BLP - Week 7 Corporation Tax and VAT Flashcards
What is VAT charged on?
- 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
When is VAT registration required?
- 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
When can VAT deregistration occur?
When taxable turnover falls below £88,000
What are Output and Input VAT?
- 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
What are the VAT rates?
- 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.
How is VAT accounted for?
- 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.
What are VAT special schemes?
- 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
What is Corporation Tax charged on?
- All income profits and chargeable gains
- Of a body corporate
- Arising in an accounting period
What are the Corporation Tax Rates?
- 19% for TTP ≤ £50,000
- 25% for TTP > £250,000
- Marginal relief for TTP between £50,000 - £250,000
TTP = total taxable profits
What is TTP & how to calculate it?
TTP is sum of company’s income profits and chargeable gains
Chargeable gains = sale proceedings - allowable expenditure - indexation allowance - capital/tradeable losses
Income profits = income receipts - deductible expenditure - capital allowances - trading losses
What are the common types of company income?
- Rental income
- Trading income
- Interest
- Dividend income (usually tax-exempt)
What are tax-deductible expenses?
- Must be wholly and exclusively for business purposes
- Includes rent, wages, repairs, utilities
- Not deductible: Client entertainment, doubtful debt provisions
What are Capital Allowances?
Allows companies, individuals and partnerships spread the cost of large purchases over time.
* 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
What are chargeable gains for companies?
- 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
How are trading losses handled?
- Current year set-off: against income profits and capital gains
- Carry back: against income profits and capital gains
- Carry forward: against income profits and capital gains
- Group relief: Surrender losses to another group company
What are Close Companies?
- Controlled by ≤ 5 participators or any number of director-participators
- Participators include shareholders & associates (family members)
- Excludes listed companies
How are loans to participators taxed?
- 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
What are the tax implications for Close Companies?
- 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
How is Corporation Tax assessed?
- 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
What are capital losses?
- Capital losses occur when a company sells an asset at a loss
- These losses can only reduce chargeable gains (profits from asset sales)
How are capital losses set off against chargeable gains?
- Capital losses (CL) are first set off against chargeable gains (CG) in the same accounting period
- If there are unused CL after being set off against CG, they are carried forward to future years to offset future CG
What are the carry-forward rules for capital and trading losses?
- 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
*If you incur a capital loss in a particular tax year, you have up to four years from the end of that tax year to notify HMRC that you want to use (claim) that loss. If you don’t claim it within that 4-year window, you forfeit the right to use the loss to reduce future capital gains—you can’t carry it forward anymore.
What are the annual loss relief limitations?
- 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
