VAT on EU acquisitionsVAT due on EU acquisitions (VAT on purchase returns (PRDB)(VAT on sales returns (SRDB) (Adjustment – Net over-claim of input tax from previous returns) Adjustment – Net understatement of output tax on previous returns

49. Question 12

50. Documentation

52. Modified Invoice Payments up to £25 Proforma Invoice VAT Receipt

53. Supplier name Total amount charged Suppliers address Tax point Description VAT rate Modified Invoice

54. Proforma Invoice Can NOT be used as a VAT invoice!!!!!

55. VAT Receipt Name & Address of retailer VAT number VAT rate Items charged

56. Question 13 & 14 Are the items suitable VAT source documents? If not, why not? All-u-want Ltd Smallton SL1 1LM VAT No. 789 1234 56 Total £123.77 (inclusive of VAT at the rate of 20.0%)

57. Question 13 Are the items suitable VAT source documents? If not, why not? XYZ Ltd 123 Mount Place London To: ABC Ltd 789 St John’s Walk Birmingham 23 July 2011 Goods£2,160.00 VAT @ 20.0%£ 419.04 £2,579.04 Terms:2% 30 days, 3% 10 days

59. Tax Points

61. Find information in reference material

62. Tax Points Goods The goods are sent to the customer The goods are collected by customers The goods are made available to customers Services Date service provided Date the work completed Basic Tax Point Actual Tax Point Advance payments 14 day rule If payment invoice is issued or payment received before supply the tax actual tax point is the invoice/payment date If invoice is issued within 14 days of supply the invoice date becomes the tax point

63. Tax Point Worksheet

64. Homework 1. Complete all questions in the handout 2.Revision of week 1 for progress test next week

65. Can we now....... Define Value Added Tax. Correctly define input and output tax. Correctly extract tax data from financial records. Identify the criteria for a business that needs to register for VAT. Discuss the relationship between the business & HMRC. List 3 pieces of information which must be included on the documentation of a VAT registered business Review of Session Objectives