ACCA Advanced Taxation (ATX) Practice Exam

If a business is considered de minimis, what does this entail regarding VAT?

1. No output VAT can be charged

2. All input VAT can be recovered

3. The business is not required to pay any VAT

4. Output VAT is restricted to specific thresholds

The correct answer is: All input VAT can be recovered

In the context of Value Added Tax (VAT), when a business is classified as de minimis, it pertains to the idea that the business engages in a minimal amount of taxable supplies in relation to its overall activities. This classification has specific implications regarding the recovery of input VAT. When a business qualifies for de minimis relief, it typically means that the business can recover all its input VAT on related expenses, provided that the input VAT is attributable to taxable supplies. This is significant because it allows businesses with limited levels of taxable output to still benefit from reclaiming VAT on purchases they make which support their business operations. For instance, if a business incurs VAT on expenses while mainly making exempt supplies, it may not be able to recover that VAT under normal circumstances. However, businesses under the de minimis threshold find it advantageous as they can recover VAT that they may not usually be able to if their input VAT exceeds the threshold of exempt or non-business supplies. In contrast, the other choices do not accurately reflect the implications of being de minimis. For example, a business being required to pay no VAT or having restrictions on output VAT threshold does not align with the de minimis principles. Instead, being de minimis primarily facilitates the recovery of input VAT,