VAT Outline

1. Introduction
2. The scope and nature of VAT
3. Types of Supply
4. VAT Registration – compulsory
5. Voluntary registration
6. VAT Groups
7. Recovery of pre-registration input VAT
8. Deregistration
9. VAT on sale of a business
1 10. The time of supply (Tax point)
11. The value of a supply
12. Recovery of input VAT
Shashi Jayatissa
ACCA, MBA (UK)
13. Relief for impairment losses
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Introduction
2

VAT is an indirect tax on consumer spending charged on most goods and services supplied within the UK
suffered by the final consumer, and collected by businesses on behalf of HMRC.
Three essentials needed before VAT can be charged are:

Taxable supply: everything which is not

Taxable person: one (individual/
legal person) who is or should be
registered for VAT, because they
make taxable supplies.
exempt or outside the scope of VAT, including
sales and purchases of most goods and services.
Business
For VAT to apply the taxable supply must be
made in the course or furtherance of a business
carried on by a taxable person.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

The scope and nature of VAT
3
Input and output VAT
Input VAT Output VAT
• Businesses pay input VAT on their purchases of goods and Registered businesses charge output VAT on their sales of
services. taxable goods and services.
• Input VAT is reclaimable from HMRC • Output VAT is payable to HMRC

Every month or quarter the input and output VAT is netted off and paid to or recovered from HMRC. The
business therefore accounts to HMRC for VAT on the 'value added' to the product.
How VAT works (Assume 20%)
Charges £200 + VAT Charges £280 + VAT Charges £315 + VAT

Manufacturer Wholesaler Retailer Final consumer

Price £200 Price £280 Price £315 Price £378

Output VAT £40 Output VAT £56 Output VAT £63 (£315+£63VAT)
Input VAT £0 Input VAT £40 Input VAT £56
Net price £240 Net price £336 Net price £378 Businesses pay to HMRC £63 of
Pay to HMRC £40 Pay to HMRC £16 Pay to HMRC £7 VAT (£40+£16+£7)

TYU 1 page 820

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Types of Supply
4
Supplies can be taxable, exempt or outside the scope of VAT.
Taxable supplies
It is important to correctly classify supplies because:
• only taxable supplies are taken into account in determining whether a trader needs to register for VAT
• input VAT related to exempt supplies is not recoverable.

Trader makes taxable supplies

Standard rated: Any taxable

Reduced rate: mainly for
domestic or charitable use are
charged at the reduced rate. (Not
examined)
Zero rated: No VAT is charged but it is classed
supply which is not charged at
as a taxable supply at 0% and taken into account
the zero or reduced rates is
in determining whether a trader should register
charged at the standard rate of
for VAT and whether input VAT is recoverable.
20%.

Trader able to register

If registered then charge VAT on taxable supplies and can claim input VAT.
Shashi Jayatissa. ACCA, MBA (UK)
02/22/2022
 Types of Supply Cont..
5 Trader making Exempt supplies Zero rated supplies
Can charge VAT? X  @ 0%
Zero rated and Exempt supplies:
Can reclaim input VAT? X 
TYU 2 page 822
Can register for VAT? X 

Zero rated items Exempt supplies

Food: used for human consumption unless it is either a supply in the course of
catering (e.g. in a restaurant) or is classed as a luxury item, such as alcohol or
confectionery.
Books and other printed matter (e.g. newspapers, books, maps and sheet music).
Construction of dwellings: includes new buildings for residential or charitable use,
but not the reconstruction of an existing building.
Transport: Transporting passengers by road, rail, sea or air, but excluding smaller
vehicles
Drugs, medicines and appliances: Drugs supplied on prescription and certain
supplies to the disabled.
Clothing and footwear: Young children’s clothing and footwear.
Sports: Entry fees to sports competitions used to provide prizes
or charged by non-profit-making sporting bodies
Insurance: premium
Financial services, including making loans, hire purchase, share
dealing and banking services.
Education: If provided by schools and universities.
Health: The services of registered doctors, dentists, opticians,
chemists and hospitals
Land: Transfers of land and rights over land, but not buildings.

Charities: Gifts to charities are zero rated.

Shashi Jayatissa. ACCA, MBA (UK)

02/22/2022
 VAT Registration – compulsory
6
Registration threshold
If a person’s taxable supplies (excluding sales of capital assets) exceed the registration threshold, then
registration is compulsory. There are two separate tests for compulsory registration:
1. Historic turnover test:
At the end of each month, the trader must look at the cumulative total of taxable supplies for the last 12
months, or since commencing trade, whichever is the shorter.
Registration procedure is as follows:
REGISTRATION = TOTAL CUMULATIVE SALES > £85000 (given)
 Notify HMRC within 30 days of the end of the month in which the registration threshold is exceeded,
by completing form VAT1, or via HMRC's online services.
 Registration is effective from the first day of the second month after the taxable supplies exceed the
threshold.
 A trader need not register if his taxable supplies for the next 12 months are expected to be less than
the deregistration threshold (£83000). (given)
 A trader need not register if his supplies are wholly zero rated.
Illustration 1 page 824/ TYU 3 page 825

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

VAT Registration – compulsory cont..
7
2. Future prospects test: REGISTRATION = TAXABLE SUPPLIES IN THE NEXT 30 DAYS >
£85000
Registration procedure is as follows:
 HMRC must be notified before the end of the 30 days, by completing form VAT1, or using HMRC's online
services.
 Registration will be effective from the beginning of the 30 day period.
Illustration 2 page 825/ TYU 4 page 826
Consequences of registration
Once registered, a certificate of registration is issued and the taxable person must start accounting for VAT:
 Output tax must be charged on taxable supplies.
 Each registered trader is allocated a VAT registration number, which must be quoted on all invoices.
 Each registered trader is allocated a tax period for filing returns, (normally every three months)
 Input tax (subject to some restrictions) is recoverable on business purchases and expenses.
 Appropriate VAT records must be maintained.
 Penalties for late registration. In addition, the trader must pay over the VAT they should have collected in
theShashi
period thatMBA
Jayatissa. ACCA, they
(UK) should have been registered. 02/22/2022
 Voluntary registration
8
Actual or intending traders
A person may register voluntarily provided he is making, or intending to make, taxable supplies. HMRC
will register the trader from the date of the request for voluntary registration, or a mutually agreed
earlier date.
Advantages and Disadvantages of voluntary registration
Advantages Disadvantages
• Avoids penalties for late registration. • Business will suffer the burden of compliance with all
VAT administration rules.
• Can recover input VAT on purchases. • Business must charge VAT. This makes their goods
comparatively more expensive than an unregistered
business, for customers who cannot recover the VAT (i.e.
final consumers)
• Can disguise the small size of the business.

Voluntary registration is therefore beneficial where the business is making zero rated supplies and has
input VAT that it can recover, or supplies to VAT registered customers but is probably not beneficial
where the business is making supplies to non-VAT registered customers (e.g. the general public).
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
Voluntary registration Cont..
9
Accepting additional new business
Accepting additional new work may increase the taxable supplies of the business above the compulsory
registration threshold. The VAT status of the customers of the business is therefore very important in
deciding whether or not taking on the new business is beneficial.

Customers VAT registered Customers are not VAT registered

• they can recover the output VAT charged
• it will be advantageous to accept the new work
• they cannot recover the output VAT charged
• if the selling price cannot be increased, the output VAT will
become an additional cost to the business, This may make the
additional new work unattractive hence may be beneficial to
decide to not accept the work, and maintain taxable supplies
below the VAT registration threshold.

Illustration 3 page 827

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 VAT Groups
10
Companies that are under common control can elect for a group VAT registration, provided that all the
companies have a place of business in the UK.
A VAT group is treated as if it is a single company for the purposes of VAT. Group registration is optional;
not all members of the group have to join the VAT group. Effect of group VAT registration is:
• Goods and services supplied by one group company to another within the group registration are
disregarded for the purposes of VAT. (no VAT on intra-group supplies)
• VAT group appoints a representative member which is responsible for accounting for all input and
output VAT for the group.
• The representative member submits a single VAT return covering all group members, but all
companies are jointly and severally liable for the VAT payable.
• Normal time limits apply for submission of VAT returns.

Advantages of group VAT registration Disadvantages of group VAT registration

• VAT on intra-group supplies eliminated
• Only one VAT return required, which should save
administration costs
Shashi Jayatissa. ACCA, MBA (UK)
• All members remain jointly and severally liable
• single return may cause administrative difficulties
collecting and collating information.
02/22/2022
 Recovery of pre-registration input VAT
11
Normally, VAT incurred before registration cannot be accounted for as input VAT. If the conditions below
are satisfied, however, then it can be treated as input tax and reclaimed accordingly.

Goods Services
• goods must be acquired for business purposes and should • services must be supplied for business purposes.
not be sold or consumed prior to registration (e.g. should
still be in inventory).
• goods have not been acquired more than four years prior • services should not have been supplied more than six
to registration. months prior to registration.
Note: term goods includes both current and noncurrent assets for VAT purposes.
TYU 5 page 829

02/22/2022
Shashi Jayatissa. ACCA, MBA (UK)
 Deregistration
12
Compulsory deregistration
A person must deregister when he ceases to make taxable supplies and the VAT registration is cancelled
from the date of cessation.
HMRC should be notified within 30 days of ceasing to make taxable supplies.
Voluntary deregistration
A person may voluntarily deregister, even if the business continues, if there is evidence that taxable
supplies in the next 12 months, will not exceed £83,000.
• 12 month period is measured starting at any time.
• onus is on the trader to satisfy HMRC that they qualify.
• VAT registration is cancelled from the date of request or an agreed later date.
Effect of deregistration
VAT output tax must be accounted for on the value of non-current assets and inventory held at the date
of deregistration, on which a deduction for input tax has been claimed. However, this final tax liability is
waived if it is £1,000 or less.
TYU 6 page 830

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 VAT on sale of a business
13
Alternative treatments
Compulsory deregistration applies where a business is sold or otherwise transferred as a going concern to
new owners.
Sale of business may treated as:

Normal taxable supply: charge output VAT on Transfer as a going concern: not treated as a
assets transferred supply for VAT if conditions met

Conditions for transfer of business as a going concern

If below conditions are satisfied the sale/transfer is not treated as a taxable supply; no output tax is therefore
charged on the assets transferred by the seller, and no input tax is recoverable by the purchaser.
 business is transferred as a going concern.
 no significant break in the trading.
 same type of trade is carried on after the transfer.
 new owner is or is liable to be registered for VAT, immediately after the transfer.
Note: all these conditions must be met.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 VAT on sale of a business Cont..
14
Transfer of registration
 On the sale of a business it is normally compulsory to deregister. However, instead of doing so, both
the transferor and the transferee may make a joint election, for the transferor’s registration to be
transferred to the transferee.
 Where this is done, the transferee assumes all rights and obligations in respect of the registration,
including the liability to pay any outstanding VAT. Therefore, this may not be a good commercial
decision.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The time of supply (Tax point)
15
Importance of tax point
VAT is normally accounted for to HMRC on a quarterly basis, so it is important to know the time of a
supply, to identify the quarter in which it falls. Also, if the standard rate of VAT were to change or if the
classification of a supply altered (e.g. a zero rated supply became standard rated), it would be necessary
to know whether a supply had been made before or after the date of change.
Basic tax point (BTP)
Basic tax point

Goods: when they are collected, delivered or

Services: when they are performed.
made available to a customer.

Illustration 4 page 832

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The time of supply (Tax point) Cont..
16
Actual tax point (ATP)
The basic tax point (BTP) may be overridden by the actual tax point as follows:
Actual tax point

Step 1: Identify BTP

Note: traders can agree an

Step 2: On or before BTP, has: extension to the 14 day invoicing
- A tax invoice been issued? or, rule with HMRC, to fit in with their
- A payment been received invoicing routines

Decision made: ATP = the earlier Step 3: Has a tax invoice been issued
date (compulsory ruling) within 14 days of the BTP?

Decision made: Decision made:

Illustration 5 page 833 ATP = Invoice date ATP = BTP

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The time of supply (Tax point) cont..
17
Tax point – special rules
Certain supplies of goods do not fit naturally into the above scheme:
Goods on sale or return
Time of supply is the earlier of:
• date when the goods are adopted
by the customer, or
• 12 months after the despatch of
the goods.
TYU 7 page 834
Shashi Jayatissa. ACCA, MBA (UK)
Continuous supplies
time of supply is the earlier of:
• tax invoice being issued, and
• a payment received
Supplies such as electricity and tax advice
do not have a basic tax point.
The supplier may issue a tax invoice once
a year in advance, showing the periodical
payments and their due dates. In this case,
there is a separate tax point for every
amount due, being the earlier of the due
date and the date on which payment is
received.
Sales under hire purchase
Time of supply for the full value of the
goods follows the normal rules. (i.e. the
time that the goods are collected, delivered
or made available).
Goods are taxed as normal at the standard
or zero rate. The interest charge is an
exempt supply, provided it is disclosed as a
separate amount.
02/22/2022
 The value of a supply
18
Basic rule
The value of a taxable supply is the amount on which the VAT charge is based. This is normally the price
(before VAT) charged by the supplier.
VAT fraction for standard rated goods
• VAT exclusive amount: price of goods before VAT.
• VAT inclusive amount: price of goods after VAT.

Discounts VAT INCLUSIVE AMOUNT = VAT EXCLUSIVE AMOUNT + VAT

120% = 100%
If a discount is offered, then VAT must be calculated on the amount+ that20%
the customer actually pays.
Customer may be offered:
• Trade discounts: reduced price for being a loyal customer or for buying large quantities of goods.
• Prompt payment discounts (cash discounts): reduced price for paying within an agreed timescale.
*In both cases VAT is charged on the price paid by the customer.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 The value of a supply Cont..
19
For prompt payment discounts, the supplier may not know when the invoice is raised whether the
customer will qualify for the discount. The supplier must therefore charge VAT on the invoice on the full
price and either:
• issue a credit note if the discount is taken, or
• show full details of the terms of the prompt payment discount and include a statement that the
customer can only recover input tax based on the amount paid to the supplier. If the discount is taken
the supplier must then adjust their records to account for output tax on the amount received.
Illustration 6 page 836
Goods for own use
The treatment of goods taken for the trader's own use depends on the purpose for which the goods
were purchased.
• trader withdraws goods which were purchased for business purposes: input VAT can be recovered
and output VAT must be accounted for on the replacement value of the supplies.
• trader initially purchased the goods for private purposes: no input VAT can be reclaimed and there
is no output VAT charge. 02/22/2022
Shashi Jayatissa. ACCA, MBA (UK)
 The value of a supply Cont..
20
Gifts
Gifts of inventory or non-current assets are treated as taxable supplies at replacement cost, except gifts
of:
• goods to the same person which cost the trader £50 (excluding VAT) or less in a 12 month period.
• business samples, regardless of the number of same samples given to the recipient.
Gifts of services, whether to employees or customers, are not taxable supplies.
TYU 8 page 837

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Recovery of input VAT
21
Conditions for recovery of input VAT
Input VAT is recoverable by taxable persons on goods and services which are supplied to them for business purposes. A
VAT invoice (see Chapter 26) is needed to support the claim.
Capital and revenue expenditure
Unlike other taxes, there is no distinction between capital and revenue expenditure for VAT. Provided the assets are
used for the purposes of the trade, the related input VAT is recoverable on both capital assets and revenue expenditure.
If capital assets are subsequently sold, output VAT must be charged as a taxable supply of goods. However, the exception
to this rule is the purchase of motor cars.
Irrecoverable input VAT
Input VAT on the following goods and services cannot be recovered:
• Business entertaining: (e.g. entertaining suppliers and U.K. customers), although VAT incurred on staff entertaining
and entertaining overseas customers is recoverable.
• Motor cars: unless they are used 100% for business purposes or leased, in which case 50% of input VAT is
recoverable where the car has some private use.
Note: where input VAT cannot be recovered on the purchase of a motor car, no output VAT will be due on its disposal.
Illustration 7 page 838
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Recovery of input VAT Cont..
22
Private use
Input VAT cannot be claimed for goods or services that are not used for business purposes. Where goods or
services are used partly for private and partly for business purposes an appropriate apportionment is made
to calculate the recoverable input VAT. The exception to this rule is the recoverability of input VAT on motor
expenses
Motor expenses
A business can recover all input VAT incurred on the running costs of a car, such as fuel and repairs, even
when there is some private use. Note: VAT is not charged on the insurance and road fund license.
Businesses pays for all fuel costs and can recover all input VAT, if
there is some private use of the car.

Driver does not reimburse business with any of fuel for private
Driver reimburses business the full cost for fuel for
journeys, Output VAT is payable on a scale charge. (scale
private journeys, Output VAT is payable on the
charge depends on the CO2 emissions of the car, provided in the
amount reimbursed.
exam)

Note: partial reimbursement of fuel costs is not examinable

Illustration 8ACCA,
Shashi Jayatissa. pageMBA840/
(UK) TYU 9 page 840 02/22/2022
 Relief for impairment losses
23
VAT output tax is accounted for when an invoice is issued. If the debt becomes irrecoverable, the seller
has paid VAT to HMRC and never recovers this from the customer. This position is addressed by the seller
being able to claim VAT relief for impairment losses.
Following conditions apply:
• At least six months must have elapsed from the time that payment was due (or the date of supply if
later)
• Debt must have been written off in the seller’s VAT account.
• Claims for relief for irrecoverable debts must be made within four years and six months of the
payment being due.
Relief is obtained by adding the VAT element of the irrecoverable debt to the input tax claimed.
Illustration 9 page 841/ TYU 10 page 841/ TYU 11 page 842
TYU 12 page 844/ TYU 13 page 844
TYU 14 page 845/ TYU 15 page 845/ TYU 16 page 845

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022