VAT and Corporation Tax Flashcards
VAT registration?
- A person is required to be registered
- At the end of any month if the value of their taxable supplies in the period of one year or less has exceeded the VAT registration.
- At any time if there are reasonable grounds for believing that the value of their taxable supplies in a period of 30 days then beginning will exceed the VAT resignation. Must notify HMRC within the 30 days.
- Current threshold is £85,000
- Alternatively, a person can register voluntarily and that means that input VAT can be recover, but it does mean it has to charge output tax on supplies of goods and services to its customer.
- A person is required to be registered
- At the end of any month if the value of their taxable supplies in the period of one year or less has exceeded the VAT registration.
- At any time if there are reasonable grounds for believing that the value of their taxable supplies in a period of 30 days then beginning will exceed the VAT resignation. Must notify HMRC within the 30 days.
- Current threshold is £85,000
- Alternatively, a person can register voluntarily and that means that input VAT can be recover, but it does mean it has to charge output tax on supplies of goods and services to its customer.
Output and input tax?
Output tax – the VAT chargeable by a business when making a supply of goods or services is called output tax
Input tax – the vat paid by a person on goods or services supplied to the person. The ones bought in by the person.
A VAT registered business offsets input tax it has suffered against output tax charged to customers and accounts for the difference to HMRC.
Types of supply?
Standard rated
20% - this generally applies unless business falls into another category
Reduced rated
Very limited number of types are charged at 5%
- such as domestic heating and power,
Zero rated
- Certain supplies for public policy reasons
Exempt
- Include provisions of insurance, finance, education and sale of land and buildings.
Accounting for VAT to HMRC and special schemes?
Accounting for VAT to HMRC
- Businesses with turnover above the VAT registration threshold are required to keep their VAT records and make their VAT return online.
Vat invoice – a taxable business making a standard rate supply of goods or services to another taxable business must supply the customer with a VAT invoice within 30 days of the supply and keep a copy.
VAT returns – must submit a vat return online to HMRC every 3 months. Must show output tax charged less the total input tax attributable to the making of taxable supplies. And pay the excess output tax charged over input tax suffered. Business that pays more than 2.3million a year must take monthly payments on account and then pay the balance when submitting the quarterly VAT return.
Special schemes
To reduce VAT liability
Retail schemes
- Special number for retailers who find it difficult for the vast amount of supplies they make to public
Cash accounting
- Business whose annual turnover is less than 1,350,000 may opt to use a cash accounting scheme if they comply with certain conditions
Annual accounting
- Business with an annual turnover not exceeding 1,350,000 may be permitted by HMRC to make an annual VAT return
Flat rate scheme
- When annual turnover is not exceeding 150,000 and total turnover is not 230,000 the business may elect that VAT be charged t a flat rate on turnover rather than on every single transaction.
Corporation tax?
The sum of a company’s income profits and chargeable gains is known as TTP – taxable total profits chargeable to corporation tax. By reference to financial year 1st April to 31st march.
Rate for 2023 is 25% for companies with TTP greater than 250,000 and is TTP is 50,000 or less the rate is 18%.
Income profits
-RENATL INCOME, TRADING INCOME, INTEREST, DIVIDEND INCOME
TAKE AWAY - DEDUCITIBEL EXPENDITURE, CAPITAL ALLOWANCES, TRADING LOSSES.
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Chargeable gains
Sale proceeds - take away allowable expenditure, indexation allowance, capital/trading losses = chargeable gain.
- Aggregate all chargeable income receipts and deduct all tax-deductible expenditure.
- Chargeable income receipts – receipts of an income nature
- Tax deductible expenditure – expenditure by a company that the company is permitted to deduct from its income receipts – thereby overall reducing tax bill
Deductible expenditure for income purposes
- To be deductible it must:
- Be wholly and excusably incurred for purposes of the trade
- Not be prohibited by statute
- Be of an income nature
Adjustments to income for capital allowances
- Capital expenditure is generally only deductible from capital receipts and not usually deductible to calculate income profits. But to allow business to spread the cost of certain capital assets over a period of time – capital allowances are given which are capable of deduction against income receipts.
- Allowances are treated as deduction for income purposes in calculating income profits.
- Qualifying expenditure incurred on plant and machinery.
Capital allowances on plant and machinery
- Companies can deduct 18% of value of plant and machinery from their income receipts each year on a reducing balance basis.
Annual investment allowances – enables a company to deduct 100% of expenditure on to a specified amount. Currently 1 million each year.
Tax reliefs and exemptions
Same rules apply in relation to allowable expenditure for chargeable disposals by companies as for individuals.
- But no annual exemption for companies
- Indexation allowance continues to be available to companies frozen up to dec 2017
- Substantial shareholding exemption – a relief that can exempt from corporation tax the whole of a chargeable gain that arises when a company disposes of shares in a trading company.
Rollover relief for replacement of business assets
- Tax deferral mechanism
- Available in following situations
- Where a company dispose of a qualifying business asset and it buys another as replacement
- Where a sole trader or partnership disposes of a qualifying business asset and buys another qualifying business asset
- Where an individual – owns a business asset, seller state asset and buyers another qualifying asset and both are used either by
- Individuals personal company
- A partnership where individual is a partner.
General effect of that relief
- Tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased.
Qualifying assets
- Land and buildings
- Goodwill
- Fixed plan and machinery
- Ships and hovercraft
- Aircraft
- Lloyds syndicate capacity
- Replacement asset must be purchased within 1 months before or 3 years after sale of old asset.
Dividends received and paid by companies
- Dividend paid to UK companies are subject to corporation tax unless dividend falls within one of exceptions
- General effect of rules is that dividends are all exempt unless certain anti-avoidance provisions apply.
Previous and future trading profits?
Previous year profits
- If trading losses cannot be used in whole or part against current profits a company can carry back any remaining trading losses against taxable profits. Must be within 2 years.
Future trading profits
- If still unused can be accrued forwards and set against all company’s taxable total profits.
- Up to 5 million in each accounting period.
- Where, in any accounting period, the company has unrelieved taxable profits in excess of the available deductions allowance for that period, carried forward losses may be used to relieve a maximum of 50% of the unrelieved profits (this is referred to as ‘loss restriction’).
Loss relief - capital losses?
Loss relief – deducitbality of capital losses
- Capital losses can generally only be set off against capital gains in current year cannot generally be carried back to previous year.
- Can be carried forward.
- May be used to relieve a maximum of 50% of unrelieved gains.
Procedure for companies TTP?
Procedure for companies with TTP of 1,500,000 or less
- Company estimates tax liability and pays HMRC within 9 months and 1 days of the end of accounting period
- Company must file a tax return within 12 months
- Unless HMRC examine or make enquires - Companies tax computation will usually be regarded to be finalised.
Procedure for companies with TTP more than 1,500,000
- Required to pay tax bill in 4 instalments
Interest paid and received by companies
- - Deductibility of interest paid – interest on business loan will generally be deductible income expense
- Obligation to withhold tax from certain interest payments. – like in PAYE system – companies obligated to withhold tax.
Close companies?
They are a close company if
- Under control of five or fewer participators OR
- Any number of participators who are also directors
Not a close company
- If its shares are quoted on a recognised stock exchange
- Controlled by one or more non-close company – wholly owned subsidiary
Company can decide to write off a loan.
When loan is written off the tax paid by the company to HMRC will be refunded to the company. Shareholder will be deemed to have received a dividend equal to the amount of the amount of the loan written off.
Taxation effect – loans to participators
Loans – all advances of credit are caught except for
- Laon in form of credit given by a company in respect of goods or services normally supplied by company in court of business where duration of credit does not exceed six months or company’s normal limits.
- A loan made in ordinary course of business
- A loan to a borrower – does not exceed 15,000 and does not have a material interest in company.
