Question

Peardrop Ltd is a VAT-registered business. During the three months' ended 30 September 20X4 it entered into the following transaction:

a) Purchase of goods for resale - £28,000
b) Purchase of new car for use in the business - £16,500
c) Payments to HMRC - £2,300
d) Sales - £55,000
All purchases and sales are inclusive of VAT at 20%.
At 1 July 20X4, Peardrop Ltd owed HMRC £2,200.
What was Peardrop Ltd's VAT liability at 30 September 20X4 (work to nearest £)?

Answer 1

Peardrop Ltd's VAT liability at 30 September 20X4 is £3,950, calculated by subtracting the input VAT on purchases from the output VAT on sales and adjusting with the starting liability.

Step-by-step explanation:

The subject of this question is calculating the VAT liability for Peardrop Ltd at the end of a specific period, given a series of transactions. VAT is calculated by subtracting the VAT on purchases (input VAT) from the VAT on sales (output VAT). Here's the breakdown of calculations:

Firstly, calculate the VAT on purchases and sales by dividing the total amount by 1.20 (since the amounts are VAT inclusive)

Add up the input VAT from purchases of goods for resale and purchase of a new car

Calculate the output VAT from the sales

Subtract the total input VAT from the total output VAT to find the VAT owed to HMRC for the period

Lastly, adjust the figure by the amount owed to HMRC at the beginning of the period

Here are the calculations:

a) Purchase of goods for resale: £28,000 / 1.20 = £23,333.33 (net) & VAT = £28,000 - £23,333.33 = £4,666.67

b) Purchase of new car for business: £16,500 / 1.20 = £13,750 (net) & VAT = £16,500 - £13,750 = £2,750

c) Total input VAT: £4,666.67 + £2,750 = £7,416.67

d) Sales: £55,000 / 1.20 = £45,833.33 (net) & VAT = £55,000 - £45,833.33 = £9,166.67

e) VAT owed to HMRC for the period (output VAT - input VAT): £9,166.67 - £7,416.67 = £1,750

f) Adjust with the starting liability: £1,750 + £2,200 = £3,950

Therefore, Peardrop Ltd's VAT liability at 30 September 20X4 is £3,950 (to the nearest £).

Answer 2

Peardrop Ltd has a VAT liability of £8,650 refundable at 30 September 20X4.

To calculate Peardrop Ltd's VAT liability at 30 September 20X4, we need to consider the VAT on purchases and the VAT on sales.

a) Purchase of goods for resale: £28,000 (inclusive of VAT at 20%)
To find the VAT on this purchase, we can use the formula VAT = Total Amount / (1 + VAT rate).
VAT = £28,000 / (1 + 0.20) = £28,000 / 1.20 = £23,333.33 (rounded to the nearest £)
So, the VAT on the purchase of goods for resale is £23,333.

b) Purchase of new car for use in the business: £16,500 (inclusive of VAT at 20%)
Using the same formula, VAT = £16,500 / (1 + 0.20) = £16,500 / 1.20 = £13,750 (rounded to the nearest £)
So, the VAT on the purchase of the new car is £13,750.

c) Payments to HMRC: £2,300
This amount is already inclusive of VAT, so no further calculation is required.

d) Sales: £55,000 (inclusive of VAT at 20%)
Again, using the formula, VAT = £55,000 / (1 + 0.20) = £55,000 / 1.20 = £45,833.33 (rounded to the nearest £)
So, the VAT on sales is £45,833.

At 1 July 20X4, Peardrop Ltd owed HMRC £2,200.
Since this amount is VAT payable to HMRC, we need to deduct it from the total VAT on sales.
VAT liability at 30 September 20X4 = VAT on purchases - VAT on sales + Payments to HMRC - VAT already paid to HMRC
VAT liability = (£23,333 + £13,750) - £45,833 + £2,300 - £2,200 = £-8,650 (negative indicates a refund)