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There has been a continuing debate following confusion over Level 2 Computerised Mock paper and Exam, which needs resolving and commenting on by a representative of ICB
Should purchases of items marked as 'Exempt' namely, postage, rent, council tax and stamps be included in the VAT return. These are recorded using T2 entries but according to the answers and exams results the sales value is being recorded for these items in Box 7 (Total Value of purchases, excluding VAT) on the VAT return.
Suggestions made are that these items, should NOT be included in the VAT return and therefore the papers are incorrect.
At this point students are answering these questions, based on how ICB want the answers, which is to include these sales, however is this correct??
Debate begin, or more importantly a response from ICB please?????
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- Member PM.Dip
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Hi
Please see below response from our Examining Team here at the ICB:
In a VAT registered business, sales and purchases of all goods and services except those deemed non-VATable, such as wages, loans, bank transfers, etc., must be included in the VAT Return. This means that even if they are zero-rated or exempt, so no VAT is actually due, their value must still be included in box 6 or 7.
For those using Sage, T2, which is the tax code for exempt items is, by default, marked for inclusion in the VAT Return. For those who have access to the Sage support website, Article 11217 explains all about tax codes, their use and how they affect the VAT Return. This specifically states that the net figure of a T2 sale is added to box 6 and the net figure of a T2 purchase is added to box 7. The only tax code that Sage does not include in the VAT Return is T9, which is the default non-VATable code.
I hope this clarifies the situation.
Allison
ICB
Edited at 21 Sep 2011 04:16 PM GMT
Edited at 22 Sep 2011 08:18 AM GMT
Edited at 22 Sep 2011 12:02 PM GMT
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Hi, the HMRC website is very clear. Check help on completing VAT form. For box 6 it says "include any zero-rated and exempt sales", the same applies for purchases. Sage will do this automatically. As far as I am aware the only sales/purchases that are not included on the VAT return are T9 - "Out of Scope". Hope this helps
Edited at 22 Sep 2011 08:15 AM GMT
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Hi Allison
Sorry to harp on about this but I have to say that not all exempt items appear on the VAT Return, there are those which are outside the scope of the VAT Return and should not appear on it at all.
The question which caused all this fuss in the first place is this table of expenses from one of the level 2 mock exams:
Task 8 – Enter and correct the cash payments
As the Orchard Bistro receives a lot of cash, it also pays a number of its bills in cash to save bank charges.
Required:
i) Post the following cash payments into the accounts:
Date Description Amount (inc VAT) VAT rate
03/04/10 Postage 35.52 Exempt
06/04/10 Rent 500.00 Exempt
20/04/10 Petrol 20.00 Standard
23/04/10 Gas 45.00 5%
30/04/10 Wages payable 2878.00 Non VATable
The Postage, if it is just an office expense or is for Direct Mailing is Exempt and beyond the scope of the VAT Return. If the postage relates to deliveries of supplies to customers in UK, EU and overseas, then it is required to be disclosed on the VAT Return.
(The question does not make this distinction clear).
However, the Rent amount should quite definitely NOT be included in the VAT Return just the same as with Bank Charges and Bank Interest. None of these items should appear on the VAT Return.
The ONLY time rent appears on the VAT Return is if the Landlord has opted into a VAT scheme and is charging you VAT on your rent. In this case the rent would NOT BE 'EXEMPT'.
I have been actively involved in accounts and payroll for 27 years and I do know what I'm talking about, however, if there are still some non-believers out there (including ICB staff) I would strongly urge you to check this out for yourself and get it from the horse's mouth.
The lovely people at the VAT Office will be happy to enlighten you on this subject and you can contact them on the HMRC Helpline number 0845 010 8500.
The answer sheet for the above question includes both rent and postage in the VAT Return and, while the postage could technically be included (although not enough information is given to the students regarding the postage for them to make up their minds about this one) but the rent should NOT be included in the VAT Return. This is an expense item, without a doubt, and is not classed as a Purchase. Therefore, aluding to previous posts, T2 in Sage is not the code to use with Rent, you should use T9 to exclude it from the return the same way you would with Bank Charges and Bank Interest.
I really do hope that you check into this very thoroughly because I will have to contine to teach my students the CORRECT way to deal with these items in the VAT Return. But it is unfair on them when they are marked wrong even though they are right.
Don't take my word for it, call the VAT helpline and ask the questions.
Caroline Barbour
Business Tutor - Openstudy College
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Hi Caroline
Hope this will help you in understanding the different between exempt and outside the scope of VAT.
Anything which is not in the UK VAT system at all - Outside the scope of VAT.
Some items are exempt from VAT because the law says they must not have any VAT charged on them.
5.8 Things to remember when completing boxes 6 and 7
Leave out:
- VAT itself
- wages and salaries
- PAYE and National Insurance contributions
- money put into and taken out of the business by you
- loans, dividends, and gifts of money
- insurance claims
- Stock Exchange dealings (unless you are a financial institution)
- MOT certificates
- motor vehicle licence duty
- Local Authority rates and
- income which is outside the scope of VAT because it is not consideration for a supply.
5.6 Box 6
Put in box 6 your total sales/outputs excluding any VAT. Include:
- standard-rated supplies including road fuel scale charges (see Notice 700/64 Motoring expenses)
- supplies to VAT registered traders in EC Member States; supplies to non-VAT registered or private individuals in EC Member States (distance sales)
- zero-rated supplies, including export supplies
- exempt supplies
- any other business income
- “reverse charge” transactions
- purchases under the special accounting scheme for gold
- supplies which are outside the scope of UK VAT under the Notice 741 Place of supply of services
- deposits for which an invoice had been issued
- own goods transferred to other EC Member States and
- supplies to customers in EC Member States on a sale or return basis.
See also common items for boxes 6 and 7 below.
Edited at 23 Sep 2011 01:40 PM GMT
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Hi Julius
I don't have any problems with understanding Exempt items. What I do have a problem with is that the question in the mock paper is including RENT in Box 7 of the VAT Return and this is WRONG!!!
I'm beginning to feel that everyone is so hung up on the SAGE codes and exempt supplies that the whole POINT of the discussion has been missed entirely.
Please phone the helpline number I have given above and ask the VAT office if rent should be included in box 7 and they will tell you, NO IT SHOULD NOT BE INCLUDED IN BOX 7.
This is the ONLY problem I and my students have and it is the problem that this original query was meant to answer.
Rent is NOT a T2 in Sage NOR does it appear ANYWHERE on the VAT Return unless the landlord is charging VAT on your rent and, in this case, it could not be classed as EXEMPT in the question.
Please check with the VAT office about the RENT in the question which has been posed in the level 2 exam and correct the answer to this question to EXCLUDE the rent from the VAT Return in the answer. I would argue that the postage should be treated the same way since the students have not been given enough detail regarding this to know whether or not it should be included, however I will advise them to include this one to be sure of gaining the marks for it.
I do hope that these comments are read PROPERLY before replies are posted to it. I'm already qualified, so it's no skin off my nose but it's very unfair to students who are being marked wrong when they are, in fact, right. Wouldn't you agree??
Caroline Barbour (HND Accs, PQ ACCA, MCIB (Comp))
Business Tutor - Openstudy College
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This is only from memory, so don't shoot me but doesn't the question actually tell you to treat it as 'exempt' rather than 'out of the scope'? So putting aside how rent should be treated in reality (being a VAT specialist is outside the scope of this course), the question has told you how to treat it?
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Edited at 02 Oct 2011 06:28 PM GMT
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Hi all
just double checked this one - Lease etc is Exempt etc and at no time states 'Outside of Scope'. Personally, I think this is being overthought. The question clearly states Rent to be shown as exempt and we include Exempt on VAT Return. We can therefore assume that the Landlord is VAT Registered.
See below:
HMRC Reference: Notice 700 February 2011, Section 29.2.8 b) Land and buildings
This includes sales, leases, licences, rights over land, sporting and mineral rights and parking facilities. Many of these supplies are exempt (although you can choose to standard-rate some supplies of property which would otherwise be exempt by opting to tax); but some are zero-rated and some are standard-rated.
If you are involved in property development or transactions in land or existing buildings you need Notice 742 and Notice 742A.
If you carry out works to protected buildings you need Notice 708.
edited as an afterthought to explain it a little better - dwelling house rent is different to commercial property rent
Edited at 01 Oct 2011 12:13 GMT
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Hi All
It is getting a bit confusing now and myself and Julius have recently written to HMRC for some proper clarification on the treatment of Postage & Rent in the question.
However, I would advise all my students (and anyone else involved in this debate) to enter these amounts in Box 7 of the VAT Return, as 'Exempt' (T2 in Sage) as stated in the question, for the time being.
I sent my letter on Wednesday last week but I don't expect to hear from HMRC for at least two weeks (although that might even be a bit optimistic). When we do get replies, we'll compare them and take the answers as the Gospel on the subject.
VAT is not an easy area unless you're a tax specialist but, since the items are marked as 'Exempt' and, according to HMRC now all 'Exempt' items should be recorded on the VAT Return, then it is adviseable to do so in order to gain the marks for that part of the question.
I hope this can put the whole thing to bed for just now and allow the students who are sitting these exams to get on with the rest of their studies in the knowledge that they know how to treat these items for examination purposes.
PS: A note to my own students, please try to be courteous and professional when posting comments on the forums, even if you feel someone has been discourteous to you. Remember your comments can be read by anyone subscribing to the forums, thank you all.
Caroline Barbour (HND Accs., MICB(Comp))
Business Tutor - Openstudy College
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Hi Julius and everyone else,
Well, I got an email reply from the VAT Office and am choking on the humle pie in my sandwiches!!
This is the reply I got and, while it doesn't specifically mention 'Rent', it does answer the question related to whether or not Exempt items are included in the VAT Return:
Dear Madam,
Thank you for your enquiry dated 28 September 2011.
The value of Exempt supplies should be included in box 7 .
Public Notice 700/12 (Filling in your VAT return) explains how to fill in your returns and also tells you about the main things to check when filling them in.
If you have any further queries regarding this matter, please submit your enquiry via our website, ensuring that you quote the case reference number at the top of this reply. Enquiries can be submitted by following the appropriate links on the VAT 'Contact us' page at www.hmrc.gov.uk
Yours sincerely
Simon Legg
Written Enquiries Officer
Value Added Tax (VAT) Written Enquiries Team
4th Floor Alexander House
21 Victoria Avenue
Southend-on-Sea
Essex
SS99 1BD
Contact telephone number (direct line): 01702 361713
So, in an exam question, if an item is marked as being 'Exempt' (regardless of what the item is) it needs to be recorded in Box 7 of the VAT Return (T2 code in Sage).
So please excuse me while I go and put on sack-cloth and ashes and beat myself senseless with a toothpick and a set of beautifully carved ivory chopsticks before flushing my brain down the loo!!
Will I ever recover, I ask myself??
Caroline Barbour (HND Accs.,MICB(Comp))
Business Tutor - Openstudy College
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