Section 8 - VAT and Corporation Tax

Question 1

Value Added Tax (VAT)

Answer 1

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

Question 2

VAT in practice

Answer 2

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

Question 3

VAT Registration

Answer 3

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

Question 4

Taxable Supplies

Answer 4

All supplies are taxable unless specifically exempt

Question 5

Exempt Supplies

Answer 5

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

Question 6

Zero Rated

Answer 6

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

Question 7

Flat Rate Scheme

Answer 7

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)

Question 8

Second-Hand Goods

Answer 8

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

Question 9

Imports and Exports

Answer 9

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

Question 10

Bad Debt Relief

Answer 10

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.

Question 11

Collecting VAT

Answer 11

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

Question 12

Corporation Tax

Answer 12

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

Question 13

Accounting Periods

Answer 13

Can’t be longer than 12 months

Usually same period as company’s accounting period

Question 14

Chargeable Gains and Losses

Answer 14

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

Question 15

Taxable Profits

Answer 15

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

Question 16

Self-Assessment

Answer 16

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)

Question 17

Trading Losses

Answer 17

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

Question 18

Close Companies

Answer 18

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

Question 19

Company Residence

Answer 19

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