COURSE: ACCA – TAXATION (TX)

Lecture Topic: Value Added Tax (VAT) – Other Aspects

1. VAT invoices
A taxable person making a taxable supply to another person registered for VAT must supply a VAT invoice within
30 days of the time of supply and must keep a copy. The invoice must show:

(a) The supplier’s name, address and registration number

(b) The date of issue, the tax point and an invoice number
(c) The name and address of the customer
(d) A description of the goods or services supplied, giving for each description the quantity, the unit price, the
rate of VAT and the VAT exclusive amount
(e) The rate of any cash discount
(f) The total invoice price excluding VAT (with separate totals for zero-rated and exempt supplies)
(g) Each VAT rate applicable and the total amount of VAT

A less detailed VAT invoice may be issued by a retailer where the invoice is for a total including VAT of up to
£250. Such an invoice must show:

(a) The supplier’s name, address and registration number

(b) The date of the supply
(c) A description of the goods or services supplied
(d) The rate of VAT chargeable
(e) The total amount chargeable including VAT

VAT invoices are not required for payments of up to £25 including VAT which are for telephone calls or car park
fees or are made through cash operated machines.

2. Records
Every VAT registered trader must keep records for six years. The following are the records needed:

o Copies of VAT invoices, credit notes and debit notes issued

o A summary of supplies made
o VAT invoices, credit notes and debit notes received
o A summary of supplies received
o A VAT account
o Order and delivery notes, correspondence, appointment books, job books, purchases and sales books, cash
books, account books, records of takings (such as till rolls), bank paying-in slips, bank statements and
annual accounts
o Records of zero-rated and exempt supplies, gifts or loans of goods, taxable self-supplies and any goods
taken for non-business use

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3. Special Accounting Schemes
There are three special accounting schemes designed to assist small businesses to account for VAT.

3.1 The cash accounting scheme

o Under the normal time of supply rules, businesses that have credit sales sometimes have to include these
sales on a VAT return and pay the Output VAT to HMRC even though they have not yet received the
money from the customers.

From a cash flow perspective, this can be very onerous for small businesses.

To alleviate this problem, HMRC allows certain small businesses to account for VAT on the cash basis.

o The cash accounting scheme allows businesses to account for VAT on the basis of when payment is
received from customers or when payments are made to suppliers. Thus, the tax point becomes the time
of receipt or payment.

Therefore, sales (and the associated Output VAT) will only be reported on a VAT return when the business
has actually received the money.

Likewise, purchases and expenses (and the associated Input VAT) will only be claimed on a VAT return
when the business has made the payment to its suppliers.

o Benefits of the cash accounting scheme are better cash flow management and automatic bad debt relief.

o Traders are eligible to use the cash accounting scheme if their expected annual taxable turnover (starting on
the date they applied to join the scheme) does not exceed £1,350,000. In addition, all VAT returns and
VAT payments must be up to date.

o A trader must leave the scheme if their annual taxable turnover exceeds £1,600,000.

3.2 The annual accounting scheme

o Smaller businesses may find it costly or inconvenient to prepare (the normal) 4 quarterly VAT returns. An
annual accounting scheme is available whereby a single VAT return is filed for a 12-month period
(normally the accounting period of the business).

o Businesses using this scheme could save both time and money by preparing one annual VAT return instead
of the normal four quarterly returns, especially if the business hires an external accountant/tax specialist to
prepare their VAT returns.

o A business using the annual accounting scheme is required to make nine payments on account. Each
payment on account represents 10% of the net VAT liability for the previous year.

The payments on account are made during months 4-12 of the annual VAT period, and any balancing
payment is made at the time the return is submitted.

o The annual VAT return must be submitted within two months after the end of the annual VAT period.

o Traders are eligible to use the cash accounting scheme if their expected annual taxable turnover (starting on
the date they applied to join the scheme) does not exceed £1,350,000. In addition, the trader must be up to
date with VAT returns.

o A trader must leave the scheme if their annual taxable turnover exceeds £1,600,000.

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3.3 The flat rate scheme

o The flat rate scheme is aimed at simplifying the way in which very small businesses calculate their VAT
liability.

o Under the flat rate scheme, the VAT liability is calculated by simply applying a flat rate percentage to
total VAT inclusive turnover (including zero-rated and exempt items), with no input VAT being
recovered.

This removes the need to calculate and record output VAT and input VAT and can save the business
money as there will be no need to hire an external accountant to prepare the VAT returns.

o The flat rate percentage varies according to the type of trade that the business is in. (A 1% reduction of the
flat rate % can be made by businesses in their first year of VAT registration).

o This scheme can be used if the tax exclusive annual turnover does not exceed £150,000. A business must
leave the flat rate scheme if the total value of its tax inclusive supplies in the year (excluding sales of
capital assets) is more than £230,000.

4. Penalties and Interest

4.1 Late submission penalties

Under a points-based system, a business incurs a penalty point each time a VAT return is submitted late.

 If a penalty threshold of four points is reached, a £200 penalty is then charged.

 Thereafter, subsequent late VAT returns also incur a £200 penalty.
 Penalty points normally expire after two years. However, they do not expire once the penalty
threshold has been reached.
 Once the penalty threshold has been reached, a business has to submit VAT returns on time over
a period of twelve months (so four quarterly returns) for their penalty points total to be reset to
zero.

4.2 Late payment penalties

Each late payment is considered separately.

 No penalty is charged if the VAT liability is paid within 15 days of the due date.
 A 2% penalty is charged if the VAT liability is paid within 16 and 30 days of the due date.
 The penalty is increased to 4% if the VAT liability is paid later than 30 days of the due date.
 In addition, where the VAT liability is paid more than 30 days late, a daily penalty at an annual
rate of 4% is charged beginning after the initial 30-day period.

4.3 Late payment interest

Regardless of whether any late payment penalties are incurred, late payment interest is charged from the
due date until the date that the VAT liability is paid.

The rate of interest for tax paid late is given the in exam (in the rates and allowances section).

Late payment and late submission penalties will not be charged if a business has a reasonable excuse for
the late payment or the late submission.

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Questions

1. Jump Ltd applies to use the annual accounting scheme from 1 January 2019. The company’s net VAT liability
for the year ended 31 December 2018 was £3,600. The actual net VAT liability for the year ended 31 December
2019 is £3,821.

Explain the returns and payments that Jump Ltd must make for the year ended 31 December 2019.

2. Funhouse Ltd runs a retail business, and is registered for VAT. The company uses the annual accounting
scheme so that it only has to prepare one VAT return each year.

The annual VAT period is the year ended 31 March.

Funhouse Ltd.’s VAT liability for the year ended 31 March 2022 was £10,200.

Funhouse Ltd. had the following results for the year ended 31 March 2023:

Output VAT - £33,827

Input VAT - £18,240

Required

(i) Calculate the monthly payments on account of VAT that Funhouse Ltd will have made in respect of the
year ended 31 March 2023, and state in which months these will have been paid.

(ii) Based on your answer to part (i) above, calculate the balancing payment that would have been paid with
the annual VAT return, and state the date by which this return was due for submission.

3. In the year ended 31 December 2022, Grape Ltd has annual sales of £70,500, all of which are standard rated.
The company incurs standard rated expenses of £4,500 per annum. These figures are inclusive of VAT.

Calculate Grape Ltd.’s VAT liability using:

(i) the normal method, and

(ii) the flat rate scheme

The flat rate percentage for Grape Ltd.’s trade is 10%

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4. Unless stated otherwise all of the figures below are exclusive of VAT.

Vanessa Serve is self-employed as a tennis coach. She is registered for value added tax (VAT), and is in the
process of completing her VAT return for the quarter ended 30 June 2022. The following information is
available:

(1) Sales invoices totaling £18,000 were issued in respect of standard rated sales.

(2) During the quarter ended 30 June 2022 Vanessa spent £600 on mobile telephone calls, of which 40%
related to private calls.

(3) On 3 April 2022 Vanessa purchased a motor car for £12,000. On 18 June 2022 £882 was spent on repairs to
the motor car. The motor car is used by Vanessa in her business, although approximately 10% of the
mileage is for private journeys. Both figures are inclusive of VAT at the standard rate.

(4) On 29 June 2022 tennis coaching equipment was purchased for £1,760. Vanessa paid for the equipment on
this date, but did not take delivery of the equipment or receive an invoice until 3 July 2022. This purchase
was standard rated.

(5) In addition to the above, Vanessa also had other standard rated expenses amounting to £2,200 in the quarter
ended 30 June 2022. This figure includes £400 for entertaining customers.

Required

(i) Calculate the amount of VAT payable by Vanessa for the quarter ended 30 June 2022. (5
marks)

(ii) Advise Vanessa of the conditions that she must satisfy before being permitted to use the VAT flat rate
scheme, and the advantages of joining the scheme.

The relevant flat rate scheme percentage for Vanessa’s trade as notified by HM Revenue and Customs for
the period is 8%.

Your answer should be supported by appropriate calculations of the amount of tax saving if Vanessa had
used the flat rate scheme to calculate the amount of VAT payable for the quarter ended 30 June 2022.
(5
marks)

5. Pen was late in submitting her VAT returns and paying the related VAT liabilities as follows:

Quarter Ended VAT Due Days Late

£
30 June 2023 32,000 10
30 September 2023 36,000 50
31 December 2023 41,000 18
31 March 2024 29,000 8

What penalties and interest will be due?