8 - Corporate Taxation Flashcards
What is VAT and what is it charged on?
VAT is charged on
- Any supply of goods or services made in the UK
- Where it is a taxable supply
- Made by a taxable person
- In the course or furtherance of any business carried on by that person.
Key terminology used when discussing VAT.
Supply of Goods or Services: Any supply made in the UK of goods or services done in return for consideration.
Made in the UK: The place of supply of the relevant goods or services must be in the UK.
Taxable supply: Any supply made in the UK which is not an exempt supply.
Taxable person: A person who is, or is required to be, registered for VAT purposes. ‘Person’ includes individuals, partners, companies and unincorporated organisations.
In the course or furtherance of any business carried on by him: ‘Business’ is a very wide term and basically any economic activity carried on, on a regular basis. An employee’s services to an employer are excluded. All of a person’s business activities are included in one VAT registration.
Under what conditions is a person required to register for VAT?
A person is required to register for VAT in the following situations:
Exceeding the VAT Registration Threshold in the Past Year:
- If the value of a person’s taxable supplies over a period of one year or less exceeds the VAT registration threshold (currently £90,000).
- The person must notify HMRC within 30 days of the end of the month in which the threshold was exceeded.
- The person will be registered from the beginning of the second month after the month in which taxable supplies went over the threshold.
Expected to Exceed the VAT
Registration Threshold in the Next 30 Days:
- If there are reasonable grounds to believe that the value of a person’s taxable supplies in a period of 30 days beginning at any given time will exceed the VAT registration threshold.
- The person must notify HMRC within the 30 days.
- The person will be registered from the beginning of the 30-day period.
Voluntary Registration:
- A person can choose to register voluntarily, even if the value of taxable supplies does not exceed the VAT registration threshold.
- Voluntary registration allows the person to recover input VAT, which can help reduce business costs.
- However, it also requires the business to charge output VAT on the goods and services supplied to its customers, which may make the business less attractive compared to unregistered competitors.
When can a VAT-registered person apply for deregistration?
A VAT-registered person may apply to cancel their registration and stop being treated as ‘taxable’ if the expected value of future annual taxable supplies will not exceed the VAT deregistration threshold.
The current VAT deregistration threshold is £88,000.
What is output tax?
The VAT chargeable by a business when making a supply of goods or services is called ‘output’ tax. The VAT relates to the ‘output’ of the business.
What is input tax?
The VAT paid by a person on goods or services supplied to the person is called ‘input’ tax. The VAT relates to goods and services ‘bought in’ by the person.
How can companies use output and input tax to their advantage?
A VAT registered business offsets input tax it has suffered (on goods and services it has purchased) against output tax it has charged customers or clients (on its own supplies) and only accounts for the difference to HMRC.
The business acts as a tax collector in collecting and paying to HMRC the tax on the value added by the business in the supply chain.
Note that where there is no output tax charged in any VAT accounting period, it is still usually possible to reclaim any input tax incurred where it is intended output tax will be charged in the future.
How much VAT is payable, and how is this calculated?
The applicable rate of VAT will depend on the type of supply. The standard rate of VAT is currently 20%.
A price is deemed to be VAT inclusive unless the contract for the supply of goods or services states otherwise. In other words, the stated consideration paid for the supply includes any VAT payable.
Where the standard rate of VAT applies, in order to calculate the VAT element of a VAT inclusive price you should multiply the price by the VAT fraction, which is currently 1/6. This has been worked out as follows:
- Tax rate = 20 = 1
- 100 + tax rate = 120 = 6
The seller must account for the VAT element amount to HMRC, so the seller won’t be allowed to keep the full amount of the stated price. In practice, the seller can deduct any input VAT that it has incurred so it only needs to pay HMRC the difference.
In many situations it will be appropriate for the price of goods or services to be expressed as exclusive of VAT so that VAT is charged in addition to the stated price. Here, the seller will account to HMRC for the VAT element and keep the (VAT-exclusive) stated price.
Arthur, a lumberjack, cuts down a tree and sells the tree to Boris for £200 +VAT;
Boris, a timber merchant, cuts the tree into planks and sells these to Carol for £400 +VAT;
Carol, a furniture manufacturer, turns the planks into desks and sells these to Desmond for £800 +VAT;
Desmond, a furniture supplier, sells the desks to a Law School for £1,000 +VAT; and
Total sent to HMRC
Calculate the VAT paid to HMRC by each of the following VAT registered businesses in connection with the supplies made.
Calculate the VAT paid to HMRC by each of the following VAT registered businesses in connection with the supplies made. Assume that VAT is charged at 20% and that all these individuals are registered for VAT. Note that the price charged is stated to be exclusive of VAT in each case.
Example - Answer
- Arthur to Boris for £200 +VAT;
Input VAT suffered = £0
Output VAT charged = £40
VAT sent to HMRC = £40
- Boris to Carol for £400 +VAT
Input VAT suffered = £40 (paid to Arthur)
Output VAT charged = £80
VAT sent to HMRC = £40 - Carol to Desmond for £800 +VAT
Input VAT suffered = £80 (paid to Boris)
Output VAT charged = £160
VAT sent to HMRC = £80 - Desmond to a Law School for £1,000 +VAT
Input VAT suffered = £160 (paid to Carol)
Output VAT charged = £200
VAT sent to HMRC = £40 - Total sent to HMRC?
- £40 + £40 + £80 + £40 = £200
What are the four types of supply a business can make for VAT purposes?
A business can make four kinds of supply (or the supply can be outside the scope of VAT altogether, such as the transfer of a business as a going concern, subject to certain conditions being satisfied):
- Standard Rated
- Reduced Rated
- Zero Rated
- Exempt
How is VAT applied to standard rated supply?
Generally, the standard rate of VAT is 20%. A supply by a business will be standard rated unless it falls within one of the other three categories.
A VAT registered business charges VAT at standard rate on its outputs and recovers any VAT suffered on its inputs (unless it makes supplies which fall into the exempt category below).
How is VAT applied to reduced rated supply?
A very limited number of types of supply are charged at 5%. These include supplies such as domestic heating and power, installation of mobility aids for the elderly, smoking cessation products and children’s car seats.
How is VAT applied to zero-rated supply?
Further supplies are zero rated for public policy reasons. Zero rated supplies include food (within certain categories), sewerage and water, books / newspapers, talking books for the blind, new houses and the construction of new houses, public transport and children’s clothing.
Zero rated supplies fall into the category of taxable supplies. This means that when a VAT registered business makes zero rated supplies it charges VAT at the rate of 0% on its outputs and it can recover any VAT suffered on its inputs. This is therefore a very favourable supply for a business to make.
How is VAT applied to exempt supply?
Supplies that are exempt include the provision of insurance, finance, education / health services and the sale of land and buildings (unless it comprises a new commercial building or the supplier of a commercial building has chosen to make the supply standard rated by waiving the exemption).
When a business makes exempt supplies it does not charge VAT on its supplies but equally it is notable to recover any VAT suffered on its inputs.
This input tax is a cost to the business.
What are the VAT invoicing requirements for taxable businesses making standard or reduced rate supplies to other businesses?
A taxable business making a standard (or reduced) rate supply of goods or services to another taxable business must:
- Supply the customer/client with a VAT invoice within 30 days of the supply.
- Retain a copy of the invoice for record-keeping.
HMRC conducts regular inspections of businesses to ensure compliance, verifying that both input invoices and copies of output invoices are maintained accurately.
What are the requirements and deadlines for submitting a VAT Return
Taxable businesses must submit a VAT Return online to HMRC every three months.
- The due date for submission is typically within one month and seven days after the end of each VAT period.
The VAT Return must detail:
- The total output tax charged on the making of taxable supplies during the VAT period.
- Less the total input tax attributable to the making of taxable supplies.
At the time of submission, the business must pay to HMRC the excess of output tax over input tax.
For businesses paying more than £2.3 million in VAT annually, monthly payments on account are required, with the balance paid upon submission of the quarterly VAT return.
What are the special VAT schemes available to simplify VAT accounting or reduce VAT liability?
Several special schemes are designed to simplify accounting for VAT or reduce VAT liability, including:
Retail Schemes:
- For retailers with a large volume of direct sales to the public, special schemes allow them to avoid issuing individual VAT invoices for each transaction.
Cash Accounting Scheme:
- Available to businesses with an annual turnover of less than £1,350,000 (excluding VAT and exempt supplies).
- Allows businesses to account for output tax when the invoice is paid, rather than when it is issued.
Input tax can only be recovered when the business pays the supplier.
Annual Accounting Scheme:
- Permits businesses with an annual turnover not exceeding £1,350,000 (excluding VAT and exempt supplies) to submit one annual VAT Return.
- VAT is paid in instalments throughout the year based on the previous year’s VAT liability, with the balance due upon submission of the annual VAT Return.
Flat Rate Scheme:
- A VAT-registered business with a taxable annual turnover up to £150,000 (excluding VAT) and a total annual turnover up to £230,000 may elect to charge VAT at a flat rate on total turnover, rather than on each transaction.
- Typically, no relief for input VAT is provided.
- The applicable flat rate depends on the business type, with HMRC publishing rates for different sectors such as hairdressers and estate agents.
- Since 1 April 2017, ‘limited cost traders’ using a flat rate scheme must account for VAT at a rate of 16.5%, due to anti-avoidance rules.
Provide a summary of the introduction to VAT.
- VAT is charged on any supply of goods or services made in the UK where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
- Persons are required to be registered for VAT if the value of their taxable supplies exceeds certain thresholds. They may also register voluntarily.
- Businesses charge ‘output’ tax on the taxable supplies they make and pay ‘input’ tax on the taxable supplies they receive.
- The rates of VAT depend on the type of supply: standard rate, reduced rate, zero rate or exempt. Input tax attributable to standard, reduced or zero rated supplies is generally recoverable. Input tax attributable to exempt supplies is not recoverable.
- Prices are deemed to be inclusive of VAT (if any) unless stated otherwise.
What is corporation tax and what is it payable on?
Corporation Tax is payable on:
- All income profits and
- Chargeable gains
- Of a body corporate
- That arise in its accounting period.
The sum of a company’s profits and gains is known as ‘TTP’ (taxable total profits chargeable to corporation tax).
Companies are assessed to corporation tax by reference to the financial year (1 April – 31 March). Note that because a company can choose its accounting period, it is often different to the financial year, which is the same for all companies.
How much corporation tax is payable by a company and how is this determined?
The amount of TTP will determine the amount of corporation tax payable.
- The main rate of corporation tax for the 2024/2025 tax year is 25% for companies with TTP greater than £250,000.
- If a company’s TTP is £50,000 or less, the corporation tax rate is 19%.
- If a company’s TTP is over £50,000 and up to £250,000, a company may claim marginal relief which has a tapering effect on the tax rate.
These are the same rates as the previous tax year.
What is the basic proforma for calculating Taxable Total Profits (TTP)?
To calculate a company’s Taxable Total Profits (TTP), the following proforma is used, consisting of two main components:
-
Chargeable Gains
Formula: Sale Proceeds - [Allowable Expenditure] - [Indexation Allowance] - [Capital/Trading Losses]
Result: Chargeable Gain -
Income Profits
Formula: Income Receipts - [Deductible Expenditure] - [Capital Allowances] - [Trading Losses]
Result: Income Profits
After calculating both chargeable gains and income profits, the TTP is determined by aggregating them for corporation tax purposes.
How are income receipts and capital receipts treated for corporation tax purposes?
Income receipts and capital receipts are subject to different tax rules:
Income Receipts: Arise through everyday trading activities. Income receipts are chargeable when derived from business or trading activities, provided they are not exempt (e.g., rental income, trading income, interest, and dividend income).
Capital Receipts: Stem from one-off transactions, like the sale of a capital asset.
Both types of receipts are taxable, but dividend income is generally exempt from corporation tax, as dividends paid to UK companies are usually exempt unless anti-avoidance provisions apply. The exemption is based on the fact that dividends represent profits that have already been taxed at the corporate level.
What constitutes a company’s income, and what is meant by a dividend in respect of corporation tax?
The most common types of company income are:
* Rental income;
* Trading income;
* Interest (usually from bank savings accounts); and
* Dividend income.
Dividends:
* Dividends paid to UK companies are subject to corporation tax unless the dividend falls within one of a number of exemptions. However, the exemptions are very broad and the general effect of the rules is that all dividends are exempt from corporation tax unless certain anti-avoidance provisions apply.
- Dividend income received by a company is therefore generally exempt from corporation tax and is therefore not included in that company’s TTP for tax purposes.
- A company pays a dividend out of profits that have already been taxed so the tax already paid satisfies the recipient company’s tax liability in respect of the dividend.
- For the same reason, the dividend is not tax deductible for the company paying it.
What is classed as tax deductible expenditure for income purposes in corporation tax?
Tax deductible expenditure: Expenditure by a company that the company is permitted to deduct from its income receipts, thereby reducing its overall tax bill.
To be deductible for tax purposes the expenditure must:
Be ‘…wholly and exclusively’ incurred for the purposes of the trade – eg expenditure which is partially by way of gift will not be deductible but if expenditure was needed to produce an item for sale, such as raw materials, it would be;
- Not be prohibited by statute – eg business entertainment expenditure (i.e. money spent by a company entertaining its clients) and provisions made in accounts for doubtful debts as they are not yet bad debts that have been written off; and
- Be of an income nature with an element of recurrence – eg rent, interest paid, wages, repairs.
