Practice Assessment Number 1, EU credit note question ?????

solidjon

Here's the past exam paper question:-
A business that is registered for VAT in the UK receives a credit note from one of its EU suppliers which is also VAT registered.
What will be the effect on the VAT Return for the UK business? Choose ONE answer.

a) Both input tax and output tax will increase.
b) Both input tax and output tax will decrease.
c) Input tax will decrease and output tax will remain the same.
d) Input tax will increase and output tax will remain the same.

According to the answer paper the correct answer is 'B', but can anyone explain why the credit note will decrease output tax.
I can totally understand how the EU VAT in Box 2 of the VAT Return will decrease, but I'm really struggling with understanding how the output tax is affected, can anyone help please. Thanks in advance.

nickyowl

Hi - you're right in saying that the EU VAT amount is what goes into box 2, but it is also included in box 4 too along with output tax.

If you remember a VAT account, you put the EU VAT on both sides of the vat account, so you're in effect charging yourself the VAT and then claiming it back immediately.

So an EU credit note received will reduce both these figures, so both input and output decrease.

Hope i've explained that ok.
Nicky x

solidjon

nickyowl said:

Hi - you're right in saying that the EU VAT amount is what goes into box 2, but it is also included in box 4 too along with output tax.

If you remember a VAT account, you put the EU VAT on both sides of the vat account, so you're in effect charging yourself the VAT and then claiming it back immediately.

So an EU credit note received will reduce both these figures, so both input and output decrease.

Hope i've explained that ok.
Nicky x

Hi Nicky, thanks for your explanation, part of it makes perfect sense where you say that on the 'VAT account' the EU VAT is entered on both the debit and credit side, and the credit note as such would be deducted, thus reducing both the debit and credit side figures. This makes total sense and I understand it from that perspective.
However, you say the EU vat goes in boxes 2 and 4 which is correct, but this is for acquisitions (purchases) (Input VAT). The answer to the question is though is stating that it 'Decreases Output Tax' which as we both know is Box 1 on the VAT return, so I'm still not understanding how it can decrease Output tax.
I've since spoken to a friend of mine in Stoke who is a tax accountant and he says it shouldn't affect the 'Output Tax' and he thinks that AAT have got their answer wrong in asking what affect it would have on the 'VAT Return', where as if they asked what the affect would be on the 'VAT Control Account' then the answer of reducing both input and output figures would be correct, but as these net each other out before the VAT Return is completed, there is no real affect to the 'Output VAT' (Box 1).

Does this make sense, or am I missing the point.
Looking forward to your reply
Jonathan x

nickyowl

Hi Jonathan, I think you're looking at it as just box 1 being Output Tax, but it is box 3 that it Output Tax (i.e. box 1 + box 2). Although the EU acquisition isn't Vat we've charged on our sales, it is still money due to HMRC so is an Output in their eyes.

I do think the answer they've given is correct, but you could always drop them an email for an explanation as you never know.

Nicky x

solidjon

Hi Nicky, thanks for that response, I think it's just clicked. Yes I was thinking of it as just box 1 rather than the box 3 end result figure.
Thanks for your explanations in clearing that up for me.

nickyowl

brilliant - no problem at all x