## **Learning Outcomes**

After reading this article, you will be able to define the VAT (sales tax) terms used in FA1 questions, including taxable supplies, input tax and output tax. You will be able to distinguish between standard-rated, reduced-rated, zero-rated and exempt supplies, and explain the impact each category has on charging VAT and reclaiming VAT on purchases. You will also be able to perform basic VAT calculations from net and gross amounts.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must understand...

- when and why a business registers for VAT (sales tax)
- the meaning of taxable supplies, input tax and output tax
- the difference between standard rate, reduced rate and zero-rated supplies
- what exempt supplies are and how exemptions affect VAT recovery
- how VAT affects invoice totals and ledger recording (gross vs net)
- basic VAT calculations from net prices and gross prices

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which statement best describes a _zero-rated_ supply?
   - A. It is not part of the VAT system and cannot be reported on a VAT return.
   - B. It is taxable at 0%, so no output VAT is charged, but input VAT can still be reclaimed.
   - C. It is exempt, so no output VAT is charged and input VAT can be reclaimed.
   - D. It is always charged at the standard rate.

2. True or false? A business that is not VAT registered must still charge VAT on its sales.

3. State the difference between _input tax_ and _output tax_.

4. A VAT-registered business makes only exempt supplies. It buys office stationery for \$240 gross (VAT rate 20%). How much VAT can it reclaim?
   - A. \$0.00
   - B. \$40.00
   - C. \$48.00
   - D. \$240.00

## **Introduction**

VAT (Value Added Tax) is a common feature of sales and purchases. For FA1, you must be able to read an invoice, identify whether VAT should be charged, and decide what amounts are recorded in the accounting records.

A frequent exam focus is terminology: _taxable_ does not always mean “standard rate”, and “no VAT charged” can mean either _zero-rated_ or _exempt_ (with very different results for reclaiming VAT on costs). Getting these definitions right helps you answer both narrative MCQs and basic VAT calculations.

## **VAT registration and the VAT “collector” role**

Only a VAT-registered business charges VAT on its taxable sales. In effect, it collects VAT from customers and passes it to the tax authority, while usually reclaiming VAT suffered on its own purchases.

> **Key Term: VAT (Value Added Tax)**
> VAT is an indirect tax charged on certain supplies of goods and services. VAT-registered businesses collect VAT on taxable sales and may reclaim VAT on qualifying purchases.
>
> **Key Term: VAT registration**
> VAT registration is registering with the tax authority so the business must charge VAT on taxable supplies and can reclaim input VAT, subject to the rules.

### When does a business register?

A business normally registers when its turnover reaches a set limit (a threshold). Some businesses can register voluntarily (for example, to reclaim VAT on start-up costs), but voluntary registration only helps if the business makes taxable supplies.

## **Taxable supplies: rates and terminology**

A _taxable supply_ is a sale (of goods or services) that is within the VAT system. Taxable supplies can be charged at different rates depending on the country and the nature of the goods or services.

> **Key Term: taxable supply**
> A taxable supply is a sale of goods or services that is subject to VAT. Taxable supplies include standard-rated, reduced-rated and zero-rated supplies.
>
> **Key Term: standard rate**
> The standard rate is the main VAT percentage applied to most taxable supplies.
>
> **Key Term: reduced rate**
> The reduced rate is a lower VAT percentage applied to specific taxable supplies set by the tax rules.

### Output tax and input tax

VAT terminology often describes VAT by where it arises:

> **Key Term: output tax**
> Output tax is VAT charged on a business’s sales and collected from customers on behalf of the tax authority.
>
> **Key Term: input tax**
> Input tax is VAT paid to suppliers on a business’s purchases, which may be reclaimable from the tax authority.

For most VAT-registered businesses, VAT payable to the tax authority for a period is:

$$\text{VAT payable} = \text{Output tax} - \text{Input tax}$$

## **Zero-rated supplies (0% VAT, but still taxable)**

A zero-rated supply is still a taxable supply, but the VAT rate applied is 0%. This is a common exam trap: “0% VAT” does not mean “outside VAT”.

> **Key Term: zero-rated supply**
> A zero-rated supply is a taxable supply charged at 0% VAT. No output VAT is charged, but input VAT on related purchases can still be reclaimed.

**Result:** zero-rated businesses often receive VAT refunds if they have input VAT on costs but little or no output VAT.

## **Exempt supplies (no output VAT and no input VAT recovery)**

Exempt supplies are not subject to VAT. The key impact is that you do not charge VAT on exempt sales, and you cannot reclaim VAT on purchases that relate to exempt activities.

> **Key Term: exempt supply**
> An exempt supply is not subject to VAT. No output VAT is charged, and input VAT on related purchases is not reclaimable.

**Result:** irrecoverable VAT becomes part of the cost of the expense or asset in the accounts.

### **Exam Warning**

Many students treat “exempt” and “zero-rated” as the same because both can mean no VAT is added to the selling price. In FA1 questions, the deciding point is input VAT:

- _Zero-rated_ → input VAT can be reclaimed (normal VAT rules)
- _Exempt_ → input VAT cannot be reclaimed (VAT becomes a cost)

## **How to apply the correct category in questions**

### Quick comparison

| Type of supply | VAT charged to customer? | Input VAT reclaimable (normal rule)? |
| -------------- | -----------------------: | -----------------------------------: |
| Standard-rated |                      Yes |                                  Yes |
| Reduced-rated  |      Yes (at lower rate) |                                  Yes |
| Zero-rated     |                  No (0%) |                                  Yes |
| Exempt         |                       No |                                   No |

### Where VAT goes in the accounting records (FA1 focus)

In typical FA1 bookkeeping questions for a VAT-registered business:

- Trade receivables and trade payables are recorded at **gross** amounts (including VAT).
- Income and expenses are recorded **net** of VAT (VAT goes to the VAT control account).
- If VAT is **not reclaimable** (for example, exempt activity), the VAT is recorded as part of the **expense** or **asset cost**.

## **VAT calculations: net and gross**

If the net price is given and the VAT rate is $r\%$:

- VAT amount = $\text{Net} \times \frac{r}{100}$
- Gross price = $\text{Net} \times \left(1 + \frac{r}{100}\right)$

If the gross price is given:

- VAT amount = $\text{Gross} \times \frac{r}{100+r}$
- Net price = Gross − VAT

### **Worked Example 1.1**

A VAT-registered trader sells:

- standard-rated goods: \$2,000 net (VAT rate 20%)
- zero-rated goods: \$500 net

In the same period it buys inventory for \$900 net plus VAT at 20%. Calculate the net VAT payable for the period.

> **Answer:**
>
> Output VAT on standard-rated sales = \$2,000 \times 20\% = \$400.  
> Output VAT on zero-rated sales = \$500 \times 0\% = \$0.  
> Input VAT on purchases = \$900 \times 20\% = \$180.  
> Net VAT payable = \$400 - \$180 = \$220.

### **Worked Example 1.2**

A business makes only exempt supplies. It buys a computer for \$1,200 net plus VAT at 20% (\$1,440 gross). What amount is recorded as the cost of the computer, and how much VAT can be reclaimed?

> **Answer:**
>
> Because the supplies are exempt, the VAT on related purchases is not reclaimable.  
> VAT on the computer = \$1,200 \times 20\% = \$240.  
> The computer is recorded at the **gross cost** of \$1,440, and VAT reclaimed is **\$0**.

### **Revision Tip**

When you see “no VAT is charged”, immediately ask: _Is it zero-rated or exempt?_ Then decide whether input VAT is reclaimable before you record purchases net or gross.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- VAT is charged only by VAT-registered businesses on taxable supplies.
- Taxable supplies can be standard-rated, reduced-rated or zero-rated.
- Output tax is VAT charged on sales; input tax is VAT paid on purchases.
- Zero-rated supplies are taxable at 0% and usually allow input VAT recovery.
- Exempt supplies have no output VAT and do not allow input VAT recovery.
- If VAT is not reclaimable, it becomes part of the cost of the expense or asset.
- You must be able to calculate VAT from net amounts and from gross amounts.

## **Key Terms and Concepts**

- VAT (Value Added Tax)
- VAT registration
- taxable supply
- standard rate
- reduced rate
- output tax
- input tax
- zero-rated supply
- exempt supply


VAT concepts and terminology - Taxable supplies and exemptions