Value Added Tax (VAT)

Introduction

**Value Added Tax ('VAT')** is a tax on the consumption of goods and services. It is charged at each stage of the supply chain but is ultimately borne by the **final consumer**, with businesses acting in effect as **unpaid tax collectors** for HM Revenue and Customs ('HMRC'). This chapter examines the **key principles** governing VAT under the **Value Added Tax Act 1994 ('VATA 1994')** — scope, supply, **input tax** and **output tax** — together with the **registration requirements**, the **issue of VAT invoices**, the rules on **returns, payment and record-keeping**, and the distinction between **exempt** and **zero-rated** supplies.

Assessment focus

For the SQE1 FLK1 assessment, VAT sits within the **Business Law and Practice** syllabus alongside the other business taxes. You should be able to explain **when VAT is charged** (a taxable supply of goods or services made in the UK by a taxable person in the course of business), calculate the **net VAT payable** (output tax less input tax), and identify the **registration threshold** (£90,000 of taxable turnover in the preceding 12 months). You must be able to distinguish **standard-rated (20%)**, **zero-rated (0%)** and **exempt** supplies, and to explain the crucial practical difference: a person making **zero-rated** supplies may **reclaim input tax**, whereas a person making only **exempt** supplies **cannot register and cannot reclaim** input tax. Questions are **single best answer questions (SBAQs)** set in **realistic client-based scenarios**; you will be expected to **apply** these rules rather than merely recall them. This is a **closed-book** assessment.

Study tips

1) Memorise the **charging provision**: **s. 4(1) VATA 1994** — VAT is charged on any **taxable supply** of goods or services made in the UK by a **taxable person** in the **course of business**. 2) Learn the formula: **VAT payable = Output Tax − Input Tax**; if input tax exceeds output tax, a **rebate (refund)** is due. 3) Fix the **threshold**: registration is mandatory once taxable turnover exceeds **£90,000** in the **preceding 12 months**; register within **30 days** of the end of the month in which the threshold was exceeded. 4) Distinguish **zero-rated** (taxed at 0%, **input tax recoverable**) from **exempt** (cannot register, **input tax NOT recoverable**) — a classic SQE trap. 5) Remember the practical deadlines: returns are usually **quarterly**; payment is due within **one month and seven days** after the end of the VAT period; records must be kept for at least **six years**. 6) Note who bears the burden: VAT **costs the business nothing** — the **final consumer** suffers the tax (see MCQ).