AAT L3 Indirect Tax (UK VAT) 2 — Questions and Answers
Question 1: The cash accounting scheme for VAT means that:
- VAT is accounted for based on invoice dates
- Output VAT is accounted for when payment is received and input VAT is reclaimed when payment is made (Correct answer)
- A business pays a flat rate of 1% of turnover
- VAT returns are submitted annually
Correct answer: Output VAT is accounted for when payment is received and input VAT is reclaimed when payment is made
Under the cash accounting scheme, businesses account for VAT on the basis of cash flow — output VAT is paid when customers pay, and input VAT is reclaimed when suppliers are paid, providing automatic bad debt relief.
Question 2: Which of the following would be classified as a zero-rated supply for UK VAT?
- Adult clothing
- Takeaway hot food
- Domestic electricity
- Printed books and newspapers (Correct answer)
Correct answer: Printed books and newspapers
Printed books and newspapers are zero-rated for UK VAT. Adult clothing is standard-rated; takeaway hot food is generally standard-rated; domestic electricity is reduced rate (5%).
Question 3: Output VAT is the VAT that a business:
- Pays on its own purchases
- Charges on its taxable sales and owes to HMRC (Correct answer)
- Reclaims from HMRC on purchases
- Charges on exempt supplies
Correct answer: Charges on its taxable sales and owes to HMRC
Output VAT is charged by a VAT-registered business on its taxable sales; it is collected from customers on behalf of HMRC and must be accounted for on the VAT return.
Question 4: The annual accounting scheme for VAT allows a business to:
- Submit one VAT return per year with advance payments during the year (Correct answer)
- Pay VAT only once per year without advance payments
- Only apply to businesses with turnover below the registration threshold
- Charge a reduced rate of VAT
Correct answer: Submit one VAT return per year with advance payments during the year
The annual accounting scheme lets eligible businesses file one VAT return per year; they make interim advance payments (typically nine monthly payments at 10% of the previous year's liability) and a balancing payment.
Question 5: A business makes both taxable and exempt supplies and is partially exempt. What is the impact on input VAT recovery?
- All input VAT can be claimed
- No input VAT can be claimed at all
- Only input VAT attributable to taxable supplies (plus a proportion of residual input tax) can be reclaimed (Correct answer)
- Input VAT is only reclaimable on capital expenditure
Correct answer: Only input VAT attributable to taxable supplies (plus a proportion of residual input tax) can be reclaimed
Under partial exemption rules, input VAT directly attributable to taxable supplies is recoverable; input VAT on exempt supplies is not; residual (mixed) input VAT is apportioned between taxable and exempt supplies.
Question 6: The VAT fuel scale charge applies to:
- VAT on electricity bills
- Reclaiming input VAT on business fuel purchased for private use in company vehicles (Correct answer)
- VAT on commercial vehicles
- The reduced rate on domestic heating fuel
Correct answer: Reclaiming input VAT on business fuel purchased for private use in company vehicles
The fuel scale charge is a method of accounting for output VAT on the private use of road fuel. If a business reclaims all input VAT on road fuel (including private use), it must account for output VAT using scale charges based on CO2 emissions.
AAT L3 Indirect Tax (UK VAT) 2
The cash accounting scheme for VAT means that: