Business Taxation Presentation MS 3255

1. Business Taxation PresentationMS 3255 Value Added Tax Mohd Sahlan bin Suhaimi (07B1706) Ak Mohd Aliuddin bin Pg Hj Ramlee (08B1934) Siti Nurul Hazimah binti Senudin (08B1737) Nuranisah binti Metusin (08B1919) Nur Sabrina binti Roslan (08B1929) Nurul Jannah binti Hj Alim (08B1933)

2. Outline • Introduction – Definition of VAT • The scope and nature of VAT • Types of supply • VAT registration compulsory • Voluntary registration • Recovery of pre registration input • Deregistration • VAT on sale of a business • The time of supply • The value of a supply • Recovery of input VAT • Relief for impaired debts • Example

3. What is VAT? • An indirect tax • Charged on most goods and services, supplied within the UK • is borne by the final consumer

4. In other words…. VAT is a tax that's charged on most goods and services that VAT-registered businesses provide in the UK. It's also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.

5. A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. • The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.

6. The scope and nature of VAT Three essentials needed before VAT can be charged • Taxable person • Taxable supply • Business

7. Taxable person - One who is or should be registered for VAT Taxable supply • Everything which is not exempt or outside the scope of VAT Business • It must be made in the course of furtherance of a business carried on by a taxable person.

8. Input and output VAT Input VAT Output VAT Businesses pay input VAT on their purchases of goods and services. Reclaimable from HMRC. Registered businesses charge output VAT on their sales of taxable goods and services. Payable to HMRC.

9. Types of supply • Supplies can be taxable, exempt or outside the scope of VAT. • VAT is charged on taxable supplies but NOT on exempt or supplies which are outside the scope of VAT. • Only taxable supplies are taken into account in determining whether a trader needs to register for VAT.

10. Items not covered by VAT • Exempt supplies • Outside the scope of VAT

11. Exempt items • insurance • providing credit • education and training, if certain conditions are met • fundraising events by charities, if certain conditions are met • membership subscriptions, if certain conditions are met • most services provided by doctors and dentists • finance: this includes wide range of financial services, such as making loans, hire purchases etc.

12. Outside the scope of VAT There are some things that aren't in the UK VAT system at all – (outside the scope of VAT). They are not taxable supplies and no VAT is charged on them. Examples: • non-business activities like a hobby - for example, you might sell some stamps from your collection • fees that are fixed by law - known as 'statutory fees' - for example the congestion charge

13. Rates of VAT Taxable supplies are charged to VAT at onf of three rates: - Zero rate – 0% • Standard rate - 17.5% (default rate) • Reduce rate – 5%

14. Examples of reduced-rated items • domestic fuel and power • installing energy-saving materials • sanitary hygiene products • children's car seats

15. Examples of zero-rated items • food - but not meals in restaurants , hot takeaways or classed as luxury items. • books and other printed matter. (e.g. newspapers, books and maps). • children's clothes and shoes • public transport.

16. The difference between exempt and zero-rated • Traders making exempt supplies cannot charge VAT to their customers. • Traders making zero-rated supplies charge VAT but at 0%. • The key difference is that traders making zero-rated supplies can reclaim the input tax they suffer, those making exempt supplies cannot.

17. VAT registration • compulsory to register if taxable supplies exceeds the registration limits. TESTS HISTORIC TURNOVER FUTURE PROSPECT Cumulative total for the last 12 month exceeds the registration limits of £68,000 Taxable supplies for the next 30 days in isolation are expected to exceed £68,000. • Notify HMRC within 30 days when it exceeds. • Registration is effective from end of month • Notify HMRC before the end of 30 days. • Registration is effective from the beginning of the 30 days

18. CONSEQUENCES OF REGISTRATION Once registered, a taxable person must start accounting on VAT: • Output tax must be charged on the taxable supplies. • Each registration trader is allocated a VAT registration number. • Each registered trader is allocated a tax period for filling returns. • Input tax is recoverable on business purchases and expenses. • Appropriate VAT records must be maintained.

19. NUMBER OF REGISTRATION • A person can be registered only once. • Where a partnership is concerned, separate business carried by the same partners, will have single registration.

20. VOLUNTARY REGISTRATION ADVANTAGES DISADVANTAGES Avoids penalties for late registration. Can recover input VAT on purchases. Can disguise the small size of the business. Business will suffer the burden of compliance with all VAT administration rules. Business must charge VAT. This makes their goods comparatively more expensive than other unregistered business.

21. RECOVERY OF PRE-REGISTRATION INPUT VAT VAT incurred before registration cannot be accounted for as input VAT. If these conditions applied, then it can be treated as input tax and can be reclaimed. • The goods must be acquired for business purposes and should not be sold or consumed prior to registration. • The goods have not been acquired more than three years prior to registration. • The services must be supplied for business purposes. • The services should not have been supplied more than six months prior to registration. GOODS SERVICES

22. Deregistration • A person must deregister when he ceases to make taxable supplies: • notify HMRC within 30 days of ceasing to make taxable supplies. • VAT registration is cancelled from the date of cessation or a mutually agreed later date.

23. A person may voluntarily deregister even if the business continues and if there is evidence that taxable supplies in the next 12 months will not exceed £66,000: • starting at any time. • The 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.

24. Effect of deregistration VAT output tax must be accounted for on the value of fixed assets and stocks held at the date of deregistration, on which a deduction for input tax has been claimed. The final tax liability is waived if it is ≤ £1,000.

25. VAT on sale of Business Sale of business Normal taxable supply Transfer of a going concern Charge output VAT on sale price Outside the scope of VAT if conditions met

26. Transfer of registration Both the transferor and the transferee may make a joint election, for the transferor’s registration to be transferred to the transferee. The transferee assumes all rights and obligations in respect of the registration, including the liability to pay any outstanding VAT.

27. The tax point • it also known as time of supply • to identify the quarter in which it falls. • change in VAT standard rate or change in classification of a supply, necessary to know whether a supply had been made before or after the date of change.

29. Special rules for certain supplies of goods : • Goods on sale or return : when the sale is adopted by the customer, or 12 months after dispatch of the goods. • Continuous supplies : the earlier of a tax invoice being issued and a payment received. • Sales under hire purchase : when the goods are collected, delivered or made available.

30. The value of supply • normally the price (before VAT) charged by supplier. • VAT fraction for standard – rated goods : VAT exclusive amount refer to the price of goods before VAT. VAT is 15% or 17.5% of the VAT exclusive amount. VAT inclusive amount refer to the price of goods includes VAT. VAT is (15/115) or (17.5/117.5) of the gross amount.

31. Discounts : VAT must be calculate as if the maximum discount available was taken. • Goods for own use : VAT must be accounted for on the replacement value of the supplies. • Gifts : Gifts of stock or fixed assets are treated at replacement value.

32. Recovery of input VAT • Recoverable by taxable persons on goods and services which are supplied to them for business purposes. • Irrecoverable under condition of: • Business entertaining • Cars, unless they are 100% used for business purpose.

33. Example: • £5400 on business entertaining and £2400 on staff entertaining • No VAT recoverable on business entertaining • VAT inclusive figure is £6210 ( £5400 + 15% of £5400) • charged against profit

34. staff entertaining will be recoverable of £360 ( 15% of £2400) • VAT exclusive amounted of £2400 will be charged against profit.

35. Motor expenses • can recover input VAT incurred in the running cost of a car • examples are fuel and repairs.

36. Business pays for all fuel costs and can recover all input VAT If there is some private use of the car Driver reimburses business the full cost for fuel for private journeys Driver does not reimburse business the full cost of fuel for private journeys. Output VAT is payable on the amount reimbursed Output VAT is payable on a scale charge Scale charge depends on the with CO2 emissions of the car.

37. Relief for impaired debts • VAT output tax is accounted for when an invoice is issued. • Sales irrecoverable ; • Seller has paid VAT to HRMC. • And never recover VAT from the customer. • Thus, sellers are able to claim VAT bad debt relief.

38. Conditions: • At least six months must have elapsed since payment from the debtor was due. • The debt must have been written off in the seller’s VAT account. • Relief is obtained by adding the VAT element of the bad debt to the input tax claimed. • Claims for bad debt relief are subjected to a three- year time limit.

39. Comprehensive Example Dynamo Ltd commenced trading as a wholesaler on 1 November 2009. Its sales have been as follows: The company’s sales are all standard-rated, and the above figures are exclusive of VAT.

40. RULE: Excess £68,000 in taxable supplies during any 12-month period, will result in compulsory registration. CALCULATION : Taxable supplies 1st January 2010 – 31st December 2010 - £68,700. ACTIONS : Notify HMRC before 1st February 2011 (30 days after the end of the period) The company will be registered from 1st February 2011 or an agreed earlier date.

41. NO Questions?