Learning Outcome 1 Understand the UK tax system as relevant to the needs and circumstances of individuals and trusts: Describe the rules and impact of VAT and Corporation Tax
Shortened demo course. See details at foot of page.
... Value Added Tax (VAT) affects all businesses in the UK and therefore has a knock-on effect on all individuals who deal with businesses in the purchasing of goods and services. Corporation Tax is charged on the profits of companies.
VAT is a tax that is charged on most goods and services provided by businesses in the UK. It is also charged on goods and some services that are imported...
Shortened demo course. See details at foot of page.
...x that is charged on most goods and services provided by businesses in the UK. It is also charged on goods and some services that are imported to the UK.
When a business provides goods and services that are deemed as taxable supplies, that is, goods and services that are deemed liable for VAT, they must then register for VAT with Her Majesty’s Revenue and Customs (HMRC) who administer the collection of it.
HMRC consider a business to be an activity carried out with a degree of frequency, over a period of time, which involves getting paid for the goods or services provided. This means that registration fo...
Shortened demo course. See details at foot of page.
...e VAT registered from 1 August 2024.
You can see the VAT Threshold figure for the current year in the tax tables.
A business can also choose to register for VAT when their turnover is below the threshold, even though they are not required by law to do so. In the ‘Applying VAT’ section we will see what the advantage of this voluntary registration is.
When must an individual or business register for VAT with HMRC?
Answer : Purchase course for answer
Once registration for VAT has been made with HMRC, the individual or business will become involved in the application of VAT in two ways.
Firstly, when the business purchases goods and services for their own use from other businesses and suppliers, they will pay VAT on the price charged. This is known as input tax . When the business then sells on their own goods and services to other bu...
Shortened demo course. See details at foot of page.
...ost businesses have to account for VAT at the time the supply takes place, known as the ‘tax point’. If a customer fails to pay, there is normally no relief given to the trader, who will still have to pay the output VAT due to HMRC.
Alpha Trading are a fairly new company and have not yet registered for VAT. What is the consequence of this?
Answer : Purchase course for answer
The rate of VAT charged by a business will depend on the type of goods or services they provide.
There are currently 3 rates of VAT: the standard rate, the reduced rate and the zero rate. You can see the rates for the current year in the tax tables.
The standard rate is known as the default rate, meaning that it is the rate charged on most goods and services. Unless specifically identified as falling into one of the other categories, the goods or services will be charged to VAT at this rate.
Where the goods or services provided are considered to be taxable supplies, VAT at the appropriate rate is charged on the full price of the sale, even if, or when, the goods or services are provided in part e...
Shortened demo course. See details at foot of page.
... from non-business activities e.g. sales of small items made as a hobby
Fees that are fixed by law – for example, the charge for a vehicle MOT certificate
There are a couple of important points to be aware of. Firstly, there is a difference between zero-rated items and items whch are exempt or outside of scope. Zero-rated goods are still considered to be ‘taxable supplies’, but the rate of VAT applied is 0%. Secondly, if a business supplies only goods and services that are considered to be exempt, they are not normally able to reclaim any input VAT they have paid.
Explain the difference between zero-rated items and exempt supplies.
Answer : Purchase course for answer
There are certain special schemes which may reduce a trader’s liability for VAT or the administrative burden.
Flat rate scheme
Small business can use a simplified rate to calculate their liability. This scheme allows such businesses to account for VAT as a percentage of their taxable turnover, rather than as the difference between input and output VAT. The flat rate percentage varies depending on the type of trade sector the business is a part of, with the rate being set according to the average percentage of gross sales paid over as VAT to HMRC for that trade sector.
To qualify for the flat rate scheme, the business must have annual taxable turnover of no more than £150,000 excluding VAT. Once a business is registered for the scheme they can continue to use it until their turnover (inc...
Shortened demo course. See details at foot of page.
...imilar reverse charge to that used for postponed VAT accounting.
Exports of goods from the Great Britain are zero-rated but for Northern Ireland, zero-rating applies to exports of goods to countries outside of the EU.
Bad debt relief
Most businesses have to account for VAT at the date that the supply takes place – the tax point. However, if a customer does not pay there is normally no immediate relief for the trader who still has to pay the output VAT. A claim for a refund of the VAT paid can usually be made if the debt is at least six months overdue for payment and has been written off in the business accounts. For those using the cash accounting system VAT on bad debts does not arise.
Explain how the flat rate scheme for small businesses operates.
Answer : Purchase course for answer
Once an individual or business has become VAT registered, there is a requirement to submit VAT returns regularly to HMRC. This is normally done on a quarterly basis, though traders who regularly reclaim VAT may apply to submit monthly returns. Some large companies have to pay VAT on a monthly basis.
Almost all traders have to submit their VAT returns and make payments online.&n...
Shortened demo course. See details at foot of page.
...n the year-end return. These traders are also able to join the cash accounting scheme which allows VAT to be paid on a cash rather than invoice basis.
Penalties will be charged for late or incorrect returns.
When a VAT return is submitted to HMRC, what will happen if the amount of output tax is greater than the amount of input tax paid by a business?
Answer : Purchase course for answer
Corporation Tax is a tax on the taxable profits o...
Shortened demo course. See details at foot of page.
... tax on their individual income from the partnership.
The taxable profits of companies and organisations include:
Taxable profits from trading activities
Investment profits (except dividends which are treated differently)
Capital gains – known as chargeable gains – on the profits fro...
Shortened demo course. See details at foot of page.
...e liable for Corporation Tax on the taxable profits arising from activities undertaken in the UK.
Which of the following is not liable for Corporation Tax?
Companies
Partnerships
Clubs
Co-operatives
Answer : Purchase course for answer
For Corporation Tax, the tax year is called the financial year or fiscal year and runs from 1 April to 31 March. It is important to note that this is different from the tax year for individual taxpayers paying income tax, which runs f...
Shortened demo course. See details at foot of page.
..., with a marginal taper for businesses with profits between £50,000 and £250,000.
You can see the figures in the tax tables.
What is the financial year for Corporation Tax purposes?
Answer : Purchase course for answer
Corporation Tax is due on the taxable profits within each Accounting Period, which can never be more than 12 months long and matches the company or organisation's financial year. The organisation's financial year begins and ends with the dates covered by the Annual Report and Accounts submitted to Companies House.
If an organisation's accounting period does not coincide with the financial year (1 April to 31 March), taxable profits have to be apportioned between the two financial years.
You can see an example of this in the workbook.
In this situation, the actual amount of Corporation Tax paid will depend on the rates applicable in each of the years. Where there is an increase in the rates in the second year, the amount of Corporation Tax due would be more. Currently, this situation will not arise as the rates re...
Shortened demo course. See details at foot of page.
...rom interest income
Any Corporation Tax already paid (early payments)
The payment of a dividend has no tax consequences for the company. The individual shareholders who receive the dividend have their personal liabilities according to the income tax rules.
The resulting figure will either show the liability or the amount that can be reclaimed.
Anti-avoidance rules are in place which apply to personal service and managed service companies. These rules are in place to prevent people who would otherwise be classed as employees of their clients avoiding income tax and national insurance contributions by providing their services through a partnership or limited company.
Where an organisation's accounting period is different from the financial year, what procedures must they follow?
Answer : Purchase course for answer
Special tax rules apply if a company is classed as a close company or a close investment-holding company.
A close company is a company controlled by five or fewer shareholders or by its directors, regardless of their number. For this purpose they are known as ‘participators’. The associates of a participator are grouped together with that parti...
Shortened demo course. See details at foot of page.
...ailable for interest paid on a loan that is used by a close company for business purposes.
A close investment company is one which does not carry out trading activities but instead has investment income, with an exception being those that invest in property that is let.
Give a definition of the term close company.
Answer : Purchase course for answer
Companies and organisations liable for Corporation Tax are required to file tax returns to HMRC. However, unlike Income Tax Self-Assessment where the dates for filing returns and making payments are the same, the deadline for paying Corporation Tax is before the deadline for filing the tax return.
I...
Shortened demo course. See details at foot of page.
...r any unpaid tax. HMRC will also pay interest to companies on overpaid tax.
Fast and Fresh Catering Ltd have an accounting period from 1 February to 31 January. If they have taxable profits of £1.25 million, when will they pay their Corporation Tax?
Answer : Purchase course for answer
Chapter revision test. Your results and 1.9 hours of estimated study time will be added to your CPD certificate on completion. If you retake the test then additional CPD time for the test will be added.
Multiple response question - select all the correct answers
About Demo Courses
This is a shortened version of our online course, built so that you can
get a good idea of what is provided. The full version shows all the
current text and is fully formatted. Use the top right drop down menu to
view the chapters. If you have already purchased this course,
please log in to access the full version
Our online courses page lists details of all our courses. For more details on the above course see;
