Question

(a) Serena Ltd has been trading for many years with a steady turnover of £5,000 per month and has not been required to be VAT registered.

As the result of developing a new product, Serena Ltd received a large order on 15 October 2019 for which an invoice was raised on the same day for £100,000 and payment was received on 18 October 2019.   

Explain why the company is required to be VAT registered, the date from which the registration will take effect and the date by which HMRC must be notified.                                                   

(b) State four conditions that must be met to use the cash accounting scheme and state two advantages of using the scheme.                                                                                                      

(c) Lewis registered for VAT on 1 August 2019. He incurred the following expenditure prior to registration and still holds a valid VAT invoice for each item:   

1) £600 plus VAT for design services for his new website. The invoice was dated 31 December 2018.

2) £1,000 plus VAT for a printer which he bought on 12 November 2018 and which is still used in the business.

3) £100 plus VAT for the purchase of ink cartridges for the printer, a quarter of which have been used by 1 August 2019. The invoice is dated 17 December 2018.

Calculate the input VAT that Lewis can claim in relation to each item of expenditure with explanations for each item.                                                                                                            

(d) Mimi is VAT registered and runs a small farming operation selling crops and livestock and she lets out an unused field to another farmer for grazing. Income generated from these activities is all zero rated for VAT purposes.

She also has four residential properties on her land which are let on six month leases to each tenant. This rental income is exempt from VAT.

While Mimi knows that she doesn’t charge VAT on any of her income, whether zero rated or exempt, she is not entirely sure why there is a distinction between each type of supply.

Briefly explain the implications of the business making both taxable and exempt supplies.                                                                                                        

Country：the United Kingdom

Answer 1

a) Under the future test,Serena knew on 1st oct 19 that her turnover will go over the vat threshold within the next 30days.she needs to inform HMRC immediately and needs to be registered for vat.

Registration date is 15 oct 19.

b) Four conditions

1. Turnover needs to be less than 1350000
2. Need to supply taxable goods or services
3. Need to be upto date with submission and payment of vat
4. need to be established in UK

Advantages

1.It helps with the cash flow

2.you declare output tax on payments received and recover input tax on payments made

3.Automatic bad debt relief

C). 1) He cant reclaim vat on the design services as invoice is more than 6 months before registration

2) 200 input tax canbe recovered = 1000*20% . It is within the 4 years period and goods are still in hand

3) 15 Input tax can be recovered = 1000*20%*3/4 . Invoice date is within 4 years.we apportion the part of ik used prior registration

Total Input tax can be claimed = 215.

D) Her farming activities are taxable supplies at Zero rated.she can recover the input tax on expenses linked to these activities.

With the propert income, which is exempt of vat .She cannot recover input taxes on any expenses linked to these activities

Under the partial exemption rule, she could reclaim input tax on the exempt supplies if it is of mimis.

For this, the input tax on exempt supplies cant be more than 625 per month on average and the value of exempt suppies doesnt exceed 50% of the value of all the supplies.