Question

Sid, Tony and Cassie all run their own businesses, which exclusively make exempt, zero rated and standard rated supplies respectively.

Required:

Who can reclaim input VAT?

and explain why

1. Sid and Tony

2. Tony and Cassie

3. Sid and Cassie

4. Cassie only.

Answer 1

Credit will be available to both Tony and Cassie.

EXPLANATION:

Credit of VAT paid will not be allowed if final product is exempt. Credit of VAT paid is available only when tax is paid on final products. Thus when final product is exempt from tax, VAT credit will not be availed. As Sid makes only exempted supplies, he will not be eligible to claim VAT credit.

Zero rated supplies means tax is not payable on final product in certain specified cases. In such cases credit will be available on inputs. Difference between zero rated supplies  and exempt suplies is that in case of zero rated supply, credit is available on tax paid on inputs, while in case of exempt goods, credit of tax paid on inputs is not available. Hence Tony is eligible to claim VAT credit. Also as Cassie makes only standard rated supplies, she is also eligible to claim VAT credit as tax is payable on final product.