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Homework answers / question archive / MELODY LTD Melody Ltd commenced trading on 1 November 2018 as a maker of musical instruments, and was required to apply value added tax (VAT) to its sales from 1 January 2020
MELODY LTD Melody Ltd commenced trading on 1 November 2018 as a maker of musical instruments, and was required to apply value added tax (VAT) to its sales from 1 January 2020. The company's sales have been as follows: £ £ 2018 November 3,800 2019 June 7,600 December 5,100 July 8,500 2019 January 5,500 August 8,000 February 4,900 September 9,100 March 3,900 October 10,900 April 4,600 November 10,200 May 6,800 December 10,200 For the period 1 November 2018 to 31 December 2019 Melody Ltd had standard rated expenses of £500 per month (VAT inclusive amount). These were all in respect of services. The company's sales are all standard rated, and all of its customers are members of the general public. It was not possible to increase prices when the company registered for VAT. Required: (a) Explain why Melody Ltd was required to have been compulsorily registered for VAT from 1 January 2020. (6 marks) (b) State, giving reasons, the amount of input VAT that Melody Ltd will have recovered in respect of inputs incurred prior to registering for (4 marks) (c) Explain why it would not have been beneficial for Melody Ltd to have voluntarily registered for VAT from 1 November 2018. Your answer should be supported by appropriate calculations. (5marks) VAT.
(a).
Melody Ltd is required to have been compulsorily registered for VAT from 1st January 2020 as its business had a VAT taxable turnover of more than £85,000 over the last 12 months.
| Month | Turnover | Cumulative Turnover |
Last 12 Months Turnover |
| Nov-18 | 3,800 | 3,800 | 3,800 |
| Dec-18 | 5,100 | 8,900 | 8,900 |
| Jan-19 | 5,500 | 14,400 | 14,400 |
| Feb-19 | 4,900 | 19,300 | 19,300 |
| Mar-19 | 3,900 | 23,200 | 23,200 |
| Apr-19 | 4,600 | 27,800 | 27,800 |
| May-19 | 6,800 | 34,600 | 34,600 |
| Jun-19 | 7,600 | 42,200 | 42,200 |
| Jul-19 | 8,500 | 50,700 | 50,700 |
| Aug-19 | 8,000 | 58,700 | 58,700 |
| Sep-19 | 9,100 | 67,800 | 67,800 |
| Oct-19 | 10,900 | 78,700 | 78,700 |
| Nov-19 | 10,200 | 88,900 | 85,100 |
| Dec-19 | 10,200 | 99,100 | 90,200 |
(b).
It had prior to its registration for VAT, the inputs related to services. Inputs incurred on services prior to registration for VAT during the six months before registration can be claimed.
Services bought each month - £500 (Inclusive of VAT)
Standard Rate 20%
Services excluding VAT = 500/1.2
= 416.67
Input VAT = 416.67*20%
= 83.33
Every month Input VAT on services = £83.33
For 6 months = 83.33*6 = £500
The amount of input VAT that is incurred prior to registration and can be claimed = £500
Conditions:
The services bought by Melody Ltd. and services bought for business purpose.
(c).
It would not have been beneficial for Melody Ltd to have voluntarily registered for VAT from 1st Nov 2018 because it was not in a position to increase prices to cover up its VAT liability if it was registered.
Let us compare both situations of Non-registered and Registered.
Selling Price - No Change
Sale of Nov 2018 - £3,800
In case of non-registration:
Vat Liability - 0
Revenue - 3,800
In case of registration:
Revenue = 3,800/1.2 = 3,166.66
Vat Liability = 633.33 - 83.33 (Input)
= 550
Decline in profit = (3,800-(3,800-(633.33-83.33)))
= 550
If Law does not require compulsory registration with threshhold limit, it is beneficial for Melody Ltd to continue without registration.
