Chapter 24
• Charge to value added tax (VAT)
• Registration
An introduction to
VAT
• Transfer of going concern
• Administration of VAT
• Tax point
• Impairment losses (bad debts)
• Recovery of input tax
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Syllabus learning outcomes 1
• Recognise the circumstances in which a person must
register or deregister for VAT (compulsory) and when a
person may register or deregister for VAT (voluntary)
• Recognise the circumstances in which pre-registration
input VAT can be recovered
• Explain the conditions that must be met for two or more
companies to be treated as a group for VAT purposes, and
the consequences of being so treated
• Calculate the amount of VAT payable/recoverable
• Explain how VAT is accounted for and administered
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Syllabus learning outcomes 2
• Recognise the tax point when goods or services are
supplied
• Explain and apply the principles regarding the valuation of
supplies
• Recognise the principal zero rated and exempt supplies
• Recognise the circumstances in which input VAT is nondeductible
• Recognise the relief that is available for impairment losses
on trade debts
• Understand the treatment of the sale of a business as a
going concern
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Chapter summary diagram 1
Value added tax
Charge to VAT
Registration
Transfer of
going concern
Standard
20%
Compulsory
Reduced 5%
Voluntary
Zero 0%
De-registration
Exempt
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Group
Chapter summary diagram 2
Value added tax
Administration
of VAT
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Tax point
Impairment
losses
Recovery of
input tax
Tackling the exam
• You should expect to see value added tax tested in both
Section A and Section B.
• Value added tax may also be tested in Section C.
• Registration is a key topic: you may be asked when a
person should register for VAT and the implications of
registration.
• The tax point is highly examinable, as is the relief for
impairment losses on trade debts.
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Introduction to value added tax (VAT) 1
• VAT is charged on taxable supplies of goods and services in
UK made by taxable persons in course of their business.
• A taxable person is a person who is registered for VAT (or who
is required to be registered for VAT). A person may be a sole
trader, a partnership, a company, a club, association or charity.
• A taxable supply is ‘any supply of goods or services made in the
UK other than exempt supplies or those outside the scope of
VAT’.
• An exempt supply is a supply on which output VAT cannot be
charged, neither input VAT cannot be recovered. An exempt
supplier has to shoulder the burden of VAT. They may increase
their prices to pass on the charge to their customers.
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Introduction to value added tax (VAT) 2
• There are three types of taxable supplies, each taxable at a different
rate of VAT:
1. Reduced rated (5%): e.g. Domestic fuel and power, Installation of
energy-saving materials etc
2. Zero rated (0%):applies to supplies of goods and services that are
considered to be essential requirements e.g. non luxury food, books,
children's clothes and footwear
3. Standard rated (20%):If a supply is not zero-rated, is not exempt
and is not reduced-rated then it is treated as standard-rated
NB: A taxable supply is one on which output VAT is chargeable and input
VAT can be recovered
• The main supplies that are outside the scope of VAT are; payment
of wages & salaries, transfer of business on going concern and
dividends.
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Registration 1
Supplies
TAXABLE
Std/reduced
rated
Zero rated
0%
Register with HMRC
Recover INPUT VAT
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EXEMPT
Cannot register
Cannot recover
INPUT VAT
Compulsory Registration
• Registration is compulsory if:
1. At the end of any month taxable supplies over the previous 12
months {or since business commenced if shorter} have
exceeded £85,000 (historic test)
2. In the next 30 days, taxable supplies are expected to exceed
£85,000 (future test)
• Requirement may be waived if can satisfy HMRC that taxable
supplies in the following 12-month period {from proposed date of
VAT registration} will be less than £83,000.
• Taxable supplies {sales} is VAT exclusive value of all zero rated
and standard rated supplies. but excluding supplies of capital
items (for example, sales of non-current assets of the business
• A trader need not register if his/her supplies are wholly zero rated
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Compulsory Registration
If a person is liable to register under :
1. Historic test, they must notify HMRC within 30 days of
the end of the month in which the threshold was exceeded
(the relevant month).
Registration takes effect from the first day after the end of
the month following the relevant month
2. Future prospects test, they must notify HMRC by the
end of the 30-day period in which the threshold is expected
to be exceeded.
Registration takes effect from the beginning of the same 30day period
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Example historic test registration
Fred started to trade in cutlery on 1 January 2021. Sales
(excluding VAT) were £8,000 a month for the first nine
months and £8,500 a month thereafter. From what date
should Fred be registered for VAT?
Solution:
Sales to 31 October 2021
80,500
Sales to 30 November 2021
89,000 (exceeds £85,000)
Fred must notify his liability to register by 30 December
2021 (not 31 December) and will be registered from 1
January 2022 or from an agreed earlier date.
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Example Future test registration
Cat Ltd signs a lease for new business premises on 1 May
2021 and opens for business on 20 July 2021. The company
estimates, from the outset, that taxable supplies will be in the
region of £85,500 per month.
State when, if at all, Cat Ltd is liable to register for VAT.
Solution
Cat Ltd is liable to register on 20 July 2021 because
supplies for the 30 days to 18 August 2021, are expected to
exceed £85,000.
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Question: Jack
Jack commenced trading on 1 January 2021. His quarterly
turnover (spread evenly over the quarter) is as follows:
Quarter ended
Turnover
£
31 March 2021
7,500
30 June 2021
13,500
30 September 2021
18,000
31 December 2021
24,000
31 March 2022
33,000
30 June 2022
39,000
Required
By what date is Jack required to notify HMRC that he is liable to
register for VAT? When will Jack be registered for VAT and from what
date must he charge his customers VAT?
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Answer: Jack
Annual turnover does not exceed £85,000 until 31 March
2022 (on a month by month basis – £88,500) therefore Jack
does not become liable to register until then.
He must then notify the HMRC within 30 days, ie by 30 April
2022.
He will then be registered from midnight on 30 April 2022
(or an earlier date by mutual agreement) and, if registered
from 30 April 2022, must charge his customers VAT from
1 May 2022.
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Question: Jill
Jill commenced trading on 1 January 2021 with monthly
sales as follows:
Goods
Goods ABC (standard rated)
Goods DEF (zero-rated)
Service GHJ (exempt)
Turnover per month
£
8,000
7,000
10,000
On 14 April 2021 Jill signed a contract to provide £30,000 of
Goods ABC on 2 May 2021 and £47,000 of Goods DEF in
addition to the monthly supplies detailed above.
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Question: Jill – cont'd
By what date is Jill required to notify HMRC that she is liable
to register for VAT? And from which date must she be
registered?

Notify 30 July 2021 and register from 1 August 2021

Notify 30 May 2021 and register from 1 June 2021

Notify 14 April 2021 and register from 14 April 2021

Notify 13 May 2021 and register from 14 April 2021
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Answer: Jill
Answer: Notify 13 May 2021 and register from 14 April 2021
The historical test would be breached on 31 May 2021.
Taxable supplies in the first five months amount to 5 
(£8,000 + £7,000) = £75,000 plus the special orders placed
in May take the total to above £85,000.
The future test is breached on 14 April 2021 because on that
date Jill knows her taxable supplies will exceed the
registration threshold as £8,000 + £7,000 + £30,000 +
£47,000 = £92,000. Notification is required 30 days from the
test (count 14 April as day 1) and registration takes effect on
14 April 2021.
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Voluntary Registration
A person making taxable supplies below the registration threshold
may apply for voluntary registration. HMRC will register that
person for VAT from a mutually agreed date.
• Advantages:
- Able to reclaim input VAT
- Avoids late registration penalties
- Allows all potentially taxable suppliers to improve their
claims for input tax on preregistration expenditures
- Give the impression of a substantial business
• Disadvantages:
- Increases administrative costs i.e. maintenance of records
- Reduces the competitive edge and deters business if the
customers are not VAT registered
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Consequences of Registration
 Once registered, a taxable person is allocated a VAT
registration number {which must be quoted on all invoices}
and a ‘tax period’ for filing returns, which is normally every
three months.
 Output tax must be charged on taxable supplies.
 Input tax (subject to some restriction) is recoverable on
business purchases and expenses.
 Appropriate VAT records must be maintained. This also
serves to impose discipline on the business.
 Exempt traders (eg insurance company): cannot register
(as they make no taxable supplies), cannot recover input
VAT suffered.
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Group Registration
A group of companies may apply for the group to be
registered as a single taxable person, rather than each
company in the group being registered individually.
Conditions:
1. 2 or more companies must be associated with each other.
That is one company must own 51% or more of the share
capital in another company, or 2 companies must be under
common control of an individual or holding company.
2. All companies must be UK resident or trading from a
permanent establishment in the UK.
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Effects of Group Registration
1. The VAT Group is treated for VAT purposes as a single
company registered for VAT on its own.
2. There will be 1 VAT registration number for the whole group.
3. One VAT return will need to be filed on behalf of the whole
group.
4. The group must have a representative who fills in the VAT
return.
―This member will have to gather all of the output and input
VAT of the individual members and fill it in on one return.
―This representative is also responsible for paying VAT on
behalf of the group
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Pros and Cons of Group Registration
Advantages of a VAT Group:
 There is no VAT on intra-group supplies
 Only one return must be filed, therefore administration
costs will be saved.
 Group registration is optional; not all members of the
group have to join the VAT group
Disadvantages of a VAT Group:
× All members remain jointly and severally liable
× A single return may cause administration difficulties in
collecting and collating the information
× There are special VAT schemes for businesses such as
the cash, annual and flat rate schemes.
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Deregistration
Deregistration may be compulsory or voluntary.
Deregistration is compulsory if a person ceases to make
taxable supplies and has no intention of making taxable
supplies {e.g. if business is sold}. The person must notify
HMRC within 30 days.
Deregistration will take effect on the date taxable supplies
ceased.
A person is eligible for voluntary deregistration if his
estimated taxable turnover for the next 12 months will not
exceed the statutory deregistration threshold.
It takes effect from the date on which the request is made or
from an agreed later date..
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Consequences of Deregistration
 On deregistration, VAT is chargeable on all inventory
and capital assets in a business on which input tax
was claimed, since the registered trader is in effect
making a taxable supply to himself as a newly
unregistered trader.
 If the VAT chargeable does not exceed £1,000, it need not
be paid.
Compulsory deregistration applies where a business is sold
or otherwise transferred as a going concern to new owners.
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VAT on sale of business
Alternative 1: Cessation of business
When a business is sold, it will cease to be registered for
VAT.
The sale of the business is assumed to be a taxable supply
for VAT purposes.
Alternative 2: Sale of business as a going concern
Such a transfer is treated as being outside the scope of VAT
{i.e. not a taxable supply} provided certain conditions are
met.
1.
The business is transferred as a going concern
2.
No change in trade & No significant break in trade
3.
Transferee is, or becomes, VAT registered immediately after the transfer.
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Tax point 1
Example – sale on credit
Order
rec'd
Qtr 1
Goods
despatched
Qtr 2
Invoice
issued
Cash
rec'd
Qtr 3
Qtr 4
Which VAT return is the sale recorded in?
Depends on the tax point.
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Tax point 2
 Tax point for VAT: VAT becomes due on a supply of goods
or services at the time of supply. This is called the tax point.
 Normally VAT must be accounted for on the VAT return for
the period in which the tax point occurs. {The tax point is the
date used to identify the VAT period which should be used to
include the output or input VAT}
× Basic tax point is the date when goods are made available, or when
services completed.
× If an invoice is issued or payment received before basic tax point:
earlier date becomes the tax point.
× If the earlier date rule does not apply and the invoice is issued within
14 days after the basic tax point the invoice date becomes the tax
point.
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Question: Jester Ltd
On 31 May Jester Ltd ordered a new printing machine and
on 16 June paid a deposit of £6,000. The machine was
despatched to Jester Ltd on 30 June. On 18 July an invoice
was issued to Jester Ltd for the balance due of £54,000. This
was paid on 23 July.
Required
(a) What is the tax point for the £6,000 deposit?
(b) What is the tax point for the balance of £54,000?
Solution
(a) 16 June
(b) 30 June
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OUTPUT VAT
Output VAT is charged on taxable supplies of goods and
services.
The main types of supplies subject to output vat:
1. Sales of goods and services (for a consideration, usually a
money payment)
2. Gifts of business assets (excluding gifts to the same
person that total no more than £50 excluding VAT in any
12 month period and gifts of trade samples)
3. Goods withdrawn from the business by the owner or an
employee
4. Provision of private fuel for the owner or an employee
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Valuation of Supplies
 Value of a supply is the VAT-exclusive price on which VAT is
charged.
 Consideration for a supply is the amount paid in money or
money's worth.
 The price of goods before VAT is the VAT exclusive amount. If the
price includes VAT, then this is the VAT inclusive amount.
VAT rate 20% X VAT exclusive figure (net) = VAT amount.
VAT fraction 1/6 X VAT inclusive figure (Gross) = VAT amount
―If a standard rated supply is made at a price of (£2,000 + VAT),
then the value of the supply is £2,000 and the total consideration
given for the supply is £2,400.
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Discounts
 VAT is calculated on the invoice price less all trade
discounts.
 VAT is chargeable on the actual amount received where a
discount is offered for prompt payment.
1. If the discount is not taken the VAT is charged on the full
sale price
2. If the discount is taken, then the VAT is based on the
discounted price
Trader must either:
― Issue credit note for the discount; or
― Include words on invoice that the customer's input VAT must only be
reclaimed to the extent paid to the trader.
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Miscellaneous
 When goods are permanently taken from a business for nonbusiness purposes {i.e. Drawings} VAT must be accounted
for on their market value.
 Gifts of inventory or non-current assets are treated as
taxable supplies at replacement/market value.
 Fuel provided for private motoring by the owner or an
employee is charged at a scale rate. The fuel scale charge
is based solely on the CO2 rating of a car and represents the
VAT inclusive deemed value of the fuel supplied.
Gifts of services, whether to employees or customers, are not
taxable supplies.
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Recovery of input tax 1
Input VAT can usually be recovered if:
× The goods or services purchased are used for business
purposes, and
× The expenditure is supported by a valid VAT invoice
• Blocked items are items of expenditure where the VAT is
irrecoverable. Examples are:
1. Purchase of cars (unless 100% used for business purposes e.g. driving
school)
2. Leased cars with some private use – only 50% input VAT is recoverable
3. Non-business use (if partial private use – appropriate apportionment is
needed)
4. Entertainment of UK Customers and suppliers
5. Purchases for which no VAT receipt is held.
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Recovery of input tax 2
Input VAT can be recovered in the following circumstances:
× Input VAT on entertainment expenses incurred for employees and
overseas customers is recoverable.
× Input VAT upon fuel cost and repair & maintenance incurred for
employees is recoverable even if there is private use of car by
employee
× Input VAT on business expenses is recoverable.
× Input Vat on Motor cars used exclusively for business purposes
NB: If a business is VAT-registered the VAT-exclusive amounts
should be applied, as the associated input VAT is recovered on most
business expenses {except motor cars with private use}. If the
business is not VAT-registered, no input VAT is recoverable,
therefore VAT-inclusive amounts are used when computing profits
and capital allowances
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Question: Chester Ltd
Chester Ltd, which is registered for VAT, incurred the
following expenditure (including VAT) during the quarter
ended 31 December 2021.
£
New car for salesman (private use)
14,500
3 new motor vans
28,200
Second-hand container lorry
29,370
Entertaining – UK customers
4,935
– employees
5,250
Required
How much VAT can be reclaimed in respect of the above and
on what amount will Chester Ltd be entitled to claim capital
allowances?
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Answer: Chester Ltd
Input tax reclaimed
Vans (28,200  1/6)
Lorry (29,370  1/6)
Entertaining employees (5,250  1/6)
£
4,700
4,895
875
10,470
Capital allowance values
Cars
Vans (28,200 – 4,700) =
Lorry (29,370 – 4,895) =
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14,500
23,500
24,475
Impairment losses (bad debts)
 If the debt becomes irrecoverable, the seller has paid the
VAT to HMRC and never recovers this from the customer.
 The output VAT on impairment losses can be reclaimed as
input VAT if:
1. At least six months must have elapsed from the time that
payment was due (or the date of supply if later).
2. The debt must have been written off in the seller’s VAT
account.
3. Claims for relief for irrecoverable debts must be made within
four years and six months of the payment being due.
 Relief is given in the VAT return by claiming input VAT
equal to the amount of output VAT charged on the original
irrecoverable bad debt.
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Private Fuel
• If a business pays for fuel which is only used for business
purposes, it can claim all the input tax paid on that fuel.
• Input tax on all road fuel purchased by the business can
be reclaimed provided there is a valid VAT invoice.
• If a business does provide fuel for private and business
use to an employee/sole trader, the business has two
options for dealing with the VAT:
1. Claim all the input VAT back and then account for output
VAT using a fuel scale charge {i.e. fuel cost not reimbursed}
2. If the employee is charged for the full cost of the fuel
provided then claim all the input VAT and account for
output VAT on the charge to the employee
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Question: Ten Ltd
John is an employee of Ten Ltd. He has the use of a car
which is used for both business and private mileage for the
quarter ended 31 March 2021.
Ten Ltd pays all the petrol costs in respect of the car, totalling
£1,200 of which 20% is for private mileage.
The relevant quarterly scale charge is £517.
Both figures are inclusive of VAT.
Required
What is the VAT effect of the above on Ten Ltd?
What would be the effect of Ten Ltd charging John for
the private fuel?
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Question: Ten Ltd – cont'd
Solution
If John is not charged for the private fuel then Ten Ltd can
reclaim input VAT of £200 (1,200 × 20/120) and will have to
account for output VAT of £86 (517 × 20/120) based on the
scale charge.
If John is charged £240 (1,200 × 20%) for the private fuel then
Ten Ltd will reclaim input VAT of £200 and will have to account
for output VAT of £40 (240 × 20/120) based on the charge to
John.
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Pre-registration Input VAT
 Normally, VAT incurred before registration cannot be
accounted for as input VAT. However, if the conditions below
are satisfied, then it can be treated as input tax and
reclaimed accordingly (on the first VAT return).
 Recovery of Pre-Registration Input VAT on Goods: It will
be recoverable if Goods were acquired in previous 4 years
from date of registration for business purpose and are still
on hand upon the date of registration.
 Recovery of Pre-Registration Input VAT on Services: It
will be recoverable if Services were acquired in previous 6
months from date of registration for business purpose.
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Question: Boz Ltd
Boz Ltd commenced trading on 1 August 2021 and applied to
register for VAT with effect from 1 October 2021. Prior to
registration, it had incurred VAT on the following VAT exclusive
amounts:
£
Accountancy fees – invoice dated 10 March 2021
5,000
Van purchased new on 23 June 2021
8,000
Inventory of spare parts as on 30 September 2021 12000
Required
What input VAT can Boz Ltd claim in respect of these items
assuming the van and inventory are still held on 1 October
2021?
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Answer: Boz Ltd
£
Van – in use post registration
1,600
Inventory – still held at date of registration
2,400
VAT on accountancy fees are not recoverable as more than
six months prior to registration.
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Computation Pro-forma
VAT FOR THE QUARTER ENDED 31 MARCH 202X
OUTPUT VAT
Cash and credit sales (including capital assets but excluding cars)
X
Drawings of inventory by owner or employee {at selling price}
X
Gifts of business assets if in excess of £50 per recipient
X
Private fuel supplied to owner or an employee (scale charge)
X
XX
LESS: INPUT VAT
Cash and credit purchases of goods
(X)
Cash and credit purchases of capital assets (excluding cars)
(X)
Business expenses{repairs & maintenance, fuel cost, car expenses
(X)
Impairment losses on trade debts
(X)
Amount payable to / (repayable by) HMRC
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X/(X)
VAT Period
 The VAT period (also known as the tax period) is the period
covered by a VAT return. It is usually three calendar months
{Quarterly}
 HMRC will allow taxable persons to have a one-month VAT
period where input tax regularly exceeds output tax, i.e. where
the taxable person is in a net VAT repayment position
 Certain small businesses may submit an annual VAT return i.e.
have an annual VAT period {see later on annual accounting
scheme}
 VAT refunds are normally made within 10 days.
 Where it is discovered that VAT has been overpaid in the past,
the time limit for claiming a refund is four years from the date by
which the return for the accounting period was due.
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Submission of returns and payment of VAT
1. On registration, the trader must charge VAT on all taxable
supplies (output VAT).
2. The trader can also reclaim VAT on all taxable supplies
purchased (input VAT).
3. At the end of a 3-month period, the trader accounts to
HMRC for all the output tax less the input tax on their VAT
return.
4. VAT is accounted for quarterly
5. VAT registered businesses must file their returns and make
payments online.
6. The deadline for submitting the VAT return and making
payments electronically is 1 month and 7 days after the
period has ended.
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Administration of VAT 3
Substantial traders
• Taxable persons whose annual liability exceeds
£2,300,000 must make monthly payments on account of
their liability:
― 1/24th of the previous year's liability
― Made at the end of months two and three of each VAT
quarter
― Treated as credits against that quarter's liability
― Balancing payment one month after the end of the
quarter (no extra seven days for payment)
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Summary 1
Charge to value added tax (VAT)
•
•
VAT is charged on taxable supplies made by taxable
persons in the course of their trade.
Some supplies are taxable. Others are exempt. Make
sure you understand the difference and can work out
VAT from the VAT-exclusive and VAT-inclusive price.
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Summary 2
Registration
•
•
•
•
A trader becomes liable to register for VAT if taxable supplies over
a 12-month period exceeds £85,000 or in the next 30 days taxable
supplies will exceed £85,000.
A trader may also register voluntarily.
Group registration allows only one VAT return to be prepared for
the group as a whole.
Some pre-registration input VAT is recoverable.
Transfer of going concern
•
VAT is not charged on the transfer of a going concern.
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Summary 3
Administration of VAT
•
•
VAT periods usually quarterly, but can be monthly or annually.
Filing of VAT returns online and payment made electronically, by
one month and seven days after end of period.
Tax point
• Basic tax point is date goods are made available or service
completed.
• Earlier tax point applies if an invoice issued or payment made
before the basic tax point.
• Later tax point is if earlier tax point does not apply and the invoice
issued within 14 days after the basic tax point.
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Summary 4
Impairment losses (bad debts)
•
A trader can claim a refund of output tax on impairment losses
which remain unpaid six months from the time that payment is due
and have been written off.
Recovery of input tax
• Not all input VAT is deductible.
• In particular VAT on most cars, business entertaining and nonbusiness purchases is not recoverable.
• Input VAT on private fuel can be recovered but output VAT is
chargeable using actual cost or scale charge.
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Recent exam questions 1
Nature of question
Exam details
VAT liability
Specimen B26
VAT on fuel
Specimen B27
Registration
Sep B26
Pre-registration input tax
Sep B27
Administration
Sep B29
VAT liability
Dec 16 A1
Registration
Dec 16 B26
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Recent exam questions 2
Nature of question
Exam details
Pre-registration input tax
Dec 16 B27
VAT liability
Dec 16 B28
Administration
Dec 16 B29
Tax point
Mar/Jun 17 C31
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Recent exam questions 3
Nature of question
Exam details
Registration
Mar/Jun 19 B21
Pre-registration input tax
Mar/Jun 19 B22
Administration
Mar/Jun 19 B23
Recovery of input tax
Mar/Jun 19 B25
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Chapter 25
• VAT invoice
• Penalties
Further aspects of
VAT
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• Imports, exports, acquisitions
and dispatches
• Special schemes
Syllabus learning outcomes
• List the information that must be given on a VAT invoice
• Understand when the default surcharge, a penalty for an
incorrect VAT return, and default interest will be applied
• Understand the treatment of imports, exports and trade
within the European Union (EU)
• Understand the operation of, and when it will be
advantageous to use, the VAT special schemes:
― Cash accounting scheme
― Annual accounting scheme
― Flat rate scheme
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Chapter overview diagram
Further aspects
of VAT
VAT invoice
Penalties
Imports/Exports
Default interest
Errors
Default
surcharge
Annual
accounting
Cash
accounting
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Special
schemes
Flat rate
Tackling the exam
• You should expect to see value added tax tested in both
Section A and Section B.
• VAT may also be tested in Section C.
• You must be able to explain the rules on supplies within
the European Union and outside it.
• The three special schemes are important: learn the
conditions and how each of the schemes operate.
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VAT invoice 1
• A taxable person making a taxable supply to another VAT
registered trader must supply a tax invoice within 30 days
of the time of supply.
• There is no requirement to supply a tax invoice if supply is
exempt, zero rated or to a non-VAT registered customer.
• A tax invoice must show certain information.
• A less detailed tax invoice is needed if total is less than
£250.
• Records must be kept of all goods and services received
and supplied in the course of a business. Records must be
kept up-to-date and must be preserved for six years
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VAT invoice contents 2
• Supplier's name, address and registration number
• Date of issue, the tax point and an invoice number
• Name and address of the customer
• Description of the goods or services supplied, giving for each
description the quantity, the unit price, the rate of VAT and the
VAT exclusive amount
• Rate of any cash discount
• Total invoice price excluding VAT (with separate totals for zerorated and exempt supplies)
• Each VAT rate applicable and the total amount of VAT
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VAT invoice 4
Less detailed tax invoice contents
• Supplier's name, address and registration number
• Date of the supply
• Description of the goods or services supplied
• Rate of VAT chargeable
• Total amount chargeable including VAT
NB: Zero-rated and exempt supplies must not be included in
less detailed invoices.
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Default Surcharge
A "default" occurs if a taxable person submits a late VAT return
or submits a return on time but makes late payment of the VAT
due
On the first default:
× HMRC will serve a surcharge liability notice specifying a 12
month surcharge period starting from the end of the return
period.
× There is no default surcharge.
For each further default during the surcharge period:
× The surcharge period is extended to end 12 months after
the end of the latest period of default.
× If VAT has been paid late, there is a surcharge based on the
outstanding amount.
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Default Surcharge 2
• Once issued it remains in force until the taxpayer has not
been in default for 12 months
• No penalty for submission of late return provided tax paid on
time, but late return extends notice period
• While notice is in force, taxpayer liable to surcharge each
time defaults by late payment of tax
• This charge depends on the number of defaults in the
surcharge period:
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Penalties 4
Q1
VAT
PAID
RETURN
SUBMITTED
RESULT
Q2
LATE
LATE
LATE
LATE
SLN Issued
Q3
ON TIME
ON TIME
2% penalty
(reset SLN)
Q4
LATE
LATE
–
SLN removed after 4 consecutive 'clean returns'
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5% penalty
(reset SLN)
Question: Mr Slow
Mr Slow prepares VAT returns to 31 March, 30 June, 30
September and 31 December. His VAT returns and payments
were all submitted on time except for the following ones:
Tax Period
Date Submitted
Net VAT Liability
13 March 2020
11 May 2020
£5,000
31 December 2020 16 February 2021
£19,000
30 June 2021
13 August 2021
(£6,000) refund
30 September 2021 17 November 2021
£10,000
Required:
Describe the penalties arising from the above events.
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Answer: Mr Slow
First late return (3 months to 31 March 2020) Would not have attracted any penalty, but it would
have initiated the default charge procedure by establishing a surcharge liability (SLN) notice period for
the 12 months ending 31 March 2021.
Second late return (3 months to 31 December 2020)
The first default during the SLN period will attract a default surcharge = 2% × 19,000 = £380. As this is
less than £400, the penalty will be waived. The SLN period continues for the 12 months ending 31
December 2021.
Third late return (3 months to 30 June 2021)
The second default during the SLN period will not attract the 5% default surcharge as a repayment of
VAT is due. However, the SLN period will continue for the 12 months ending 30 June 2022.
Fourth late return (3 months 30 September 2021)
The third default during the SLN period will attract a default surcharge = 10% × 10,000 = £1,000. This
amount will be collected. The SLN period continues for the 12 months ending 30 September 2022.
The £400 waiver is irrelevant not just because the assessment is £1,000, but because HMRC only
applies it where the 2% and 5% rates are used (i.e. the waiver is inappropriate for persistent
offenders).
Assuming that Mr Slow submits his next four consecutive returns and payments on time, no further
penalties will arise and the default surcharge process will stop at 30 September 2022. If he makes a
further default after that date, the process will be re-started as explained above.
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Errors on VAT returns
If a taxpayer notices a misdeclaration or error before an
investigation by HMRC, and its net effect does not exceed the
higher of:
(a) £10,000 (net under-declaration minus over-declaration); OR
(b) 1% of turnover for the VAT period (max is 1% of £50k)
The trader is allowed to correct the mistake in the next VAT return.
No interest is charged and no separate disclosure is required.
If the net effect exceeds the higher of £10,000 or 1% of turnover
for the VAT period, separate disclosure to HMRC is required.
Default interest is charged.
Errors on VAT returns may lead to standard penalties
because of submission of an incorrect VAT return
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Question: Primary LLP
Your firm, Primary LLP, has four new clients who have been
struggling with their VAT administration and have now engaged the
firm to prepare their VAT returns. Whilst preparing the clients’ returns
for this quarter, you have noticed the following errors in the returns
from the previous quarter:
Client
Net error
Turnover Include in next
VAT Return?
1
3,567
150,000
2
22,987
3,000,000
3
42,690
3,500,000
4
51,260
5,700,000
Separate
Disclosure?
For each of the businesses indicate whether they can correct
their net(non-deliberate) errors on the next VAT return or
whether separate disclosure is required
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Answer: Primary LLP
1. 1% of turnover is £1,500, which is less than £10,000, therefore the
de minimis limit is £10,000. The net error is less than £10,000
therefore the error can be included in the next return.
2. 1% of turnover is £30,000, which is more than £10,000, therefore
the de minimis limit is £30,000. The net error is less than £30,000
therefore the error can be included in the next return.
3. 1% of turnover is £35,000, which is more than £10,000, therefore
the de minimis limit is £35,000. The net error is more than £35,000
therefore the error must be disclosed separately, and default
interest will be charged.
4. 1% of turnover is £57,000, but this is subject to an upper limit of
£50,000. Since the net error made is for more than £50,000, it
must be disclosed separately and default interest will be
charged.
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Penalties 6
Default interest
• Default interest is charged on unpaid VAT if:
― HMRC raise an assessment of VAT
― Trader makes a voluntarily discloses (before
assessment) an error that exceeds the de minimis.
• Runs from the date the VAT should have been paid to the
actual date of payment
• Cannot run for more than three years before the
assessment or voluntary payment
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Example: Harry
Harry discovers an error in his VAT return for the quarter ended 31
December 2020 which has led to an underpayment of VAT of
£54,100. Harry pays the outstanding sum on 7 March 2022.
Assuming the rate of interest is 2.6% calculate the interest on
late paid tax payable by Harry.
Answer
The under declared VAT is greater than £50,000 therefore it cannot be de
minimis and will need to be separately disclosed by Harry. As such, default
interest will be charged.
The error relates to the quarter ended 31 December 2020 and the VAT for this
quarter would have been due on 7 February 2021. Since the amount of £54,100
is not paid until 7 March 2022, 13 months of interest will apply.
Thus, the interest charge will be £54,100 × 2.6% × 13/12 = £1,524.
In addition, penalties will apply – the precise percentage will depend on Harry’s
behaviour in terms of the original error.
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Imports and exports for goods
 A sale of goods to a country outside the UK is an export/dispatch. The
purchase of goods from a country outside the UK is an
import/acquisition.
 Exports to anywhere in the world are zero-rated. The supplier must hold
evidence that the goods have been exported, such as copy invoices and
consignment notes.
 For imports, UK VAT registered business don’t have to pay VAT at the
time of importation.
 Instead the import VAT is declared on the VAT return as output VAT, but
can be reclaimed as input VAT on the same VAT return. So there is no
overall cost. (Reverse charging)
 Import VAT is accounted for on the VAT return covering the date that the
goods are imported.
 The only time that there is a VAT cost is if a business makes exempt
supplies, since an exempt business cannot reclaim any input VAT.
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Postponed Accounting
During the VAT quarter ended 31 March 2022, Yung Ltd
imported goods costing £12,000 from a supplier situated in
South Africa, and goods costing £4,000 from a supplier
situated in Russia. Yung Ltd.'s sales are all standard rated.
Show how the VAT is accounted for
Solution
Yung Ltd will include output VAT and input VAT of £3,200
((12,000 + 4,000) x 20%) on its VAT return for the quarter
ended 31 March 2022.
NB: Postponed accounting means that VAT no longer has to be paid immediately at the
port of entry, but can now be declared on the VAT return as output VAT. It can be
reclaimed as input VAT on the same VAT return. The system prevents goods being held at
the customs until the VAT is paid and also improves the cash flows.
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Question: Imports and exports
A company registered for VAT in the UK has the following trade in goods and
services for one year:
VAT exclusive amounts
Goods
Services
£
£
(a) Exports to countries outside of UK:
customers registered for VAT abroad
150,000
100,000
120,000
60,000
(b)Imports from countries outside the UK:
suppliers registered for VAT abroad
Required:
Explain the UK VAT treatment of the various trading activities.
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Answer: Imports and exports
(a) Exports to countries outside the UK
 Exports of goods (£150,000) to VAT registered customers are zero-rated supplies
made in the UK (i.e. no UK VAT is added to the invoiced amounts).
 Exports of services (£100,000) to VAT registered customers are made in the
country where the customers are located and are outside the scope of UK VAT
(i.e. no UK VAT is added to invoiced amounts).
(b) Imports from countries outside the UK
 Under postponed accounting, the imports of goods are treated as taxable supplies
for UK tax, and UK VAT registered companies can charge output VAT and claim
input VAT under a reverse charge procedure. 20% UK VAT will be added to the
invoiced amount of £120,000, i.e. £24,000. Input VAT of £24,000 will also be
included, so that there is no overall VAT effect.
 The import of services will be charged to UK output VAT in the hands of UK VAT
registered customers by "reverse charging" UK VAT of £12,000 (20% × £60,000)
by reference to the foreign supplier's invoice, i.e. output VAT and input VAT of
£12,000 will be included on the same return, so that there will be no VAT effect.
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Imports and exports for services
• The general rule is that supplies of services to any business
customer are charged where the customer is
established/situated.
• Supply of services to UK business customer: (import of services)
― Place of supply in UK
― UK trader accounts for output VAT
― Treated as VAT input tax {Reverse charge procedure}
― Usually VAT neutral
• Supply of services by UK trader to non-UK business customer:
(Export of services)
― Place of supply outside UK
― Not within scope of UK VAT
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VAT Special schemes 1
There are three schemes available to help small businesses in accounting for VAT.
They all aim to simplify VAT accounting, reduce administration and help the cash flow
of small businesses.
1. Cash accounting scheme
• Account for VAT when cash is paid and received.
• A business can only join the cash accounting scheme if:
a.
its taxable supplies in the next 12 months are not expected to exceed £1,350,000
b.
it is up to date with its VAT returns and has paid all outstanding VAT liabilities
c.
it has not been convicted of any VAT offences, assessed for penalties for VAT
evasion nor denied entry into the scheme in the last 12 months.
• Gives automatic impairment loss (bad debt) relief
• Must cease using the cash accounting scheme as soon as taxable turnover
exceeds £1,600,000
NB: The cash accounting scheme cannot be used for supplies of goods and services for which a VAT
invoice is issued before the supply is made, or for supplies where a VAT invoice is issued and full
payment is not due within six months of the invoice date.
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Special schemes 2
Annual accounting scheme
• Conditions (same as cash accounting scheme)
• Allows small businesses to submit only one annual VAT
return each year and spread the payments of VAT more
evenly throughout the year. This may help cash flow and
reduce administration burden.
• Payments on account: 10%  previous year's net VAT
liability, usually made equally over 9 months (starting on
month 4 of the current annual VAT {accounting} period)
• A balancing payment and the annual VAT return are
submitted to HMRC within two months of the end of the
year.
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Question: Mr Walker
Mr Walker registered for VAT on 1 April 2020. He applied for
annual accounting from 1 April 2021 and selected an annual
accounting period based on his financial accounting period to 31
March.
Relevant details for the two years ending 31 March 2022 were:
12 months to
31 March 2021
Turnover
Net VAT liability
12 months to
31 March 2022
£140,000
£160,000
£21,000
£25,000
Required:
Show the settlement of the value added tax liability for the
year ended 31 March 2022.
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Answer: Mr Walker
Settlement of the VAT liability for y/e 31 March 2022
£
Payments on account
10% x £21,00 = £2,100 each:
Due: 31 July 2021 – 31 March 2022 [9 x £2,100] 18,900
Balancing payment
Due: 31 May 2022 £(25,000 – 18,900)
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6,100
Special schemes 3
Flat rate scheme
• This scheme enables a small business to calculate its VAT liability as a
flat-rate percentage of total turnover and so avoids the need to keep
detailed records of input tax and output tax.
• A business can only join the flat rate scheme if its expected taxable
supplies (excluding VAT and capital items) in the next 12 months are not
expected to exceed £150,000. It must leave the scheme if its total
income (including VAT) in the previous year exceeded £230,000,
• Apply a flat rate percentage to total (VAT inclusive) turnover {inclusive of
zero-rated and exempt supplies).
• There is no deduction for input VAT.
• The scheme therefore reduces the administrative burden of keeping
detailed records of purchase and expense invoices and recoverable
input VAT.
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Special schemes 4
• 1% reduction if joins flat rate scheme in first year of VAT
registration
• The business will issue tax invoices for VAT-registered
customers and apply the appropriate rate of VAT i.e.
standard rate, zero rate. It does not have to keep records
of the input VAT on individual purchases.
• The flat rate scheme can be used in conjunction with the
annual accounting scheme but not the cash accounting
scheme
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Question: Kit Ltd
Kit Ltd has annual turnover of £84,900. 85% of the sales are
standard rated and 15% are zero rated. Standard rated
expenses are £14,100.
All figures are exclusive of VAT.
The relevant percentage for Kit Ltd's trade is 11%.
(1)
What is the VAT liability if Kit Ltd does not use the flat
rate scheme?

£9,677

£14,160

£11,613

£14,433
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Question: Kit Ltd (2)
(2)
What is the VAT liability if Kit Ltd DOES use the flat
rate scheme?

£9,339

£11,207

£10,927

£8,107
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Answer: Kit Ltd (1)
Answer: £11,613
Output VAT
£
84,900  85%  20% =
14,433
Input VAT
14,100  20%
VAT payable
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=
(2,820)
11,613
Answer: Kit Ltd (2)
Answer: £10,927
Using the flat rate scheme
(84,900  85%  1.20) + (84,900  15%)  11% = 10,927
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Question: Specimen exam question A10
For the quarter ended 31 March 2022, Faro had standard
rated sales of £49,750 and standard rated expenses
of £22,750. Both figures are exclusive of value added tax
(VAT).
Faro uses the flat rate scheme to calculate the amount of
VAT payable, with the relevant scheme percentage for her
trade being 12%. The percentage reduction for the first year
of VAT registration is not available.
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Question: Specimen exam question A10 – cont'd
How much VAT will Faro have to pay to HM Revenue and
Customs (HMRC) for the quarter ended 31 March 2022?
 £5,970
 £3,888
 £5,400
 £7,164
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(2 marks)
Answer: Specimen exam question A10
Answer: £7,164
£(49,750  120/100) = 59,700  12%
£7,164
Under the flat rate scheme, a business calculates VAT by
applying a fixed percentage to its tax inclusive turnover.
However, the business cannot reclaim any input tax
suffered.
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Summary 1
VAT invoice
•
There are various items of information that must be shown on a
VAT invoice which is used to charge VAT.
Penalties
•
•
•
Default surcharge regime applies if taxable person submits late
return or submits return on time but makes late payment of the VAT
due.
Errors may be corrected in next return if within limits.
Default interest charged on unpaid VAT.
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Summary 2
Imports, exports, acquisitions and dispatches
•
•
•
Imports from outside the EU are subject to VAT and exports outside
the EU are zero rated.
Taxable acquisitions from EU states are treated as a sale and a
purchase by the UK trader.
Dispatches to EU states are zero rated.
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Summary 3
Special schemes
•
•
•
•
Special schemes exist to aid traders.
Cash accounting protects gives automatic relief for impairment
losses.
Annual accounting simplifies the submission of VAT returns.
Flat rate scheme makes the calculation of the VAT liability easier.
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Recent exam questions 1
Nature of question
Exam details
Flat rate scheme
Specimen A10
Default surcharge percentage
Specimen B28
Surcharge notice period
Specimen B29
VAT invoice
Specimen B30
Annual accounting scheme
Sep 16 A4
VAT invoice
Sep 16 B30
Surcharge notice period, special schemes Dec 16 B30
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Recent exam questions 2
Nature of question
Exam details
Default interest
Mar/Jun 19 B24
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