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VAT, CORPORATION TAX, CLOSE COMPANIES - Coggle Diagram
VAT
Types of Supply
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2. Reduced RatedLimited types of supply are charged at 5%
- E.g. domestic heating + power / installation of mobility aids for elderly / smoking cessation products and children’s car seats.
3. Zero RatedZero rated for public policy reasons still fall into the category of taxable supplies so input VAT can be recovered
- E.g. food (within certain categories), sewerage and water, books / newspapers, talking books for the blind, new houses and the construction of new houses, public transport and children’s clothing
4. ExemptInput tax cannot be recovered = business cost
- E.g. insurance, finance, education / health services and the sale of land and buildings
Output and input tax
Output tax
VAT chargeable by a business when making a supply of goods or services = the ‘output’ of the business.
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VAT registered business offsets input tax it has suffered against output tax it has charged customers or clients = only accounts difference to HMRC.
IF NO OUTPUT TAX = still possible to reclaim input tax incurred if output tax will be charged in the future.
Accounting for VAT to HMRC
Businesses with turnover above the VAT registration threshold are required to keep their VAT records and make their VAT return online
1. VAT Invoice
A taxable business making a standard (or reduced) rate supply of goods or services to another taxable business MUST supply customer with VAT invoice within 30 days of the supply and keep a copy.
HMRC carries out regular inspections of businesses to ensure copy is kept.
2. VAT Return
Taxable businesses must submit a VAT Return online to HMRC every 3 months showing the total output tax - the total input tax on making of taxable supplies = pay balance to HMRC
Due date = within 1 month and 7 days after the end of the VAT period.
Businesses that pay more than £2.3 million a year in VAT must make monthly payments + pay balance when submitting the quarterly VAT return.
3. Special Schemes to simplify / reduce VATa. Retail Schemes
- Used by retailers who find it difficult to issue VAT invoices for large number of supplies so they make direct to the public.
b.Cash Accounting
- Businesses with annual turnover of less than £1,350,000 (excluding VAT) may opt to use it if they comply with certain conditions = output tax is accounted for when the invoice is paid rather than issued.
c. Annual Accounting
- Businesses with an annual turnover not exceeding £1,350,000 (excluding VAT) may be permitted by HMRC to make an annual VAT Return.
d. Flat Rate SchemeVAT-registered business with taxable annual turnover not exceeding £150,000 (excluding VAT) and a total annual turnover not exceeding £230,000 the business may elect that VAT be charged at a flat rate on turnover rather than on every single transaction.
Registration
A person is required to be registered:
- at the end of any month if the value of his/her taxable supplies in 1 year or less has exceeded the VAT registration threshold OR
- at any time if there are reasonable grounds for believing that the value of their taxable supplies in 30 days then beginning will exceed the VAT registration threshold OR
- Voluntary registration = input VAT can be recovered BUT output VAT will be charged on supplies of goods and services to customers
The current registration threshold is £90,000
De-registration
VAT registered person ceases to be taxable by cancelling registration
IF value of future annual taxable supplies < VAT deregistration threshold.
The current deregistration threshold is £88,000.
Calculating VAT
The standard rate of VAT is 20%
A price is deemed to be VAT inclusive unless the contract for the supply of goods or services states otherwise
To calculate % of VAT included in price =
tax rate / (100 + tax rate) = fraction
multiply VAT inclusive price by fraction
VAT is charged on
- any supply of goods or services made in the UK
- where it is a taxable supply
- made by a taxable person
- in the course or furtherance of any business carried on by that person.
CORPORATION TAX
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Rate of corporation tax
From April 23:- 25% for companies with profits < £250,000
- 19% for companies with profits LESS than £50,000
25% for companies with profits between £50,000 and £250,000
- BUT marginal relief may apply which has a tapering effect.
Calculation:
Chargeable gain = Sale proceeds - (Allowable Expenditure + Indexation Allowance + Capital/Trading Losses)
+
Income profits = Income Receipt - (Deductible Expenditure + Capital Allowances + Trading Losses)
= TTP
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Corporation Tax is payable on:
- all income profits +
- chargeable gains
- of a body corporate
- that arise in its accounting period.
PROFITS + GAINS = TAXABLE TOTAL PROFITS (TTP)
Companies are assessed to corporation tax by reference to the financial year (1 April – 31 March)
Straddling = if company's accounting year does not coincide with financial year the TTP of accounting period are apportioned between FYs and proportions will be taxed at relevant rates
CLOSE COMPANIES
Taxation effect
1. ‘Loans’: All advances of credit are caught by special tax rules, except for:a. loan in the form of credit given by a company for goods or services supplied by them in course of business + duration of credit does not exceed six months or company’s normal limit ORb. loan made in ordinary course of business which includes money lending ORc. loan to a borrower + other outstanding loans made by company to that borrower, do not exceed £15,000 + borrower works full time for the company with no material interest
- Material Interest: indirect control of more than 5% of company's ordinary share capital / entitlement on winding up of more than 5% of the assets available.
IF NO EXCEPTIONS apply, these are the tax rules a company must follow:The tax effect for the company
- The company must pay corporation tax to HMRC on the amount of the loan, at the rate of income tax payable on dividends by higher rate taxpayers within 9 months and 1 day after the end of the accounting period in which the loan is made.
- The company may claim refund of tax paid if the loan is repaid, satisfied, written off or waived.
The tax effect for the recipient participator
- If the loan is written off or waived, the participator is deemed to receive a dividend equal to the amount of the loan written off/waived
- NO tax effect for the participator if he pays back the loan in full.
2. Distributions
Includes living accommodation and other benefits in kind provided to participators for employment
3. Inheritance Tax Implications
ONLY individuals pay IHT > SO company can be formed to make a transfer through it
BUT anti-avoidance legislation = transfer of value by a close company results in the value being apportioned between its shareholders.
4. Transactions in Securities rules
Apply to a transaction involving a close company that gives any person a tax advantage by changing an income receipt into a capital receipt
A company will be a close company if it is under the control of:
- 5 or fewer participators (person having a share or interest in capital or income e.g. shareholders) OR
- any number of participators who are also directors
Control = controlling affairs by voting rights or the entitlement to:
- issued share capital giving < 50% of income of company if distributed OR
- < 50% assets of company on winding up
EXCLUSIONS Company will NOT be a close company if:
- its shares are quoted on a recognised stock exchange
- it is controlled by 1 or more non-close companies (wholly-owned subsidiary is not one) = could only be a close company by treating a non-close company as one of the five or fewer participators having control.
Close companies are subject to special tax treatment as it prevents taxpayers from exploiting some of the tax benefits of incorporation