Corporation tax and VAT

What are the three main requirements for VAT to be chargeable?

A supply of goods or services for consideration, made in the UK, by a taxable person in the course or furtherance of business, and constituting a taxable supply.

What is the standard rate of VAT?

20%, the default rate unless another category applies.

What is the reduced rate of VAT?

5%.

Which supplies are examples of reduced-rated VAT?

Domestic heating and power, certain mobility aids for elderly people, smoking cessation products and children's car seats.

What is the VAT treatment of zero-rated supplies?

They are taxable at 0%, and the business can generally recover VAT incurred on inputs.

What are examples of zero-rated supplies?

Qualifying food, water and sewerage, books and newspapers, talking books for the blind, new houses, public transport and children's clothing.

How does zero-rated VAT differ from exempt VAT?

Zero-rated supplies allow input VAT recovery; exempt supplies generally do not.

What are examples of VAT-exempt supplies?

Insurance, finance, education, health services and most sales of land and buildings.

When may a commercial property supply be excluded from the land exemption?

Where it concerns a new commercial building or the supplier has opted to tax the commercial property.

What is the consequence of making an exempt supply for input VAT recovery?

The business generally cannot recover VAT incurred on inputs attributable to exempt supplies.

What is a taxable person for VAT purposes?

A person required to register for VAT, including legal persons and unincorporated organisations.

What is the VAT registration threshold in the notes?

£90,000 of taxable turnover.

When must a business register after exceeding the VAT threshold over a period of 12 months or less?

Notify HMRC within 30 days after the end of the month in which the threshold was exceeded.

When does registration take effect after exceeding the historic turnover threshold?

From the beginning of the second month after the threshold was exceeded.

When must a business register based on expected future turnover?

When there are reasonable grounds to expect taxable supplies in the next 30 days alone to exceed the threshold.

When does registration take effect under the expected-turnover test?

From the beginning of the relevant 30-day period.

What is voluntary VAT registration used for?

Recovering input VAT, although charging output VAT may make the business less attractive to customers.

What deregistration threshold is stated in the notes?

£88,000 of expected future annual taxable supplies.

What constitutes business activity for VAT purposes?

Regular economic activity; services supplied by employees to their employer are excluded.

What is output VAT?

VAT a business charges on its taxable supplies.

What is input VAT?

VAT a business pays on goods and services supplied to it.

How does a VAT-registered business calculate the VAT payable to HMRC?

Output VAT minus recoverable input VAT.

When may input VAT be reclaimed before output VAT is charged?

Where there is an intention to charge output VAT on future taxable supplies.

A business sells goods for £1,000 plus VAT at 20%. What output VAT does it charge?

£200.

A business charges £300 output VAT and has £200 recoverable input VAT. What does it pay HMRC?

£100.

How is VAT extracted from a VAT-inclusive price at 20%?

Multiply the VAT-inclusive price by 1/6.

How is VAT calculated on a VAT-exclusive price at 20%?

Multiply the VAT-exclusive price by 0.2.

What is the VAT treatment of a price where the contract is silent on VAT?

The price is deemed inclusive of VAT.

When must a VAT invoice be issued for a standard- or reduced-rated supply to another taxable business?

Within 30 days of the supply; the supplier must retain a copy.

How frequently must a business normally submit VAT returns?

Quarterly, online.

When is a quarterly VAT return normally due?

Within one month and seven days after the end of the VAT period.

What must a VAT return show?

Output VAT charged during the period less attributable input VAT.

When must excess output VAT be paid to HMRC?

At the same time as the VAT return is due.

What payment arrangement applies to businesses normally paying over £2.3 million VAT annually?

Monthly payments on account, followed by a balance payment with the quarterly return.

Why may retailers use a special VAT scheme?

To simplify accounting where issuing invoices for numerous public sales is impractical.

What is the turnover limit for the cash accounting scheme in the notes?

Annual turnover below £1,350,000, excluding VAT and exempt supplies.

When is output VAT accounted for under cash accounting?

When the customer pays the invoice, rather than when it is issued.

When can input VAT be recovered under cash accounting?

When the business pays its supplier.

What is the turnover limit for annual accounting in the notes?

Annual turnover below £1,350,000, excluding VAT and exempt supplies, subject to HMRC permission.

How does annual VAT accounting work?

Instalments are paid during the year based on the previous year's liability, with the balance paid when the return is submitted.

What are the turnover limits for the flat rate scheme in the notes?

Taxable turnover below £150,000 and total turnover below £230,000 annually, excluding VAT where applicable.

How does the flat rate VAT scheme calculate VAT?

Using a prescribed percentage of turnover rather than individual transaction calculations.

What is the usual input VAT treatment under the flat rate scheme?

Input VAT is generally not recoverable.

What special flat rate applies to limited cost traders?

16.5%.

What are the two categories of profits subject to corporation tax?

Income profits and chargeable gains.

How are corporation tax income profits calculated?

Income receipts minus deductible expenditure, capital allowances and trading losses.

What are income receipts for corporation tax purposes?

Income arising from the business or trading activity, such as rent or interest.

What is the general corporation tax treatment of dividend income?

Effectively exempt unless anti-avoidance provisions apply; dividend income is not deductible expenditure.

What is the test for deductible trading expenditure?

It must be incurred wholly and exclusively for the trade, not prohibited by statute, and have an element of recurrence.

Which common business expenses are generally deductible?

Rent, wages, electricity and qualifying interest payments.

How is business entertainment expenditure treated for corporation tax?

It is prohibited from deduction under the rules stated in the notes.

What interest restriction is stated in the notes for amounts exceeding £2 million?

The Corporate Interest Restriction generally limits deductible interest to 30% of income receipts.

What are capital allowances?

Tax relief for qualifying capital expenditure, mainly on plant and machinery.

How does a writing down allowance work?

A percentage of the remaining tax value of qualifying plant and machinery is deducted each year.

Using the notes' 14% writing down rate, what is the first-year allowance on £345,000?

£48,300 (14% of £345,000).

How is the second-year writing down allowance calculated in that example?

14% of the remaining £296,700.

What is the annual investment allowance (AIA) in the notes?

100% relief for qualifying new, used or refurbished plant and machinery up to £1 million annually.

How is expenditure above the AIA limit treated?

Writing down allowances may be available on the remaining qualifying expenditure.

What is full expensing?

For qualifying companies, 100% deduction for the cost of new and unused plant and machinery in the period incurred, without a cap.

What first-year allowance rate for certain plant and machinery is stated for purchases after 1 January 2026?

40% in the purchase year, followed by the main 14% writing down rate in subsequent years, subject to the stated conditions.

What is the basic formula for a corporation tax chargeable gain?

Sale proceeds minus allowable expenditure and any applicable indexation allowance and losses.

What can constitute allowable expenditure when calculating a chargeable gain?

Initial cost, qualifying subsequent expenditure such as enhancements or defending title, and disposal costs.

Is there an annual exempt amount for corporation tax chargeable gains?

No.

What is the Substantial Shareholding Exemption (SSE)?

An exemption that can eliminate a qualifying company's chargeable gain on disposal of shares in a trading company or its holding company.

What shareholding and holding-period conditions for SSE are stated in the notes?

At least 10% of ordinary share capital held for 12 consecutive months within the preceding six years.

What is the purpose of indexation allowance?

To account for inflation in the increase in an asset's value.

What is the stated availability of indexation allowance for assets acquired from 2017 onwards?

Indexation allowance ceased for assets purchased from 2017 onwards.

What is the purpose of rollover relief?

To postpone tax on a qualifying gain by rolling it into the base cost of a replacement business asset.

Who can generally claim rollover relief under the notes?

A company, sole trader or partnership disposing of a qualifying asset and acquiring another qualifying business asset.

When may an individual qualify for rollover relief?

Where both assets are used by their personal company or by a partnership in which they are a partner.

What is the permitted replacement-asset purchase period for rollover relief?

One year before to three years after the disposal of the old asset.

How is the replacement asset's base cost calculated under rollover relief?

Actual replacement cost minus the gain rolled over.

When does tax on a gain deferred through rollover relief become payable?

When the replacement asset is disposed of, unless further rollover relief applies.

Which assets are listed as qualifying for rollover relief?

Land and buildings, goodwill, fixed plant and machinery, ships and hovercraft, aircraft and Lloyd's syndicate capacity.

What is the first step in calculating rollover relief?

Calculate the original gain: sale proceeds minus purchase cost and any applicable indexation allowance.

What must be checked before claiming rollover relief?

That both assets qualify and the replacement purchase falls within the permitted time limit.

What happens if sale proceeds exceed the replacement asset's cost?

The excess proceeds are not rolled into the replacement base cost and must be considered separately in the gain calculation.

What happens if the unspent sale proceeds exceed the chargeable gain?

Rollover relief cannot be claimed under the rule stated in the notes.

What is taxable total profits (TTP)?

The sum of taxable income profits and chargeable gains after applicable reliefs and loss offsets.

How are negative chargeable gains treated in the current accounting period?

They are not deducted from income profits in that period; capital losses are dealt with under the capital loss rules.

What is a company's accounting period?

The period for which its corporation tax profits are calculated; the company can choose its accounting period.

What is the UK financial year for corporation tax rate purposes?

1 April to 31 March.

How are profits apportioned if an accounting period spans financial years with different tax rates?

Apportion TTP between the financial years and apply the relevant rates to each proportion.

Against what can capital losses be offset?

Chargeable gains only, not income profits.

How must capital losses be used in the accounting period in which they arise?

They must first be set against chargeable gains of that same accounting period.

How are unused capital losses treated?

Carried forward and set against future chargeable gains.

Against what must trading losses first be set?

Income profits and chargeable gains in the same accounting period.

What is the deadline for claiming same-period or carry-back trading loss relief in the notes?

Within two years of the end of the accounting period in which the loss arose.

When can unused trading losses be carried back to the previous accounting period?

Where the company carried on the same trade in both periods; a successful claim may produce a tax repayment.

What special carry-back relief may apply when a company ceases trading?

Trading losses from the final 12 months can be set against profits of the preceding three years before that final 12-month period.

How are trading losses treated if they remain unused after current-year and carry-back relief?

Carried forward against future total profits, provided the loss-making trade continues.

Must carried-forward trading losses be used only against profits from the same trade?

No; they can be set against other profits, provided the loss-making trade continues.

What is group relief for trading losses?

A company may surrender qualifying losses to another profitable company in the same group.

What anti-avoidance restriction may apply to trading losses after a company is sold?

Rules may restrict carry-forward or carry-back where ownership changes and the company's nature substantially changes within five years.

How does the deductions allowance interact with carried-forward losses?

It can be used for trading or capital losses, but not both.

How much chargeable gain can carried-forward losses relieve under the stated £5 million allowance?

Up to £5 million can be relieved; above that, relief is limited to 50% of the excess.

What corporation tax rate applies where TTP exceeds £250,000?

25%.

What corporation tax rate applies where TTP is £50,000 or less?

19%.

What applies where TTP is between £50,000 and £250,000?

Marginal relief, tapering the effective rate between the small-profits and main rates.

When must a company with TTP of £1.5 million or less normally pay corporation tax?

Within nine months and one day after the end of its accounting period.