BLP - Week 7 Corporation Tax and VAT

Question 1

What is VAT charged on?

Answer 1

• Any supply of goods or services made in the UK
• Must be in return for consideration
• Must be a taxable supply (not exempt)
• Made by a taxable person (individuals, partners, companies)
• Must be in the course of business

Question 2

When is VAT registration required?

Answer 2

• If taxable supplies exceed £90,000 in a year, or
• If taxable supplies are expected to exceed this threshold in any 30-day period
• Must notify HMRC within 30 days

Question 3

When can VAT deregistration occur?

Answer 3

When taxable turnover falls below £88,000

Question 4

What are Output and Input VAT?

Answer 4

• Output VAT: VAT charged by a business on sales
• Input VAT: VAT paid by a business on purchases
• VAT-registered businesses offset input VAT against output VAT

Question 5

What are the VAT rates?

Answer 5

• Standard rate: 20%
• Reduced rate: 5% (e.g., domestic heating, mobility aids, children’s car seats, smoking cessation products)
• Zero-rated: 0% (e.g., food, sewarage, water, books, public transport, children’s clothing)
• Exempt supplies: Services like insurance, finance, education/health services and the sale of land and buildings. No VAT charged, but input VAT cannot be reclaimed.

Question 6

How is VAT accounted for?

Answer 6

• VAT returns submitted every three months
• Payment due one month and seven days after the end of the VAT period
• Large businesses over £2.3 million VAT/year must make monthly prepayments and any remaining balance due with their VAT return.

Question 7

What are VAT special schemes?

Answer 7

• Retail schemes: Simplifies VAT for businesses making many small sales
• Cash accounting: Small businesses (<£1.35m turnover) pay VAT only when customers pay
• Annual accounting: Small businesses (<£1.35m turnover) pay VAT in installments
• Flat rate scheme: Small businesses (<£150,000 turnover) pay VAT at a fixed percentage

Question 8

What is Corporation Tax charged on?

Answer 8

• All income profits and chargeable gains
• Of a body corporate
• Arising in an accounting period

Question 9

What are the Corporation Tax Rates?

Answer 9

• 19% for profits ≤ £50,000
• 25% for profits > £250,000
• Marginal relief for profits between £50,000 - £250,000

Question 10

What are the common types of company income?

Answer 10

• Rental income
• Trading income
• Interest
• Dividend income (usually tax-exempt)

Question 11

What are tax-deductible expenses?

Answer 11

• Must be wholly and exclusively for business purposes
• Includes rent, wages, repairs, utilities
• Not deductible: Client entertainment, doubtful debt provisions

Question 12

What are Capital Allowances?

Answer 12

• Main Rate Allowance (18%): Claimed yearly on plant & machinery
• Annual Investment Allowance (AIA): 100% relief up to £1m/year
• Full Expensing (2023-2026): 100% immediate deduction for new equipment

Question 13

What are chargeable gains for companies?

Answer 13

• Sales proceeds - allowable costs - indexation allowance - losses
• Substantial Shareholding Exemption (SSE): No tax on share sales if 10%+ stake held for 12 months
• Rollover Relief: Defers tax if profit is reinvested into a new qualifying asset

Question 14

How are company losses handled?

Answer 14

• Current year set-off: Against all profits in the same year
• Carry back: Against previous year profits
• Carry forward: Against future trading profits
• Group relief: Surrender losses to another group company

Question 15

What are Close Companies?

Answer 15

• Controlled by ≤ 5 participators or any number of director-participators
• Participators include shareholders & associates (family members)
• Excludes listed companies

Question 16

How are loans to participators taxed?

Answer 16

• Taxed at dividend tax rate for higher-rate taxpayers
• Must be repaid within 9 months and 1 day after year-end to avoid tax charge
• If written off, participator is deemed to receive a taxable dividend

Question 17

What are the tax implications for Close Companies?

Answer 17

• Special tax rules apply to:
• Loans to participators
• Distributions (e.g., company-paid benefits)
• Inheritance tax (IHT) planning
• Transactions in Securities Rules prevent tax avoidance via capital distributions

Question 18

How is Corporation Tax assessed?

Answer 18

• Small companies (≤ £1.5m TTP): Pay tax 9 months & 1 day after year-end
• Large companies (> £1.5m TTP): Pay tax in 4 quarterly instalments
• Must file tax return within 12 months after year-end

Question 19

What are capital losses?

Answer 19

• Capital losses occur when a company sells an asset at a loss
• These losses can only reduce chargeable gains (profits from asset sales)

Question 20

How are capital losses set off against chargeable gains?

Answer 20

1. Capital losses (CL) are first set off against chargeable gains (CG) in the same accounting period
2. If there are unused CL after being set off against CG, they are carried forward to future years to offset future CG

Question 21

How are trading losses treated against income profits and chargeable gains?

Answer 21

1. Trading losses (TL) can be set off against income profits (IP) or CG in the current accounting period
2. If TL remain unused, they can be carried back to the previous accounting period (if from the same trade) and set off against previous IP
3. If there are still unused TL after current-year and prior-year set-offs, they can be carried forward to future years for deduction against future IP or CG

Question 22

What are the carry-forward rules for capital and trading losses?

Answer 22

• Capital losses (CL) carry forward indefinitely but must be claimed within four years of the year they occurred
• Unused trading losses (TL) can also be carried forward to offset future IP if they arise from the same trade

Question 23

What are the annual loss relief limitations?

Answer 23

• Capital losses applied to future CG can offset up to £5 million per year
• Any additional CG beyond £5 million can only have 50% of the excess gain relieved by carried-forward CL