Indirect Taxes: VAT and Other Indirect Taxes
The VAT mechanism
VAT is charged on supplies of goods and services by a taxable person in the course or furtherance of business. Output tax less input tax equals the amount payable, with the burden on the final consumer. Supplies are standard rated (20%), reduced rated (5%), zero rated or exempt. Only taxable supplies (standard, reduced and zero) give full input tax recovery; exempt supplies do not. That is why zero rating is more valuable than exemption.
Registration
Compulsory registration arises when taxable turnover in any rolling 12 months exceeds 90,000, or is expected to exceed 90,000 in the next 30 days alone. Notify HMRC within 30 days; the effective date depends on which test was failed. The deregistration threshold is 88,000. Voluntary registration is often worthwhile where inputs exceed outputs.
Concepts and traps
- Place of supply, and the reverse charge on services from overseas suppliers; business-to-business general rule versus business-to-consumer use and enjoyment.
- Transfer of a business as a going concern: no supply, provided the buyer is VAT registered and intends to continue the business.
- Partial exemption: standard method, the de minimis test, annual adjustment and the capital items scheme.
- Option to tax on land, and the anti-avoidance provisions.
- Boundary questions: food versus catering, books versus e-books, education and health exemptions.
- Penalties: the points-based regime for late submission and late payment, plus interest.
Worked example
Input tax of 30,000, of which 10,000 relates to taxable supplies, 5,000 to exempt supplies and 15,000 is residual. Recover 10,000 plus 15,000 multiplied by 200 over 300, giving 20,000 in total. The balance is irrecoverable and becomes a cost.