Business Law and Practice - Corporation Tax and VAT Flashcards

1
Q

Corporation Tax

A

Payable on a company’s profits (trading or otherwise)

Tax rate = 19%

Tax due: 9 months and 1 day from end of an accounting period

Tax return due: 12 months from the accounting period’s end

Larger companies must pay in quarterly instalments (profits greater than £1.5m)

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2
Q

Corporation Tax Formula

A

Tax = (Trade profit + other income + chargeable gains - charitable deductions) x 19%

Can ignore dividends paid or received by a company (former not deductable and the latter is exempt from CT)

Salary and bonuses paid to directors and employees are an allowable deduction against trading profits

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3
Q

Chargeable Gains

A

Net gains = chargeable gains - (current period capital losses + any unused capital losses brought forward)

From sales of capital assets

Capital gains charged as income of the company

No annual exempt amount

Replacement of Business Assets Relief is available (Roll Over relief)

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4
Q

Loss Relief Options

A
  1. Loss may be offset against profits (before qualifying charitable deductions) of same accounting period
  2. Loss may be offset against total profits (before qualifying charitable deductions) of prior 12 month accounting period [can only be done after a current year claim has been made first]
  3. Carry loss forward against future profits

Offsetting losses against the same accounting period and then a prior accounting period of prior 12 month accounting period may result in charitable donations not being deductable if offset results in corporation not having a profit for the period

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5
Q

Close Company Anti-Avoidance Rules

A

Close company = one controlled by 5 or fewer shareholders or by any number of shareholders who are the company’s directors

‘Control’ = ownership of greater than 50% of company or its voting rights

Anti-Avoidance Rules:

Income tax due on no or low interest loans:

  • Tax is on unpaid interest rather than on loan itself (e.g. if loan is a 1% interest loan but official interest rate is 2.5%, tax is paid on 1.5% of the loan amount per annum)
  • If loan is below £10,000 in aggregate there is no requirement to pay income tax on interest benefit
  • The company pays penalty tax of 32.5% on loan (dividend tax rate imposed on higher rate taxpayers)
  • Tax due 9 months and 1 day after accounting period end
  • Company is refunded when loan repaid or waived
  • If waived, borrower owes tax on amount forgiven at their income tax rate
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6
Q

VAT

A

Tax on consumers charged when a business (whether incorporated or not) supplies goods and services

VAT business charges known as output tax

Business can also reclaim VAT it suffers on its purchases (input tax)

Net amount is paid to HMRC (output tax - input tax)

  • Must be remitted to HMRC only to the extent that the goods on which VAT paid were used in business activity (if only partially used in business then a proportion is deductable)
  • VAT on cars or business entertaining usually cannot be re-claimed

Burden of tax suffered by end consumer

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7
Q

Exempted Supplies

A

Supply of land, insurance, financial services, education, health services and postal services are all exempt

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8
Q

VAT Rates

A

Generally supplies are taxed at 20%

Some supplies are taxed at 5%

Some supplies are zero-rated: food, books, newspapers, water, sewerage services, transport and residential construction

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9
Q

Compulsory VAT Registration

A
  1. Historic test: if value of taxable supplies made by business in previus 12 months exceeds VAT registration threshold (currently £85,000) they must register - this is rolling so businesses must check every month and all supplies count (i.e. 20%, 5% and 0% rated) other than those exempted supplies
  2. Future test: are there reasonable grounds for believing that the value of taxable supplies in the next 30 days is likely to exceed the VAT registration threshold (£85,000)? If yes, they must register

Timing of registration:

  1. Historic test: within 30 days from the time the threshold is crossed and registered for VAT at the start of the following month after notification period ends
  2. Future test: within the 30-day period during which the threshold is expected to be exceeded and account for VAT from the date they became aware
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10
Q

Voluntary VAT Registration

A

A business might do this to recover input tax or appear more established than it actually is

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11
Q

VAT Deregistration

A

Required if it stops trading or stops making taxable supplies

If a business stops supplying goods or services that are subject to VAT they must deregister within 30 days

May choose to deregister if value of taxable supplies falls below £85,000 going forward

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12
Q

Option to tax

A

Most supplies of land or buildings are exempt, however owners of interest in commercial land and buildings may opt to charge VAT to recover input tax

Exercisable on a building by building basis and does not apply to residential buildings

Once option to tax is made it can be revoked in first 6 months provided no VAT has been charged on rent in the meantime otherwise it is irrevocable for 20 years

Purchasing a new commercial building is a taxable transaction - therefore, landlord may opt to tax when renting out to be able to recover the input tax

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13
Q

Accounting for Tax

A

Must account for VAT 1 month after each VAT quarter

Which months constitute a business’s quarter is decided by HMRC

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14
Q

VAT invoices

A

Must include:

  • Supplier’s VAT number
  • Tax point
  • Value of the supply
  • Rate of tax charged

Can be used to recover input tax

Must be issued to ALL customers regardless of their VAT status

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15
Q

VAT calculations

A

To work out how much of an amount is VAT divide by one sixth

For reduced rate transactions the VAT element of a VAT inclusive figure is 1/21

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16
Q

VAT Tax Point

A

Tax point = time of supply

Basic tax point for goods: time goods were removed or time they were made available to the person whom they are supplied

Basic tax point for services: time services are performed

Tax point can be varied:

  • If supplier issues a VAT invoice or receives payment before the date the goods are delivered or made available the tax point is brought forward to that earlier date
  • If a VAT invoice is issues within 14 day after the basic tax point the invoice date becomes new tax point
17
Q

Corporation Tax Rates

A

Profits below £50,000 - 19%

Profits above £250,000 - 25%

Between the two financial thresholds marginal relief available - means that the tax rate gradually increases to 25%