On 1 April 2018, Elisa had an inventory of goods which had cost £13,800. The non-current assets were not used until after Elisa registered for VAT on 1 April 2018.
The above figures are all exclusive of VAT.
- Input VAT of £2,760 (13,800 x 20%) can be recovered on the inventory at 1 April 2018.
- The inventory was not acquired more than four years prior to registration, nor was it sold or consumed prior to registration. The goods must have been acquired for business purposes.
- The same principle applies to non-current assets, so input VAT of £12,800 (64,000 x 20%) can be recovered on the non-current assets purchased during March 2018.
- Input VAT of £1,840 ((2,600 + 3,000 + 3,600) x 20%) can be recovered on the advertising services incurred from 1 January to 31 March 2018.
- This is because the services were not supplied more than six months prior to registration. The services must have been supplied for business purposes.
- The total input VAT recovery is £17,400 (2,760 + 12,800 + 1,840).
VAT deregistration
A business stops being liable to VAT registration when it ceases to make taxable supplies. HM Revenue and Customs must be notified within 30 days, and the business will then be deregistered from the date of cessation or from an agreed later date.
A business can also request voluntarily VAT deregistration.
There is a deemed supply of business assets such as plant, equipment and inventory when a business ceases to be registered for VAT.
However, the transfer of a business as a going concern does not normally give rise to any VAT implications.
Example 8
Fang is registered for VAT but intends to cease trading on 31 March 2018. On the cessation of trading, Fang can either sell his non-current assets and inventory on a piecemeal basis to individual purchasers, or he can sell his entire business as a going concern to a single purchaser.
Sale of assets on a piecemeal basis
- Upon the cessation of trading, Fang will cease to make taxable supplies so his VAT registration will be cancelled on 31 March 2018 or an agreed later date.
- He will have to notify HM revenue and Customs by 30 April 2018, being 30 days after the date of cessation.
- Output VAT will be due in respect of non-current assets and inventory on hand at 31 March 2018 on which input VAT has been claimed (although output VAT is not due if it totals less than £1,000).
Sale of business as a going concern
- If the purchaser is already registered for VAT, then Fang’s VAT registration will be cancelled as above.
- If the purchaser is not registered for VAT, then they can take over Fang’s VAT registration, though from a commercial point of view this may be inadvisable.
- A sale of a business as a going concern is not treated as a taxable supply, and therefore output VAT is not due.
Group VAT registration
Two or more companies can register as a group for VAT purposes if they are under common control (such as a parent company and its subsidiary companies) and each of them is resident in the UK.
A VAT group is treated for VAT purposes as if it was a single company registered for VAT on its own. Group VAT registration is made in the name of a representative member, and this company is then responsible for completing and submitting a single VAT return and paying VAT on behalf of the group. However, all the companies in the VAT group remain jointly and severally liable for any VAT liabilities.
Example 9
Yung Ltd and its two 100% subsidiaries are considering registering as a group for VAT purposes.
- The advantage of group VAT registration is that there will be no need to account for VAT on goods and services supplied between group members. Such supplies are simply ignored for VAT purposes.
- It will also only be necessary to complete one VAT return for the whole group, so there should be a saving in administrative costs.
The tax point
It is very important to correctly identify the date of supply or tax point, as this determines when output VAT will be due.
Example 10
Explain the VAT rules which determine the tax point in respect of (1) a supply of goods, and (2) a supply of services.
- The basic tax point for goods is the date that they are made available to the customer.
- The basic tax point for services is the date that they are completed.
- If an invoice is issued within 14 days of the basic tax point, the invoice date will usually replace that given above.
- If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point.
With the supply of services there may be more than one tax point.
Example 11
Denzil is a self-employed printer who makes standard rated supplies. For a typical printing contract he receives a 10% deposit at the time that the customer makes the order. The order normally takes 14 days to complete, and Denzil issues the sales invoice three to five days after completion. Some customers pay immediately upon receiving the sales invoice, but many do not pay for up to two months.
- The tax point for each 10% deposit is the date that it is received.
- Invoices are issued within 14 days of the basic tax point (the date of completion), so the invoice date is the tax point for the balance of the contract price.
Output VAT and input VAT
There are several important points regarding output VAT and input VAT which should be remembered:
- For VAT purposes there is no distinction between revenue and capital items as there is for income tax and corporation tax.
- Output VAT is charged on the actual amount received where a discount is offered for prompt payment. The supplier therefore has to either provide details of the potential discount on the sales invoice, or to issue a subsequent credit note for the discount.
- Relief for an impairment loss is only available if the claim is made more than six months from the time that payment was due and the debt has been written off in the business’s books.
- Input VAT cannot be recovered in respect of business entertainment (unless it relates to the cost of entertaining overseas customers) or the purchase of a motor car (unless the car is used 100% for business purposes).
- Output VAT is charged where goods are taken from a business for non-business purposes, and similarly where services are used for non-business purposes.
- An apportionment is made where goods or services are used partly for business purposes and partly for private purposes.
Example 12
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2018. The following information is available:
- Cash sales amounted to £50,400, of which £46,200 was in respect of standard rated sales and £4,200 was in respect of zero-rated sales. All of these sales were to non-VAT registered customers.
- Sales invoices totalling £128,000 were issued in respect of credit sales to VAT registered customers. These sales were all standard rated, and none of these customers were offered a discount for prompt payment.
- On 20 February 2018, a credit sales invoice for £7,400 was issued in respect of a standard rated supply to a VAT registered customer. To encourage this previously late paying customer to pay promptly, Gwen offered a 10% discount for payment within 14 days of the date of the sales invoice. The customer paid within the 14-day period.
- Standard rated materials amounted to £32,400, of which £600 were taken by Gwen for her personal use.
- Standard rated expenses amounted to £24,800. This includes £1,200 for entertaining UK customers.
- On 15 March 2018, Gwen sold a motor car for £9,600, and purchased a new motor car at a cost of £16,800. Both motor cars were used for business and private mileage, but no fuel was provided for private mileage. These figures are inclusive of VAT where applicable.
- On 28 March 2018, Gwen sold machinery for £3,600, and purchased new machinery at a cost of £21,600. She paid for the new machinery on this date, but did not take delivery or receive an invoice until 6 April 2018. These figures are inclusive of VAT where applicable.
- On 31 March 2018, Gwen wrote off impairment losses in respect of three invoices which were due for payment on 15 August 2017, 15 September 2017 and 15 October 2017 respectively. The amount of output VAT originally paid in respect of each invoice was £340.
- During the quarter ended 31 March 2018, £600 was spent on mobile telephone calls, of which 40% relates to private calls.
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT Return – Quarter ended 31 March 2018