8 - VAT and Corporation Tax Flashcards
VAT
What VAT rates are there?
The main rates are 0% and 20%.
There is also a reduced 5% rate for some items (domestic fuel, installation of insulation, certain property renovations).
VAT
What are taxable and exempt supplies?
All products your business sells are either taxable or exempt.
Note that goods with a 0% VAT rate are still taxable, not the same as exempt!
Exempt supplies include financial services, insurance, health, education, burial and cremation services.
VAT
What is the implication of selling/providing exempt supplies?
Exempt supplies mean that you don’t have to charge VAT to customers (output VAT).
However you are also unable to re-claim VAT on goods you purchase in order to run your business and provide those supplies (input VAT).
If your business supplies both taxable and exempt supplies then you are partially exempt and a calculation will determine how much input VAT you can re-claim.
VAT
For a normal taxable business what do they pay to HMRC?
A taxable business charges VAT to their customers, which becomes their output VAT.
They calculate how much this is, deduct the VAT they have paid to their suppliers (input VAT) and pay the difference to HMRC.
If they paid more to suppliers than they charged customers HMRC pays you the excess! New businesses buying a lot of equipment and not yet selling much benefit a lot from this.
VAT
When must a business register for VAT?
A business must register for VAT if their taxable supplies over the previous 12 months is above £85k (or if this is likely to become the case within 30 days).
As soon as they are registered they can start claiming back input VAT on their purchases.
VAT
What kind of goods are zero rated and how are suppliers of these items treated?
Suppliers of zero rated goods and services get a great deal. They charge 0% on their sales, but since the supplies are taxable (at 0%) instead of exempt, they can re-claim all of their input VAT. This includes:
- most food and drink
- domestic water and sewerage supplies
- hard copy books
- sales of new residential property
- public transport of passengers
- drugs & medecine
- childrens clothing and footwear.
VAT
What is the flat rate scheme?
This is a simplified VAT scheme available to businesses with up to £150k pa turnover (excluding VAT).
Instead of calculating input and output VAT, use a set percentage rate based on the industry you are in and apply it to your entire turnover.
HMRC calculate the rate for each industry so that you pay roughly the right amount (i.e. it’s based on industry average gross profit margins).
VAT
What is the treatment of second hand goods dealers?
There is a margin scheme in operation for dealers in second hand goods, so VAT is paid on the difference between the price paid and the amount received.
VAT
Implications of trading within the EU
Sales made to businesses in other EU states don’t need to charge VAT.
However you do charge on sales to private individuals in other EU states.
A VAT liability will arise if you buy goods from a business in another EU state, which you pay on your next tax return.
VAT
How does bad debt relief work?
Bad debt relief is the process for getting VAT back if your customers don’t pay you.
You paid for VAT (input VAT) when you bought the goods and invoice for output VAT when you sold them. You paid HMRC the difference, but 3 months later the customer has gone bust.
You can re-claim the output VAT from HMRC since you never received payment, but you’re effectively out of pocket for the 3 month period.
VAT
What payment terms are available?
- Most businesses pay VAT quarterly;
- Regular payers of VAT can switch to a monthly basis;
- Alternatively if the annual value of taxable supplies is below £1.35m you can elect for an annual VAT return
Note that if taxable supplies are below £1.35m you can also apply to pay on a cash rather than invoice basis (thus protecting you from cashflow problems in the case of bad debts).
Corporation Tax
How is corporation tax calculated:
- Charged on what?
- Period covered?
- Rate used?
Corporation tax is charged on a companies profit (income and gains less allowable expenses).
It is charged over an annual accounting period (can’t be longer than 12 months), which companies usually choose to match their annual financial accounts (but doesn’t have to be).
The rate is based on the HMRC rates (19% for April 17 to March 18, in tax tables). If your accounting year isn’t April to March the rate for your accounting year is a blended rate over the two tax years you straddle.
Corporation Tax
How are gains and losses treated?
The method of calculation is similar to CGT, but instead of being taxed separately you add your gains in the year to your profit and then charge corporation tax on the lot.
Note however that chargeable losses (eg buy your head office for £10m then sell it for £5m years later) cannot be offset against profits to reduce the corporation tax bill.
Corporation Tax
What expenses are allowable? (general rule)
Entertaining expenses?
Charity donations?
Depreciation?
In general the rule is that expenses must be “wholly and exclusively incurred for the purposes of the business”.
Entertaining expenses aren’t allowed, so add these back to your profit.
Gift aid charity donations can be deducted.
Depreciation on plant and equipment must be replaced with capital allowances, which is basically the HMRC approved method of calculating depreciation. Otherwise a company could manipulate their tax bill by changing their depreciation policy.
Corporation Tax
Basis of payment
Calculated by the company on a self assessment basis.
Normally paid 9 months and 1 day after the end of the accounting period.
Large companies pay quarterly.
