Section 8 - VAT and Corporation Tax Flashcards
Value Added Tax (VAT)
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, contraception, car seats and certain property renovations
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
VAT in practice
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
VAT Registration
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
Taxable Supplies
All supplies are taxable unless specifically exempt
Exempt Supplies
Include insurance, finance, education, and burial/cremation services
Output VAT not charged
In principle, input VAT attributable to such supplies can’t be reclaimed (or recovery is restricted)
Where a business makes exempt and taxable supplies - called partially exempt business
Zero Rated
A business making zero-rated supplies doesn’t charge VAT on supplies, but can still reclaim input VAT
Includes:
- Most food and drinks (but not catering)
- Domestic supplies of water and sewerage
- Books and publications - hard copy and e-books
- Sales of new residential buildings
- Public transport of passengers
- Drugs, medicine, and aids for disabled
- Children’s clothing and footwear
- Woman’s sanitary products
- Installation of energy savings materials
Flat Rate Scheme
Allows small businesses to account for VAT as percentage of taxable turnover
You pay a fixed rate of VAT to HMRC
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 - max. annual turnover £150,000 (excl. VAT)
Second-Hand Goods
Margin scheme for dealers in second-hand goods
VAt is difference between price paid for an item and the price at which it is sold
Imports and Exports
VAT due on goods imported into GB from overseas
Also due 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
Bad Debt Relief
Most businesses account for VAT at tax point (date supply takes place).
If a customer doesn’t pay, trader still has to pay outgoing VAT so then no immediate relief for trader.
The trader can claim a refund of VAT paid if the debt is at least 6 months overdue for payment.
Collecting VAT
Normally VAT returns submitted and VAT paid every 3 months
If you regularly reclaim VAT from HMRC, then can submit and pay monthly
If annual value of taxable supplies is £1,350,000 or less, then can elect for annual tax return and can also elect to pay VAT on cash basis (instead of invoice basis)
Most use Making Tax Digital (MTD):
- Return required by 7th day of month after month following VAT period
Corporation Tax
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
Final year 2022 (1st April 2022 - 31st March 2023) flat rate - 19% on all profits
Accounting Periods
Can’t be longer than 12 months
Usually same period as company’s accounting period
Chargeable Gains and Losses
Gains and Losses calculated according to CGT rules, but CGT not paid as separate tax
Indexation allowance removed for gains on or after 1st January 2018
- Indexation allowance calculated on gains up to December 2017
Chargeable gains added to company’s income in determining total profits
Can’t offset chargeable losses against trading profit or investment income
Taxable Profits
Expenses wholly and exclusively incurred for purpose of business
Entertaining expenses not allowed so need to be added back
Charitable donations under gift aid can be deducted
Depreciation on machinery and buildings - add back but can deduct specifically allowable capital depreciation
Self-Assessment
Companies assess own tax liabilities
Corporate Tax normally paid 9 months and 1 day following end of accounting period
Large companies pay CT quarterly, very large also pay quarterly (although dates are earlier)
Trading Losses
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
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
Loss arising from 1st April 2017 relieved against taxable total profits:
- If profits for any year exceed £5m, loss relief is restricted to £5m plus 50% of profits in excess of £5m
- Similar restrictions apply to capital losses from 1st April 2020 – Only one £5m deduction applies and can be allocated between trading and capital losses
Close Companies
Controlled by 5 or fewer shareholders/or by its directors whatever their number
Tax charge on loans by close companies to proprietor
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
Company Residence
UK resident companies subject to Corporate Tax
Most companies incorporated in UK are UK resident
Companies incorporated overseas are UK resident if central management UK controlled
