This two-part article is relevant to those of you sitting the TX-UK exam in the period 1 June 2023 to 31 March 2024, and is based on tax legislation as it applies to the tax year 2022–23 (Finance Act 2022).
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.
For the VAT quarter ended 31 March 2023, Jet has output VAT of £12,400 and input VAT of £7,100.
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.
Keen Ltd registered for VAT on 1 March 2023.
The company only sells goods, and at present issues sales invoices which show (1) the invoice date and invoice number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Keen Ltd’s name and address, and (5) the name and address of the customer. Keen Ltd does not offer any discount for prompt payment.
The company wants to know the circumstances in which it is and is not required to issue a VAT invoice, the period during which such an invoice should be issued, and the additional information which it will have to show on its sales invoices in order that these are valid for VAT purposes.
Issue of VAT invoices
The following information is required:
A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than £250.
Jude is registered for VAT, but only a few of her customers require a VAT invoice. All of Jude’s sales are for less than £250.
A simplified invoice should be issued when a customer requests a VAT invoice. This must show the following information:
New late payment and late submission penalties will be introduced from 1 January 2023 to replace the default surcharge system. However, for exams in the period 1 June 2023 to 31 March 2024, it will be assumed that the existing default surcharge system continues to apply.
A default occurs if a VAT return is not submitted on time or if VAT is paid late. If the default involves the late payment of VAT then a surcharge may be incurred.
Li has submitted her VAT returns as follows:
|Quarter ended||VAT paid|
|30 September 2021||6,200||Two months late|
|31 December 2021||28,600||One month late|
|31 March 2022||4,300||On time|
|30 June 2022||7,600||On time|
|30 September 2022||1,900||On time|
|31 December 2022||3,200||On time|
|31 March 2023||6,900||Two months late|
Li always pays any VAT which is due at the same time that the related VAT return is submitted.
Neither a surcharge liability notice, nor a default surcharge, will be incurred if a business has a reasonable excuse for the late submission or the late payment. 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 penalty interest.
During March 2023, Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three cars when completing its VAT return for the quarter ended 31 December 2022.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a taxpayer’s behaviour.
Continuing with example 21
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.
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing £1,000 (exclusive of VAT) from either a UK supplier or an overseas supplier.
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.
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT registered businesses situated overseas. As business-to-business services, these are treated as being supplied in 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.
Ming is registered for VAT. She has annual standard rated sales of £800,000. This figure is inclusive of VAT. Ming pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her customers have recently defaulted on the payment of their debts.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to submit one VAT return each year.
Newt Ltd is registered for VAT. The company has annual standard rated sales of £950,000. This figure is inclusive of VAT. Because of bookkeeping problems, Newt Ltd has been late in submitting its recent VAT returns.
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.
Omah registered for VAT on 1 January 2023. He has annual standard rated sales of £100,000, and these are all made to the general public. Omah has annual standard rated expenses of £16,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for Omah’s trade is 13%.
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.
Continuing with example 27, assume that the relevant flat rate scheme percentage for Omah’s trade is instead 16.5%.
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