AAT L3 Tax Processes for Business 2 — Questions and Answers
Question 1: A business purchases goods for £600 including VAT at 20%. What is the net amount and the VAT amount?
- Net £500, VAT £100 (Correct answer)
- Net £480, VAT £120
- Net £504, VAT £96
- Net £510, VAT £90
Correct answer: Net £500, VAT £100
When a VAT-inclusive price needs to be broken down: Net amount = £600 / 1.2 = £500. VAT amount = £600 - £500 = £100. Alternatively, VAT = £500 × 20% = £100. The VAT fraction for standard rate is 1/6 of the gross amount: £600 × 1/6 = £100.
Question 2: Under PAYE, an employer must deduct income tax and National Insurance contributions from employees' pay. By what date must these deductions be paid to HMRC each month?
- By the 22nd of the following month (for electronic payments) (Correct answer)
- By the last day of the same month
- By the 5th of the following month
- By the 14th of the following month
Correct answer: By the 22nd of the following month (for electronic payments)
Employers must pay PAYE deductions to HMRC by the 22nd of the month following the deduction (for electronic payments) or by the 19th if paying by cheque. For example, deductions made from March pay must be paid by 22nd April electronically.
Question 3: Which of the following expenses can a business typically reclaim input VAT on?
- Office stationery and computer equipment used for business (Correct answer)
- Staff entertaining and hospitality for employees
- Business entertaining for clients
- A car used partly for private purposes by a director
Correct answer: Office stationery and computer equipment used for business
Input VAT can be reclaimed on goods and services purchased for business purposes. Office stationery and computer equipment are legitimate business expenses. VAT on business entertaining for clients is specifically blocked from recovery, and cars with private use have restrictions.
Question 4: What is the flat rate VAT scheme designed for?
- Small businesses with taxable turnover of £150,000 or less, to simplify VAT accounting (Correct answer)
- All businesses regardless of size
- Businesses that only make exempt supplies
- Businesses that trade internationally
Correct answer: Small businesses with taxable turnover of £150,000 or less, to simplify VAT accounting
The flat rate scheme simplifies VAT accounting for small businesses with taxable turnover of £150,000 or less (excluding VAT). Instead of calculating actual input and output VAT, businesses apply a fixed percentage (based on their trade sector) to their gross turnover. This reduces administration.
Question 5: Corporation tax is currently charged at what rate for companies with profits exceeding £250,000?
- 25% (Correct answer)
- 19%
- 20%
- 23%
Correct answer: 25%
From April 2023, the main rate of corporation tax is 25% for companies with profits exceeding £250,000. Companies with profits up to £50,000 pay the small profits rate of 19%, and marginal relief applies to profits between £50,000 and £250,000.
Question 6: A business issues a credit note to a customer for £240 including VAT at 20%. What adjustment is required to the VAT account?
- Reduce output VAT by £40 (Correct answer)
- Increase output VAT by £40
- Reduce input VAT by £40
- Increase input VAT by £40
Correct answer: Reduce output VAT by £40
A credit note reduces the original sale. The net amount is £240 / 1.2 = £200, and the VAT is £40. Since the original sale created output VAT, the credit note reduces output VAT by £40. This is recorded as a debit to the VAT account.
AAT L3 Tax Processes for Business 2
A business purchases goods for £600 including VAT at 20%.
What is the net amount and the VAT amount?