Chapter 8 - Corporation Tax and VAT Flashcards
1
Q
Corporation Tax
A
- Paid by companies on income and chargeable gains
- Charged on strict accounting period basis
- Rates set for a financial year
- If a company’s accounting period straddles 2 financial years with different rates, then
profits apportioned - Financial Year 2021 (1 April 2021 - 31 March 2022) flat rate - 19% on all profits
2
Q
Corporation Tax - Chargeable Gains and Losses
A
- Gains and losses calculated according to CGT rules, but CGT not paid as separate tax
- Indexation allowance removed for gains on or after 1 January 2018
o Indexation allowance calculated on gains up to December 2017 - Chargeable gains added to company’s income in determining total profits
- Cannot offset chargeable losses against trading profit or investment income
3
Q
Corporation Tax - Self-Assessment
A
- Companies assess own tax liabilities
- CT normally paid 9 months and 1 day following end of accounting period
- Large companies pay CT quarterly, very large companies also pay quarterly (although dates are earlier)
- Large company is one with profits over £1.5m or over
- or If the company is a member of a 51% group, the threshold for each company is reduced by dividing it by the number of related 51% group companies plus one
4
Q
Corporation Tax - Trading Losses
A
- Trading losses can be offset against other income / chargeable gains in same accounting period
- Excess losses can be carried back to profits of preceding 12 months
o Temporary Covid rules have increased this to 3 years for loss making a/c periods ending 1 April 2020 – 31 March 2022, subject to a £2m cap for a/c period ending between 1 April 2020 – 31 March 2021 and a further £2m cap for 1 April 2021 – 31
March 2022 - where carry back extends beyond the usual 12 months - Losses must be set against current accounting period before they can be carried back
- Loss relief must be claimed within 2 years of end of loss-making period
- Losses arising from 1 April 2017 relieved against taxable total profits
o If profits for any year exceed £5m, loss relief is restricted to £5m plus 50% of
profits in excess of £5m
o Similar restrictions apply to capital losses from 1 April 2020 – only one £5m deduction applies and can be allocated between trading and capital losses
5
Q
Corporation Tax - Close Companies
A
- Controlled by 5 or fewer shareholders/or by its directors whatever their number
- Loans by close companies to proprietor - no tax charge
- Interest on loans to buy close company shares - allowable deduction for income tax
- Close investment companies - a close company that doesn’t trade but has investment
income
6
Q
Corporation Tax - Company Residence
A
- UK resident companies subject to CT
- Most companies incorporated in UK are UK resident
- Companies incorporated overseas are UK resident if central management UK
controlled
7
Q
Value Added Tax (VAT)
A
- Levied on most goods and services made in UK and when goods imported into UK
- Administered by HMRC
- Two main rates - zero and standard 20%
- Reduced rate - 5% on e.g., domestic fuel, installation of energy saving materials and certain property renovations, (hospitality and leisure services until Sept 2021, then 12.5% for a further 6 months)
- Taxable supplies - supplies of goods and services that carry VAT
- Exempt supplies - supplies exempt from VAT e.g., finance, insurance, education, health, burial, and cremation services
8
Q
VAT in Practice
A
- VAT registered traders must charge customers output VAT on taxable supplies of goods and services
- Input VAT - VAT payable on goods and services purchased
- Output VAT - VAT payable on goods and services sold
- Able to offset input VAT against output and pay excess to HMRC and reclaim excess VAT paid
9
Q
VAT Registration
A
- Must register for VAT if value of taxable supplies in previous 12 months is more than £85,000 (or likely to be within 30 days)
- Once registered then can reclaim VAT on business related purchases
- Registered from the first day of second month after exceeding limit
10
Q
Exempt Supplies
A
- Include insurance, finance, education, and burial/cremation services
- Output VAT not charged
- In principle input VAT attributable to such supplies cannot be reclaimed (or recovery is restricted)
- Where a business makes exempt and taxable supplies - called partially exempt business
11
Q
Zero Rated
A
- A business making zero rated supplies doesn’t charge VAT on supplies, but can still reclaim input VAT
- Includes:
o Most food and drinks (but not catering)
o Domestic supplies of water and sewerage
o Books and publications – hard copy and e-books
o Sales of new residential buildings
o Public transport of passengers
o Drugs, medicines, and aids for disabled
o Children’s clothing and footwear
o Women’s sanitary products
12
Q
Flat Rate Scheme
A
- Allows small businesses to account for VAT as percentage of taxable turnover
- Instead of difference between input and output tax
- Flat rate % varies according to the main sector business operates in – flat rate of 16.5% applies to limited cost traders
- Rate set according to average percentage of gross sales paid over as VAT to HMRC for that sector
- Qualifying condition - maximum annual turnover £150,000 (excl. VAT)
For example, Anns is the owner of a VAT registered business that has a total turnover of £98,400, inclusive of 20% VAT. She claims input VAT of £7,000 annually. If her business were to join the flat rate scheme, the flat rate percentage for the type of services provided would be 11%
For comparison
- Using the usual method of calculating VAT payable, £16,400 (£98,400 x 20 / 120) output tax less input VAT of £7,000 = £9,000
- Using the flat rate scheme £98,400 x 11% = £10,824 with no claim for input VAT
- It is therefore not beneficial for Anna to Join the flat rate scheme
13
Q
Second-Hand Goods
A
- Margin scheme for dealers in second-hand goods
- VAT is on difference between price paid for an item and the price at which it is sold
- Scheme covers all second hand goods except precious metals and gemstones
- VAT paid at 16.67%
14
Q
Imports and exports
A
- VAT due on goods imported into GB from overseas
- And on goods imported into NI from outside EU
- Exports of goods from GB zero-rated
- Exports of goods from NI zero-rated for countries outside EU
15
Q
Bad Debt Relief
A
- Account for VAT at tax point (date supply takes place)
- but if customer doesn’t pay then no immediate relief for trader
