2. Value Added Tax Part D

3. Seller － tax payer Seller － tax payer Buyer － tax bearer Buyer － tax bearer Tax payable = output tax － input tax Tax payable = output tax － input tax The scope of VAT The scope of VAT VAT is chargeable on taxable supplies by a taxable person in the course of a business. 1. Taxable supplies (1) Supplies of goods － Transfer of ownership (2) Supplies of services － For consideration 2. Taxable persons A person whose taxable turnover exceeds certain limits. A person whose taxable turnover exceeds certain limits.

4. Tax rate and exemptions Tax rate and exemptions 1. Standard rate Taxable at 17.5%; Can recover input tax. Taxable at 17.5%; Can recover input tax. 2. Zero rate Taxable at 0%; Can recover input tax. 3. Lower rate Taxable at 5%; Can recover input tax. 4. Exemptions Not taxable; Cannot recover input tax. Standard rateZero rateLower rateExemption Output tax √ × √ × Input tax √√√ ×

5. Registration Registration 1. Compulsory registration · Historical test － The value of taxable supplies exceeds 67000 in any period of up to 12 calendar months · Future test － the value of taxable supplies will exceed 67000 in the next 30 days 2. Voluntary registration Advantages ·Input VAT can be reclaimed ·The impression of a substantial business Disadvantages ·Increased administrative cost ·Penalties if VAT return is late ·Increased cost for non- registered customers

6. 3. Deregistration (1) Voluntary deregistration the value of taxable supplies ≤ 65000 p.a the value of taxable supplies ≤ 65000 p.a (2) Compulsory deregistration no longer making taxable supplies no longer making taxable supplies (3) The consequences of deregistration VAT is charged on all stocks and capital assets in a business on which input tax was claimed. Exemptions: · If VAT chargeable does not exceed 1000 · If the business is sold as a going concern

7. Accounting for output tax Accounting for output tax 1. The valuating of supplies (1) Value of supply The value of a supply is the VAT-exclusive price. (2) Discounts Where a discount is offered for prompt payment, VAT is chargeable on the net amount, regardless of whether the discount is taken up. 2. VAT periods three calendar months The VAT period is the period covered by a VAT return. one month a year

8. 3. The tax point The tax point is the deemed date of supply. (1) basic tax point · date on which goods are removed or made available to the customers · date on which services are completed (2) actual tax point · The date invoice issued or payment made if before (1) · The invoice date, if invoice issued within 14 days after (1) The tax point determines The tax point determines VAT period tax rate

9. 4. Substantial traders A trader whose total VAT liability over 12 months exceeds 2000000 is a substantial trader. (1) make monthly returns (2) make payments on account · a month before the end of the quarter · a month before the end of the quarter · at the end of the quarter · at the end of the quarter · a month after the end of the quarter · a month after the end of the quarter The amount of each of the two payments on account is 1/24 of the total VAT liability of the 12 months.

10. Example Example Large Ltd is liable to make payments on account calculated at 250000 each for the quarter ended 31 Dec 2008. When payments/repayments are due if its VAT liability for the quarter is calculated as: (a) 680000; (b) 480000. (a) 680000; (b) 480000.Solution (a) 30 Nov 2008 — payment of 250000 31 Dec 2008 — payment of 250000 31 Dec 2008 — payment of 250000 31 Jan 2009 — payment of 180000 31 Jan 2009 — payment of 180000 (b) 30 Nov 2008 — payment of 250000 31 Dec 2008 — payment of 250000 31 Dec 2008 — payment of 250000 31 Jan 2009 — repayment of 20000 31 Jan 2009 — repayment of 20000

11. 5. Refunds of VAT There is a 3 year time limit on the right to reclaim overpaid VAT. The deduction of input tax The deduction of input tax Conditions of input tax recovery: · The payer must be a taxable person · A VAT invoice must be held 1. Capital items The capital items subject to VAT will be allowed to deduct input tax if they are used to make taxable supplies. If the capital item is sold secondhand then VAT should be charged on the sale.

12. 2. Non-deductible input tax (1) VAT on motor cars not used wholly for business purposes (2) VAT on business entertaining where the cost of the entertaining is not a tax deductible trading expense (3) VAT on domestic accommodation for directors (4) VAT on non-business items (5) VAT which does not relate to the making of supplies by the buyer in the course of a business ★ Treatment of irrecoverable VAT The non-deductible VAT is included in the cost for income tax, corporation tax, capital allowance or capital gains purposes. The non-deductible VAT is included in the cost for income tax, corporation tax, capital allowance or capital gains purposes.

13. 3. Pre-registration input tax Input tax can be recovered if: · The goods were acquired within 3 years and still held at the date of registration · The goods were acquired within 3 years and still held at the date of registration · The services were supplied for the purpose of business in the 6 months before registration · The services were supplied for the purpose of business in the 6 months before registration 4. Motoring expenses (1) Cars The VAT incurred on the purchase of a car not used wholly for business purposes is not recoverable. (2) Fuel for business use The VAT incurred on fuel used for business purpose is fully deductible as input tax.

14. 3. Fuel for private use If fuel is supplied for private purposes, all input tax is deductible but the business must account for output tax on: · scale charges · the amount employee paid 4. Relief for bad debts Relief is available for VAT on bad debts if: · it is over 6 months old · it has been written off in accounts Bad debt relief claims must be made within 3 years. If the debtor later pays all or part of the amount owed, the VAT repaid must be paid back to the Revenue.

15. Special schemes Special schemes 1. The cash accounting scheme This scheme enables business to account for VAT on the basis of cash paid and received. A trader can join the scheme only if · annual taxable turnover (excl VAT) ≤ 1350000 · annual taxable turnover (excl VAT) ≤ 1350000 · all returns and VAT payments are up to date · all returns and VAT payments are up to dateAdvantages Tax deference; automatically bad debt relief

16. 2. The annual accounting scheme Under the scheme traders file annual VAT returns, but they must make payments on account. · 10% monthly payments during the year · 10% monthly payments during the year · VAT return and balancing payment due within 2 months of the end of the year · VAT return and balancing payment due within 2 months of the end of the yearConditions Advantages and disadvantages

17. Example : A Ltd applies to use the annual accounting scheme from 1 Jan 2008. It’s net VAT liability for the year ended 31 Dec 2007 was 3600. The actual net VAT liability for the year ended 31 Dec 2008 is 3821. What returns and payments must it make for this year? Example : A Ltd applies to use the annual accounting scheme from 1 Jan 2008. It’s net VAT liability for the year ended 31 Dec 2007 was 3600. The actual net VAT liability for the year ended 31 Dec 2008 is 3821. What returns and payments must it make for this year? Solution Solution A Ltd must submit the annual tax return by 28 Feb 2009. Payments will be made as follows: Monthly payments: Apr to Dec 9 at 360 3240 Monthly payments: Apr to Dec 9 at 360 3240 Final payment due on 28 Feb 2009 581 Final payment due on 28 Feb 2009 581 3821 3821

18. 3. Flat rate scheme To join the scheme, business must have · A tax exclusive taxable turnover of up to 150000 · A tax exclusive annual total turnover of up to 187500 The scheme enables businesses to calculate VAT due simply by applying a flat rate percentage to their total inclusive turnover. The percentage depends on the trade sector. No input tax recovery. Business using the scheme must issue VAT invoices to their VAT registered customers at the normal rate.

19. Example: M Ltd has annual sales of 80,000 of which 50% are standard-rated and 50% are zero-rated. All of its sales are to VAT registered businesses. The company’s standard-rated expenses are 28200 p.a. These figures are inclusive of VAT. The flat rate for M Ltd’s trade is 9%. Using normal basis and flat rate scheme to calculate its VAT liability. Normal basis: Output tax 80000×50%×7/47=5957 Input tax 28200×7/47=4200 Taxpayable 1757 Flat rate scheme: Taxpayable 80000×9%=7200

20. VAT invoices and records VAT invoices and records 1. Invoices A taxable person must supply a VAT invoice within 30 days of the time of supply. A less detailed VAT invoice may be issued where the invoice is for a total including VAT of up to 250. 2. Records Every registered trader must keep records for six years. Administration Administration 1. Local administration Local VAT offices carry out general administration. 2. Appeals An appeal must be lodged with the RCPO within 30 days.

21. Penalties Penalties 1. Default surcharge A default occurs when a trader submits VAT return late or pays the VAT late. surcharge period surcharge percentages 2. Penalties for errors Errors on a VAT return may be corrected on the next return if not exceeding the greater of: · 10000 · 10000 · 1% of net VAT turnover · 1% of net VAT turnover 3. Default interest