Corporation Tax & Value Added Tax (VAT)

Corporation Tax Fundamentals

A company, as a separate legal entity, pays corporation tax on its profits.
Qualifying charitable payments can be deducted from total profits before tax.
Tax rate: 19% on taxable total profits (with exceptions for large companies).
Payment due: Nine months and one day from the end of the company's accounting period.
Tax return due: Twelve months from the period's end.
- Example: Year-end 12/31/2020, tax due 10/01/2021, return due 12/31/2021.
Taxable profit Calculation: (\text{Trade profits} + \text{Other income} + \text{Gains} - \text{Charitable donations}) \times 0.19
Profit Calculation: Turnover minus revenue expenses minus deductible capital allowances.
Dividends:
- Dividends paid by a company are not deductible for corporation tax purposes.
- Dividends received by a company are generally exempt from corporation tax (unless the recipient is another company).
Gains from selling capital assets:
- Taxed as regular income at 19%.
- Companies do not receive the annual exemption available to individuals.
- Rollover relief: Companies can defer gains by reinvesting in qualifying business assets.
Loss Relief:
- Offset against profits of the same accounting period.
- Offset against total profits of the prior twelve-month accounting period (after current year claim).
- Carried forward against total future profits.
- Note: Offsetting losses against profits may impact the deductibility of charitable donations.

Purpose: To prevent shareholders from unfairly avoiding taxes through company control.
Definition: A close company is controlled by five or fewer shareholders or any number of shareholders who are also directors.
Control: Ownership of greater than 50% of the company or its voting rights.
Example: Shareholder-director borrowing from the company.
- Scenario: Avoiding income tax on profits by borrowing from the company instead of taking dividends.
- HMRC Countermeasures:
  - Tax on the benefit of interest-free or low-interest loans to directors/employees at the official rate.
    - Tax is applied on the interest foregone, not the loan value.
    - Exception: Loans below £10,000 in aggregate are exempt from this tax.
  - Penalty tax: The company pays a notional tax to HMRC at 32.5% (the dividend tax rate for higher-rate taxpayers) on the loan value.
    - Tax is due on the usual corporation tax payment date.
    - Refund: The company can get a refund if the loan is repaid.
  - Loan Write-Off:
    - If the company writes off the loan, the individual will owe tax on the amount as a dividend distribution to the shareholder.

VAT is a tax on consumers, charged on the supply of goods and services by VAT-registered businesses.
Supply: VAT terminology for the sale of goods or services.
Output Tax: VAT charged on a business's sales.
Input Tax: VAT a business pays on its purchases that it can reclaim.
Net Amount: The difference between output tax and input tax, owed to or due from HMRC.
Non-registered customers: Bear the burden of VAT without the ability to reclaim it.
Example: Yo-yo factory VAT calculation
- Buys plastic pellets for £1,000 + £200 VAT (input tax).
- Pays metal supply company £500 + £100 VAT (input tax).
- Pays string manufacturer £100 + £20 VAT (input tax).
  - Total input tax: £320.
- Sells yo-yos to retail chain for £4,000 + £800 VAT (output tax).
  - Pays HMRC £480 (£800 - £320).
- Retail chain sells yo-yos to consumers for £4 each + VAT.
  - Collects £1,600 VAT.
  - Pays HMRC £800 (£1,600 - £800 input tax).
Exemptions:
- Land, insurance, financial services, education, health services, postal services.
VAT Rates:
- Basic rate: 20%.
- Reduced rate: 5% (domestic fuel, energy-saving materials, child car seats).
- Zero-rated: 0% (food, books, newspapers, water, sewage services, transport, residential construction).
Other Exemptions:
Sale of company shares, sale of a business as a going concern.

Compulsory Registration:
- Historic Test: Taxable supplies in the previous twelve months exceed the VAT registration threshold.
- Future Test: Reasonable grounds to believe that taxable supplies in the next thirty days alone will exceed the VAT registration threshold.
- Zero-rated supplies count towards the threshold.
- Notification:
  - Historic test: Notify HMRC within thirty days from when the threshold is crossed.
  - Future test: Notify HMRC within the thirty-day period during which the threshold is expected to be exceeded.
Voluntary Registration:
- Businesses may register to recover input tax or appear more established.
Deregistration:
- Required if a business stops trading or making taxable supplies.
- Optional if taxable supplies fall below £83,000 in a twelve-month period going forward.

Most supplies are exempt (sale or lease of a building).
Commercial land and building owners may opt to charge VAT to recover input tax.
Purchase of a commercial building less than three years old is standard-rated (20%).
Option to tax:
- Exercisable on a building-by-building basis.
- Does not apply to residential buildings.
- Can be revoked within six months if no VAT has been charged on rent.
- Irrevocable for twenty years; new owner can decide whether to opt to tax if the building is sold.

Registered businesses account for VAT one month after the end of each VAT quarter.
Tax Point:
- Basic: Date of supply (delivery of goods or performance of services).
  - Earlier: When the customer pays in advance or is invoiced in advance.
- Later: If a VAT invoice is issued within fourteen days after the sale, the invoice date is the tax point.
Tax Invoices:
- Must contain the supplier's VAT number, the tax point, the value of the supply, and the rate of tax charged.
- Used to deduct input tax from output tax.
- Must be issued to all customers.
Deducting Input Tax:
- Only deductible to the extent that goods/services were used in business activity.
- Partial business use: Deduction is proportional.
Quirks:
- VAT on cars and business entertaining generally cannot be reclaimed.
- Businesses selling zero-rated supplies can reclaim input tax.
- Refunds: If input tax exceeds output tax, a business can claim a refund.

Businesses must keep VAT records, including a summary of all inputs and output tax and all invoices received.
VAT Calculation Trick:
- If given a VAT-inclusive figure, divide by six to calculate the VAT amount (for standard-rated goods/services).