This two-part article is relevant to those of you sitting the TX-UK exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).
The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.
VAT returns are normally completed on a quarterly basis. Each return shows the total output VAT and total input VAT for the quarter to which it relates.
Virtually all businesses, including those voluntarily registered for VAT, have to use making tax digital software to directly submit their VAT returns to HM Revenue and Customs (HMRC). They also have to keep digital records.
VAT returns have to be submitted within one month and seven days of the end of the relevant quarter. Any VAT payable is due at the same time, and must be paid electronically.
Because VAT is a self-assessed tax, HMRC can make control visits to VAT registered companies. The purpose of a control visit is to provide an opportunity for HMRC to check the accuracy of VAT returns.
A VAT registered business may have to issue VAT invoices in respect of standard rated supplies. VAT invoices must contain certain information.
A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than £250.
Under a points-based system, a business incurs a penalty point each time a VAT return is submitted late.
Late submission penalties are only examined in the context of quarterly VAT returns.
Each late payment is considered separately.
Late payment penalties are only examined in the context of quarterly VAT returns.
Regardless of whether any late payment penalties are incurred, late payment interest is charged from the due date until the date that the VAT liability is paid.
The late payment penalties and late payment interest can be summarised as follows:
|
Up to 15 days late | 16 to 30 days late | More than 30 days late |
| Penalty | None | 2% | 4% |
| Daily penalty | No | No | Yes |
| Interest | Yes | Yes | Yes |
Late payment and late submission penalties will not be charged if a business has a reasonable excuse for the late payment or the late submission.
For example, an unexpected stay in hospital should count as a reasonable excuse for either late payment or late submission. However, having insufficient funds will not normally be accepted by HMRC as a reasonable excuse for late payment.
A VAT registered business which makes an error in a VAT return resulting in the underpayment of VAT, can be subject to both a penalty for an incorrect return and late payment interest.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a taxpayer’s behaviour.
When a UK VAT registered business imports goods into the UK, VAT has to be accounted for according to the date the goods are imported. This import VAT is at the UK VAT rate.
A system of postponed accounting applies so that the import VAT is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT return (a reverse charge procedure).
Therefore, for most businesses, there is no VAT cost because the output VAT and corresponding input VAT are equal. However, there is a VAT cost if a business makes exempt supplies, since an exempt business cannot reclaim any input VAT, or if the imported goods are of a type for which input VAT is not recoverable (such as cars for private use).
Postponed accounting does not have to be used, and there are some circumstances when it cannot be used. However, as far as TX-UK is concerned, it should be assumed that postponed accounting applies to all imports of goods.
When a UK VAT registered business exports goods, the supply is zero-rated.
Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated. Therefore, where a UK VAT registered business receives international services the place of supply will be the UK.
The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK.
The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful the schemes are not confused, as they are completely different from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to submit one VAT return each year.
The flat rate scheme can simplify the way in which small businesses calculate their VAT liability.
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total income. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the gross total income figure (including exempt supplies) with no input VAT being recovered. The percentage varies according to the type of trade which the business is involved in, and will be given to you in the examination.
A flat rate of 16.5% applies to those businesses which have no, or only a limited amount of, purchases of goods. You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question could be set where this rate applies.
There is very little advantage to using the flat rate scheme if the 16.5% rate applies because it is equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a business has much input VAT, the flat rate scheme will not be beneficial if the 16.5% rate applies.
There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. Several different topics will usually be covered within a longer-style VAT question, so it is important to cover the whole subject area.
Written by a member of the TX-UK examining team