Study tips: Indirect Tax

Dealing with indirect tax, or as most of us know it Value Added Tax (VAT), is an important part of many accountants’ duties.

As an accountant, if you were unsure of a fact, you would research the HMRC guidance to check before you offered advice or completed a calculation. As a student, you must do the same. It’s vital to know where to find the information you need and how to apply it correctly and appropriately.

Now, let’s look at a few situations you might deal with as an accountant.

1. VAT registration

You have a client who has asked your advice on whether he needs to register for VAT. His normal turnover is split between both standard and zero rated – £30,000 standard rated and £20,000 zero rated. He has a ‘one off’ contract for £50,000 – what should he do? Should he register for VAT?


Standard rated                          £30,000

Zero rated                                 £20,000

‘One off contract’                      £50,000

The current threshold for VAT registration is £85,000 according to the HMRC guidance.

Without the ‘one-off contract’, the business is well below the threshold. However, with the ‘one-off contract’ it is over the threshold.

The guidance states that ‘A business which has trading that temporarily takes it above the VAT threshold of £85000 but which expects turnover to drop back below the threshold almost immediately can apply to stay unregistered, but the business must be able to prove to HMRC that the momentary increase is a true one-off occurrence.’

Therefore, you would advise that your client should apply to remain unregistered so long as it was a true ‘one-off contract’.

2. Entertainment

It can be confusing to both clients and students. The first distinction you need to make is – is it for an employee or is it business entertainment?

For business entertainment, it is ‘any form of free or subsidised entertainment or hospitality to non-employees’ – this would most commonly be customers. If an organisation is spending on business entertainment it cannot reclaim the VAT.

However, you must remember there is an exception – if it is an overseas customer then this is allowable and you can reclaim the VAT. For employees, you can reclaim VAT on their expenses for their travel, subsistence and entertainment.

For example, your client is organising a large business meeting for customers and employees from both the UK and overseas. Simple refreshments of sandwiches and soft drinks will be provided during the meeting. Your client can reclaim the VAT on the proportion of the expenses that relates to their employees and any overseas customers. They cannot reclaim any VAT for UK customers who are at the event.

3. Special accounting schemes

You may have a client who approaches you because he has heard there are ‘different accounting schemes’ for VAT. He wonders why and if he should be doing something differently.

Again, you can look this up to check the facts before you offer advice.

There are three schemes that you need to be aware of:

  • Annual Accounting
  • Cash Accounting
  • Flat Rate

The advice you would give to your client would depend on what the nature of his business was.

For example, if this client had a turnover of approximately £250,000 then he would be registered for VAT, but he could look at being on an annual scheme which would mean that only one VAT return a year would need to be submitted – therefore reducing administration and possibly accountancy fees.

There are advantages and disadvantages to all the schemes and a thorough conversation would need to be had to ensure all the facts were known prior to giving a definitive answer.

Remember, in the real world you will have access to the HMRC website so you can always check the relevant facts prior to giving advice. This is a vital part of providing due care to your clients, and as such is integral to being a proficient, professional accountant – and a successful student.

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Andrea Moore is an AAT tutor for ICS.

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