What are exempt and zero-rated supplies, and how the subtraction of input tax and interest on unpaid value added tax (VAT) performed in a business formation UK


The article will discuss the exempt supplies and the zero-rated supplies and the effect of exempt supplies in the case of subtraction of input tax.

The VAT is applicable to imports from offshore company formation UK, in order to make sure that people do not have an incentive of tax to purchase abroad, and in order to enhance the sales to offshore company formation UK, VAT is not made applicable to exports.

Exempt and Zero-Rated Supplies

Some supplies are liable to tax at either a standard rate, zero rate or a reduced rate. Other than these, the supplies are not liable to tax.

What are the types of supplies?

The supplies that are said to be zero rated are liable to tax at zero percent. In the case of a supplier who is supposed to make the payment of tax and who has the outputs at a zero rate, but the inputs at a standard rate, can acquire the repayments of the VAT that he has paid on his purchases.

In the case of a person who makes the supplies that are exempt, then he is not able to make the recovery of VAT on inputs, exactly in the same manner as in the case of a person who is not registered. An exempt supplier is supposed to bear the charge of VAT. He is allowed to have an increment in his costs to pass on the charge, but he is not authorized to issue an invoice of VAT that would let a customer who is liable to tax, to acquire a credit for VAT, as his supplies are not chargeable for VAT.

The categorizing of supply for VAT is done in the following order if a trader makes a supply:

  • Check for the supply if it is zero rated, if not, then:
  • Check if the supply is exempt. Again, if not, then:
  • Check if it is a supply of reduced rate. No?
  • Then surely the supply is standard rated.

Supplies that are Zero Rated

Some common items on the list of zero-rated supplies are as under:

  • Food for both humans and animals
  • Goods that are exported from outside the European Union
  • Books, newspapers or other printed matter that is used for reading
  • Shoes and clothing for the young ones and some specific protective clothes such as the helmets for motor cyclists
  • Sale of the freehold or construction work on new homes, or a lease by builders of over a duration of 21 years (minimum 20 years in Scotland) of new homes

Supplies on the Exempt List

Some common items on the exempt list include insurance, financial services and selling freeholds of building except the commercial buildings within three years after its completion and leaseholds of buildings and land of any age that includes a surrender of a lease

Decremented Rate of VAT

There are some specific supplies that are at a charge of 5 percent. The supplies are still considered as the taxable supplies. The main supplies include supplies of services for the installation of materials that save energy in homes and supplies of fuel for domestic purposes.

Exceptions in the Case of Main Rules

Many exceptions exist when considering the main rule. As an example, consider that it is stated in the zero rated list that the human food is zero rated. However, it is stated by the legislation that the supply of food in the genre of catering such as the meals in restaurants or hot takeaways are not considered as zero rated. The items of food that are luxury such as the peanuts, crisps and chocolate coated biscuits are also not considered zero rated.

It is a known fact that the financial services are exempt in the exempt list, however, the legislation makes a statement that the services of processing and management of credit are not exempt. The advice of investment is also not exempt.

While categorizing the services or goods as zero rated, standard rated or exempt, great care should be taken. It is not as easy and straight as it appears to be.

Supplies that are Standard Rated

No list of supplies that are standard rated, exists. If a supply is not considered to be zero rated and also, is not exempt, then its treatment is done considering it standard rated. The VAT’s standard rate is 20%.

Buildings and Land

The transactions in land can be standard rated, zero rated or exempt. It should be noted that selling out of a new commercial building’s freehold is standard rated. ‘New’ is defined as not more than 3 years old. The commercial building’s construction is also considered as standard rated. The construction of buildings or new dwellings that is to be used for the purposes of residency or charity is considered zero rated. Other sales and most of the leases of buildings and land are exempt.

Waving the Exemption

It is up to the owners that they may choose to treat the leases and sales of commercial buildings and land as liable to tax rather than treating them as exempt. This is known as option to tax or waving the exemption.

If the owner is not already registered for the value added tax, then he must first get himself registered for VAT. This is important for the purpose of making the choice or election. The exemption leads to the standard rated supply replacing an exempt supply, in a usual manner, in order to let the recovery of input VAT take place.

A payer of tax has the choice to make a REE, a real estate election, rather than making distinct elections for every property that he is an owner of. If a payer of tax goes for the making of REE, then he will be subject to the treatment of making the election for every property that he obtains after once making the real estate election, although he may revoke the option on any specific property according to the cooling off provisions.

The revoking of elections can be done when:

  • There is no holding of interest in the property for over the period of six years.
  • The duration of cooling off period is within the period of six months when the elections take effect, under the condition that own use or a no use has been made of the land, no charge of tax has been made applicable on the land’s supply as a result of the option, no occurrence of TOGC has been found and a notification has been given the notification of the revocation on the particular form.
  • More than twenty years have passed since the election had effect at the first place, under the condition that certain terms are fulfilled or with the consent of HMRC beforehand.

Subtraction of Input Tax

All the input VAT are not to be subtracted, such as the VAT in the case of majority of motor cars.

The input tax is to be subtracted for the supplies to a person liable to tax such as the case of a person who has to register a business name UK.

Capital and Revenue Expense for VAT

There is no difference between the two terms of capital and revenue expense when it comes to VAT. So a manufacturer who is making the payments of VAT when he makes the purchase of plant in order to make supplies liable to tax, will be able to acquire a credit immediately for all the VAT.

Input Tax not to be Subtracted

The following input tax as mentioned below cannot be subtracted:

  • VAT cannot be reclaimed on cars until and unless the acquiring for car is done newly for the resale or is obtained to be used for making a lease to the business of taxi, a business of self-drive car hires or a driving school. In the case if VAT cannot be recovered on a car because its use is not completely limited to the purposes of business, then if the car is sold out, VAT is not charged.
  • VAT on expenses that are borne on accommodation of domestic nature for proprietors or directors of a business.
  • VAT in the case if you wonder of starting a business, that entertains where the price of entertaining is not a tax to be subtracting the expense of trade unless the entertainment is for the customers who are abroad in which scenario, the input tax is to be subtracted.
  • VAT on the non-business items that are passed through the accounts of business. If the buying of goods is done partly for the business purposes, the buyer is allowed to subtract all of the input tax, and account for the output tax with respect to the usage that is private or make a subtraction of only the input tax’s proportion of business.

VAT that cannot be Recovered

The VAT is also included in the price for income tax, capital allowance, corporation tax or purposes of capital gains in the case where the input tax on a purchase is not to be subtracted.

The VAT that is to be subtracted is not included in the costs, so that only the total amounts are a part of the accounts. In a similar manner, the sales made and the proceeds in the calculation of chargeable gains are the total of VAT shown, since the payment of VAT is made over to HMRC.

Interest on Unpaid VAT

The charge of default interest is made on the VAT that is unpaid if HMRC goes for raising an assessment of VAT or the trader having business formation UK makes a payment voluntarily prior to the assessment being raised. It becomes effective from the date the payment of VAT is made to the payment date in reality but cannot become effective for more than a duration of three years prior to the assessment or a payment made voluntarily.

The interest that is not be subtracted in the computation of the profits liable to tax, is charged on VAT that is subject to an assessment where the returns were not correct or were not made at all, or which could have been subject to an assessment but its payment was made prior to the assessment being raised. It is effective from the reckonable date until the date the payment is made. This interest is referred to as a default interest.

It is worth mentioning here that the reckonable date is when the payment of VAT should have been made, that is, one month from the termination of a period of return, or in the case of the repayments of VAT, seven days since the order has been given for the issuance of repayment. However, where the charge of VAT is made with the help of an assessment, interest is not applicable from more than three years prior to the date of assessment. In the case where the payment of assessment was made before raising an interest, then the interest is not effective for more than three years prior to the payment date.

As a normal practice, the charge of interest is only applied when there would be a loss to the exchequer otherwise. For example, it is not charged when an online company registration UK could not succeed in making a charge of VAT, but if it had happened, then some other online company registration UK would have gotten the chance to make a recovery of the VAT.

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