Level 3 Tax Processes for

Businesses (TPFB)
reference material
Finance Act 2023 – for assessment from 29 January 2024
Reference material for AAT assessment of Tax Processes for Businesses

Introduction

This document comprises data that you may need to consult during your Tax Processes for
Businesses computer-based assessment.

The material can be consulted during the practice and live assessments by using the reference
materials section at each task position. It’s made available here so you can familiarise yourself
with the content before the assessment.

Do not take a print of this document into the exam room with you*.

This document may be changed to reflect periodical updates in the computer-based assessment,
so please check you have the most recent version while studying. This version is based on
Finance Act 2023 and is for use in AAT Q2022 assessments in 2024.

*Unless you need a printed version as part of reasonable adjustments for particular needs, in
which case you must discuss this with your tutor at least six weeks before the assessment date.

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Contents

1. Rates of VAT 4
2. Registration and deregistration for VAT 4
3. Failure to register for VAT 5
4. Changes to the VAT registration 5
5. Keeping business and VAT records 5
6. Contents of a VAT invoice 6
7. Partial exemption for VAT 6
8. International trade and VAT 7
9. Tax points for VAT 7
10. Time limits for issuing a VAT invoice 7
11. Blocked expenses and VAT 8
12. Fuel scale charge and VAT 8
13. Bad debt and VAT 10
14. Due dates for submitting the VAT return and paying electronically 11
15. Special accounting schemes for VAT 11
15.1 Annual accounting scheme for VAT 11
15.2 Cash accounting scheme for VAT 11
15.3 Flat Rate Scheme for VAT 12
16. Errors in previous VAT returns 12
17. Late submission and late payment of VAT 13
17.1 Late submission 14
17.2 Late payment 14
17.3 Interest charged 14
18. Assessment of VAT 14
19. Penalties for inaccuracies in VAT return 15
20. Payroll record retention 15
21. Types of payroll submission 15
22. Payroll deadlines 15
23. Penalties for late submission of payroll filings 16
24. Penalties for late payroll payment 17
25. Penalties for inaccuracies in payroll filings 17

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1. Rates of VAT
Taxable supplies:

Standard rate 20%

Reduced rate 5%
Zero rate 0%

Non-taxable supplies have no VAT applied:

• Exempt
• Outside the scope of VAT

2. Registration and deregistration for VAT

Registration threshold £85,000

Deregistration threshold £83,000

Compulsory registration Notify HMRC Registration effective from

Historic test Within 30 days of the end of the First day of the second
month threshold was exceeded month after threshold
exceeded
Future test Before the end of the 30 day From the start of the 30 day
period period

Deregistration Notify HMRC Deregistration effective

from
Compulsory Within 30 days of the business Date of cessation
ceasing to make taxable supplies
Voluntary Evidence that taxable supplies will Date request received by
not exceed the VAT deregistration HMRC, or
threshold in the next 12 months Agreed later date

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3. Failure to register for VAT

• This can result in a penalty for failure to notify. The penalty is a % of potential lost revenue (PLR).

Type of behaviour Within 12 months of tax 12 months or more after tax

being due was due
unprompted prompted unprompted prompted
Non-deliberate 0-30% 10-30% 10-30% 20-30%
Deliberate 20-70% 35-70% 20-70% 35-70%
Deliberate and concealed 30-100% 50-100% 30-100% 50-100%

• Penalties will not be applied if there is a reasonable excuse.

• HMRC will treat the business as though it had registered on time and will expect VAT to be
accounted for as if it had been charged. The business has two choices:

i. treat the invoices as VAT inclusive and absorb the VAT which should have been
charged, or

ii. account for VAT as an addition to the charges already invoiced and attempt to
recover this VAT from its customers.

4. Changes to the VAT registration

HMRC must be notified of a change of:

Name, trading name or address Within 30 days

Partnership members Within 30 days
Agent’s details Within 30 days
Bank account details 14 days in advance
Change in business activity Within 30 days

5. Keeping business and VAT records

Record retention period 6 years
Penalty for failure to keep records £500

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6. Contents of a VAT invoice

Full VAT invoice

• a sequential number based on one or more series which uniquely identifies the document
• the time of the supply (tax point)
• the date of issue of the document (where different to the time of supply)
• supplier’s name, address, and VAT registration number
• customer’s name and address
• a description sufficient to identify the goods or services supplied
• for each description, the quantity of the goods or the extent of the services, the rate of VAT, and
the amount payable excluding VAT — this can be expressed in any currency
• the gross total amount payable, excluding VAT — this can be expressed in any currency
• the rate of any cash discount offered
• the total amount of VAT chargeable — this must be expressed in sterling
• the unit price (applicable to countable elements).

Simplified VAT invoices (<£250)

• suppliers name, address, and VAT registration number
• the time of supply (tax point)
• a description which identifies the goods or services supplied
• for each applicable VAT rate, the total amount payable, including VAT, and the VAT rate.

Modified VAT invoices

• a full VAT invoice showing the VAT inclusive rather than VAT exclusive values.

7. Partial exemption for VAT

De minimis amount £625 per month
Proportion of total input VAT <50%

• Generally, a partially exempt business cannot reclaim the input tax paid on purchases that relate to
exempt supplies.

• If the amount of input tax incurred relating to exempt supplies is below a minimum de minimis
amount, input tax can be reclaimed in full.

• If the amount of input tax incurred relating to exempt supplies is above the de minimis amount,
only the part of the input tax that related to non-exempt supplies can be reclaimed.

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8. International trade and VAT
Export of goods Zero-rated
Import of goods UK VAT applied using postponed accounting.
Export of services Apply UK VAT if place of supply is in the UK:
•for supplies to business, place of supply is the
location of the customer (outside the scope of UK
VAT)
• for supplies to non-business customers, place of
supply is the location of the supplier (charge UK
VAT).
Import of services Reverse charge applies

9. Tax points for VAT

Basic tax point date Date of despatch of the goods/carrying out of the service
Actual tax point date may be earlier If either:
• payment is received earlier
• invoice is issued earlier.
Actual tax point becomes the earlier of these two dates.
Actual tax point date may be later If:
• invoice is issued within 14 days of despatch/service
(and advance payment didn’t apply).

• Deposits are treated separately to final payment and so may have a different tax point.
• The tax point is always the date of payment if cash basis is being applied.
• Where services are being supplied on a continuous basis over a period in excess of a month but
invoices are being issued regularly throughout the period, a tax point is created every time an invoice
is issued or a payment is made, whichever happens first.
• Goods on sale or return will have a tax point date either on adoption (the customer indicates they will
keep the goods) or 12 months after removal of the goods where this is earlier.

10. Time limits for issuing a VAT invoice

Within 30 days of tax point which is either:

• within 30 days of date of supply or

• within 30 days of payment if payment was in advance.

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11. Blocked expenses and VAT
Input VAT cannot be recovered on blocked expenses.

Business entertainment
• The exception is that input tax can be reclaimed in respect of entertaining overseas customers,
but not UK or Isle of Man customers.

• When the entertainment is in respect of a mixed group of both employees and non-employees
(e.g. customers and/or suppliers), the business can only reclaim VAT on the proportion of the
expenses that is for employees and on the proportion for overseas customers.

Cars

• Input VAT can only be recovered on cars if it is wholly for business (no private use).

• 50% of input VAT can be recovered when cars are hired/leased.

• VAT can be recovered on commercial vehicles such as vans/lorries.

Assets with private use

• The VAT recovery should be based only on the proportion related to business use.

12. Fuel scale charge and VAT

If the business pays for road fuel, it can deal with the VAT charged on the fuel in one of four ways:

• reclaim all of the VAT. All of the fuel must be used only for business purposes

• reclaim all of the VAT and pay the appropriate fuel scale charge (as follows) - this is a way of
accounting for output tax on fuel that the business buys but that is then used for private
motoring

• reclaim only the VAT that relates to fuel used for business mileage. Detailed records of
business and private mileage must be kept

• do not reclaim any VAT. This can be a useful option if mileage is low and also if fuel is used
for both business and private motoring. If the business chooses this option it must apply it to
all vehicles, including commercial vehicles.

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 The fuel scale charge is as follows:

Description of vehicle: VAT inclusive consideration for VAT inclusive consideration VAT inclusive consideration
vehicle’s CO2 a 12 month prescribed for a 3 month prescribed for a 1 month prescribed
emissions figure accounting period (£) accounting period (£) accounting period (£)

120 or less 737 183 61

125 1,103 276 91

130 1,179 293 97

135 1,250 312 103

140 1,327 331 110

145 1,398 349 115

150 1,474 368 122

155 1,545 386 128

160 1,622 405 134

165 1,693 423 140

170 1,769 441 146

175 1,840 459 152

180 1,917 478 159

185 1,988 497 164

190 2,064 515 171

195 2,135 534 178

200 2,212 552 183

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Description of vehicle: VAT inclusive consideration for VAT inclusive consideration VAT inclusive consideration
vehicle’s CO2 a 12 month prescribed for a 3 month prescribed for a 1 month prescribed
emissions figure accounting period (£) accounting period (£) accounting period (£)

205 2,283 571 190

210 2,359 588 195

215 2,430 607 202

220 2,507 626 208

225 or more 2,578 644 214

• Where the CO2 emission figure is not a multiple of 5, the figure is rounded down to the next
multiple of 5 to determine the level of the charge.

13. Bad debt and VAT

VAT that has been paid to HMRC and which has not been received from the customer can be
reclaimed as bad debt relief. The conditions are that:

i. the debt is more than six months and less than four years and six months old

ii. the debt has been written off in the VAT account and transferred to a separate bad
debt account

iii. the debt has not been sold or handed to a factoring company

iv. the business did not charge more than the normal selling price for the items.

Bad debt relief does not apply when the cash accounting scheme is used because the VAT is
not paid to HMRC until after the customer has paid it to the supplier.

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14. Due dates for submitting the VAT return and paying
electronically
Deadline for submitting return and paying VAT 1 month and 7 days after the end of the VAT
– quarterly accounting period
Deadline if being paid by direct debit HMRC will collect 3 working days after the
submission deadline.

• Please see alternative submission and payment deadlines for special accounting schemes.

15. Special accounting schemes for VAT

15.1 Annual accounting scheme for VAT

Joining the scheme Maximum (estimated) taxable £1.35m

turnover in next 12 months
Leaving the scheme Compulsory if taxable turnover at £1.6m
the end of the VAT accounting
year exceeds the threshold

VAT returns One annual return 2 months after the end of the
accounting period
VAT payments (monthly) Nine monthly interim payments At the end of months 4 to 12
(10% of estimated VAT bill based in the accounting period
on previous returns)
Balancing payment 2 months after the end of the
accounting period
VAT payments (quarterly) Three interim payments (25% of At the end of months 4, 7
estimated VAT bill based on and 10 in the accounting
previous returns) period
Balancing payment 2 months after the end of the
accounting period

15.2 Cash accounting scheme for VAT

Joining the scheme Maximum (estimated) taxable £1.35m

turnover in next 12 months
Leaving the scheme Compulsory if taxable turnover at £1.6m
the end of the VAT accounting year
exceeds the threshold

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 15.3 Flat Rate Scheme for VAT
Joining the scheme Taxable turnover £150,000
(excluding VAT) in the next 12
months

Leaving the scheme On the anniversary of joining, £230,000

turnover in the last 12 months
(including VAT) or expected
turnover in next 12 months

Discount In first year of being VAT- 1%

registered
Limited cost business Goods cost less than either: 16.5%
• 2% of turnover, or
• £1,000 a year
Capital expenditure Input tax can be recovered on £2,000
individual large capital
purchases

• The appropriate flat rate % will be provided in the assessment.

16. Errors in previous VAT returns

Adjustments can be made to correct errors that are:
• below the reporting threshold
• not deliberate
• for an accounting period that ended less than 4 years ago.
The reporting threshold is;
• £10,000 or less or
• up to 1% (maximum £50,000) of total value of sales and all other outputs excluding any VAT
• When the next VAT return is submitted, the net value is added to VAT due on sales and
other outputs for tax due to HMRC, or to VAT reclaimed in the period on purchases and
other inputs for tax due to you.

If the value of the net VAT error discovered is above the reporting threshold, it must be declared to
HMRC separately, in writing.

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17. Late submission and late payment of VAT
17.1 Late submission

Submission frequency Penalty point threshold Period of compliance

Annual 2 points 24 months

Quarterly 4 points 12 months

Initial penalty £200

Subsequent penalty £200

Removal of penalty points

Business has not Each point automatically expires two years from the first
reached penalty day of the month after the month when the late
threshold submission occurred.

Business has reached All points will be reset to zero if both conditions below are
penalty threshold met:
• a period of compliance (meeting all submission
obligations on time for the period of compliance),
and
• all submissions due in the preceding 24 months
have been made (whether or not they were on
time).

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 17.2 Late payment

Number of days overdue First late payment Second late payment penalty
penalty

up to 15 None None

16 to 30 2% on the VAT None

outstanding at day 15 *

31 or more 2% on the VAT A daily rate based on 4% per

outstanding at day 15 annum charged every day from
day 31 until paid in full

AND

2% on the VAT
outstanding at day 30

* HMRC have stated that the first late payment penalty which applies to the first 30 days will not be
charged until after 31 December 2023.

17.3 Interest charged

Interest is calculated at the Bank of England base rate plus 2.5%.

The Bank of England base rate will be given in the assessment.

18. Assessment of VAT

If a VAT Return is not submitted on time, HMRC will issue a ‘VAT notice of assessment of tax’ which
will state how much HMRC think is owed.

If HMRC issue an assessment that is too low, a penalty of up to 30% can be charged for not telling
them it is incorrect within 30 days.

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19. Penalties for inaccuracies in VAT return
A penalty can be charged as a percentage of the potential lost revenue (PLR):

Type of behaviour Unprompted Prompted

disclosure disclosure
% %
Careless 0-30 15-30

Deliberate 20-70 35-70

Deliberate and concealed 30-100 50-100

20. Payroll record retention

Retention period 3 years
Penalty for failure to maintain records £3,000

21. Types of payroll submission

Full payment submission (FPS)

• File on or before employees pay day.

• Include payments to and deductions for all employees.

Employer payment summary (EPS)

• File if no employees were paid in the month.

• Send by the 19th of the following tax month.

22. Payroll deadlines

Registering for PAYE You must register before the first payday.
You cannot register more than 2 months before
you start paying people
Month end date for PAYE 5th of each month
Payment date for monthly payroll 22nd of each month if paid electronically.
19th otherwise.
If monthly amounts are <£1,500, quarterly
payments can be made
Provide employees with P60 31st May
Filing deadline for Expenses & Benefits 6th July
forms
PAYE and Class 1A NIC payment date 22nd July if paying electronically.
19th July otherwise
PAYE settlement agreement submission 31st July
date
PAYE and Class 1B NIC payment date 22nd October if paying electronically.
19th October otherwise

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23. Penalties for late submission of payroll filings
Penalties may apply if:
- the FPS was late
- the expected amount of FPSs was not filed
- an EPS was not filed.

Number of employees Monthly penalty

1 to 9 £100

10 to 49 £200

50 to 249 £300

250 or more £400

Penalties may not apply if:

• the FPS is late but all reported payments on the FPS are within three days of the employees’
payday (unless there is regular lateness)
• a new employer is late but sends the first FPS within 30 days of paying an employee
• it is a business’s first failure in the tax year to send a report on time.

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24. Penalties for late payroll payment
Late payment of monthly/quarterly payments
• The first failure to pay in a tax year does not count as a default.
• Late payment penalties apply to late payments and payments of less than is due.

Number of defaults in a Penalty percentage applied to the amount that is late in the
tax year relevant tax month

1 to 3 1%

4 to 6 2%

7 to 9 3%

10 or more 4%

Additional penalties will apply if:

A monthly or quarterly amount remains outstanding after 6 months 5% of unpaid tax

A monthly or quarterly amount remains outstanding after 12 months A further 5% of
unpaid tax

These additional penalties apply even where only one payment in the tax year is late.

Late payments of amounts due annually or occasionally

30 days late 5%
6 months late Additional 5%
12 months late Additional 5%

25. Penalties for inaccuracies in payroll filings

A penalty can be charged as a percentage of the potential lost revenue (PLR):

Type of behaviour Unprompted Prompted

disclosure disclosure
% %
Careless 0-30 15-30

Deliberate 20-70 35-70

Deliberate and concealed 30-100 50-100

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