Value Added Tax (VAT)
UK companies supplying certain goods or services are required to register for VAT if:
- the VAT supply turnover exceeds the threshold in the previous 12 months (2018/19: £85,000), or
- where it’s expected the threshold will be exceeded in the next 30 days.
A company may also need to register for VAT if it buys goods or services from the EU in excess of the threshold. For these purposes, the VAT supply turnover should include not just standard rated supplies but also reduced rate and zero rated supplies.
Once a company is registered, VAT must be added to all taxable supplies, with the amount of VAT payable and the VAT rate itemised on invoices. An invoice is not required for exempt or zero-rated supplies, or where the customer operates a self-billing system.
What is a taxable supply?
This refers to the supply of goods or services made in the normal course of business in the UK. Currently, for supplies made to other EU members, the reverse charge system operates, which means that VAT is not added to the invoice. The reverse charge is the amount of VAT that would have been payable on that service if it had been supplied in the UK. This amount needs to be added to the total of VAT payable to HMRC in that quarter and also should be added to the amount of VAT reclaimed in that quarter.
Supplies made in countries outside the EU, are outside the scope of VAT and no VAT is due on those supplies.
Being VAT registered means that, in most cases, a company can reclaim VAT on expenses it incurs during the course of business. But there are certain important exceptions.
- mainly in relation to corporate entertaining or gifts, where any VAT cannot be reclaimed, and
- where the company is using the Flat Rate Scheme.
The Flat Rate Scheme
Here, the company pays a percentage of the gross sales amount (including VAT) but, except in limited circumstances, it cannot claim a deduction for VAT on expenditure. This scheme works well for companies with very little expenditure where VAT is payable, but is not available if your turnover exceeds £150,000 per annum.
The Cash Accounting VAT Scheme
Available to most small businesses but subject to certain eligibility criteria, with Cash Accounting VAT is paid in relation to when customers pay and when purchase invoices are paid. This helps companies with their cash flow, but cannot be used in conjunction with the Flat Rate VAT Scheme, which has a separate cash-based scheme.
VAT Filing
Typically, VAT returns must be filed online four times a year. However, this is not the case with the Annual Accounting Scheme. Here, a VAT return is filed annually, but payments are made monthly or quarterly. The amount payable is 10% of the estimated VAT amount if paying monthly, or 25% if paying quarterly. A final payment (or refund) based on the actual amount of VAT due, is made within 2 months of the end of the year.
Pay As You Earn (PAYE) and National Insurance (NI)
For UK companies employing staff, HMRC requires that deductions are made for PAYE and Class 1 NI contributions from each employee’s salary and that the employee is provided with a payslip detailing the deductions made.
In addition, the company is required to pay Class 1A NI (or employer’s secondary NI) on every employee’s gross salary (including bonuses and overtime) and certain benefits in kind. The rate for employer’s NI contributions for 2018/19 is 13.8%, but this is only paid on amounts above the Secondary Threshold (2018/19: £8,424 per annum).
An annual Employment Allowance is provided for companies who employ staff other than directors, or those who work under IR35 rules. This allowance (2018/19: £3,000) is deducted automatically from the employer’s NI contributions, until the contributions exceed the allowance for the year.
HMRC requires all companies to file Real Time Information (RTI) about payments made to employees. This comprises an online return called a Full Payment Submission (FPC) due by the deadline. There are penalties for late submissions. Submissions can be made using a third party payroll bureau, HMRC’s RTI Tool, or payroll software.
Company Requirements
- At the end of each tax year, each employee needs to be provided with a P60 showing details of total amounts paid in the year and amounts deducted from their gross pay
- Any Director or employee earning over £8,500 who received benefits-in-kind must also be provided with a P11D showing the taxable value of those benefits
- For employees earning less than £8,500, the company is required to complete a P9D each tax year in respect of any benefits-in-kind
- The company is also required to prepare a P11D(b) summarising all benefits for its employees and calculating the amount of employer’s NI payable
Corporation Tax
Corporation Tax is paid on a company’s taxable profit for the year. The rules are fairly complex but, in essence, a company pays a percentage (2018/19: 19%) of its profits (as shown in the accounts for the year), adjusted for disallowable items, capital allowances and brought forward taxable losses. Typically, disallowable items will include client entertaining or corporate gifts, depreciation on fixed assets, as well as profits or losses on disposal of fixed assets.
Capital allowances are available on most items of fixed assets and these can be used to reduce a company’s overall Corporation Tax liability.
Employee vehicles and company cars
Employees may use their own vehicles for business journeys, provided they are paid no more than 45p per mile first the first 10,000 per tax year (25p per mile thereafter), the no tax or NI is payable by the company or the employee. Reduced rates apply for motorcycles and cycles.
If you provide employees with a company car, there are detailed rules for calculating the taxable benefit to the employee based on the value of the vehicle, CO2 emissions and fuel type. Additional tax arises where employees do not pay for private use fuel. Tax is reduced if the car is not available for the full year.
Where a company has incurred a taxable loss for the year, it typically has two options:
- If it had taxable profits in the previous year, it can carry back some or all of the loss, to create a tax refund.
- Alternatively, the loss can be carried forward indefinitely, to be offset against future taxable profits.
A Corporation Tax return (CT600) must be filed no later than nine months after the end of the accounting period to which it relates. The CT600 should include a full set of accounts produced in accordance with accounting standards. Payment of any tax due must also be made by this date.