Business Taxes and VAT

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Yellow Belt
All business have to be aware of the current tax situation regarding how much in taxes they have to pay. This might include such things as Corporation tax, VAT, Income tax for staff and so on. Not all taxes will be payable for all businesses though.

It's important to get the very latest information about tax liabilities, rates of tax, thresholds and fees, as they often change in the Budget, and come into effect from the beginning of a new tax year.

The Inland Revenue and VAT offices are more than happy to furnish businesses with copies of the above, as it's obviously in their own interests for business owners to get things done properly.

Reports and returns are made during the year. Some are made at the end of the tax year, some are made at the end of what is called an "accounting period" while others are made quarterly or monthly.

Failure to use the correct rate or allowance for the relevant tax year may lead to a penalty.

Income Tax

Everyone has their own personal allowance for paying income tax. Tax is only payable once a persons income goes above that threshold. Employers normally collect their employee's income tax through PAYE and these are then sent to the Inland Revenue. Self-employed people, and other groups are accountable for paying their own income tax.

National Insurance contributions

Most workers are required to pay National Insurance contributions (NICs). These contributions go towards certain social security benefits, such as the state pension and jobseekers allowance.

The different types of NICs:
Primary Class 1 NICs - paid by employed people

An employee only starts paying NICs once they are earning above the earnings threshold. If an employee earns less than the earnings threshold, they are treated as paying NICs on the earnings between the lower earnings limit (LEL) and the earnings threshold. Employees pay NICs at a lower percentage rate on earnings above the upper earnings limit (UEL).

Secondary Class 1 NICs - paid by employers

An employer pays on the same level of earnings but there is no upper earnings limit (UEL).

Capital Gains Tax is payable on capital gains made on selling or disposing of assets, such as property and shares. For example, you may be liable to pay CGT on the gains on your share of partnership assets when you sell or transfer a business.

Everyone has an annual personal exemption, currently in 2008/09 - £9,600, so that figure is free from tax. Only taxable gains over £9,600 incur CGT.

Corporation tax

Corporation tax is payable by limited companies on profits. However, certain organizations that are not limited companies are also required to pay corporation tax. This should be checked with HM Revenue & Customs, If you are self-employed you do not pay Corporation tax.

Value Added Tax

VAT is a tax payable on the majority of business transactions that involve the transfer of goods or services.

Registration for VAT is required once your business' annual turnover reaches a certain level and VAT will then be payable to HM Revenue & Customs. The current figure for 2008/09 is £67,000. If your turnover has not reached the level required, you still have the option to register on a voluntary basis, as this may have benefits for the business, particularly when a business first starts up.

Value Added Tax, or VAT, is a tax charged on most business-to-business and business-to-consumer transactions in the UK. VAT is also charged on goods, and some services, imported from places outside the European Union (EU) and on goods and some services coming into the UK from other EU countries.

VAT is charged to a buyer by a VAT-registered seller. It is reclaimed by a VAT-registered buyer after goods and services are purchased.

There are three different rates of VAT which apply to different types of goods and services, these are:

* standard rate
* reduced rate
* zero rate

Some goods and services are exempt from VAT, while others are outside the scope of VAT. Businesses registered for VAT usually, not always, account for VAT on a quarterly basis by filling in a VAT return and submitting it to HM Revenue & Customs. Further details on these rates further down.

Who charges VAT and what VAT is charged on

You must register for VAT if your turnover for the previous 12 months is over a specific limit - currently £67,000 - or if you think your turnover may soon go over this limit. You may register voluntarily at any time. There are a few exemptions from registration.

VAT is charged by someone who is registered for VAT - a "taxable person" - on:

* goods and services sold or otherwise supplied in the UK
* goods, and some services, imported from places outside the European Union
* goods and services coming into the UK from other EU countries

How VAT is charged and accounted for

For items which are standard rated or reduced rated for VAT, VAT is charged to the buyer (output tax) by the VAT-registered seller. This VAT is reclaimed by the VAT-registered buyer (input tax) after goods and services are purchased.

If you are registered for VAT, generally you charge VAT on your business sales and reclaim it on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HM Revenue & Customs. If the value of the VAT you reclaim is more than the value of the VAT you charge, then HMRC pays you.

If you are not registered for VAT, you do not charge VAT on your sales. VAT paid on your purchases cannot be reclaim.

You usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HMRC. You then pay HMRC the excess of your output tax over the VAT you can reclaim as input tax. If the input tax you can reclaim is more than your output tax, you can reclaim the difference from HMRC.

Vat rates

Different VAT rates apply to different goods and services. At the end of 2008 the government announced a chnage to the standard rate of VAT in order to help stimulate the economy.

Currently there are three rates:

* Standard rate - 17.5 per cent up to 30 November 2008 and from 1 December 2008 the standard rate is 15 per cent. It will change back to 17.5 per cent on 1 January 2010.
* Reduced rate - 5 per cent
* Zero rate - 0 per cent

The standard rate of VAT is the default rate for goods and services unless specified otherwise.

Examples of reduced rate items include:

* domestic fuel and power
* installation of energy-saving materials
* residential conversions
* women's sanitary products
* children's car seats

Here is a list of some zero-rated items:

* food - but not meals in restaurants or hot takeaways
* books and newspapers
* children's clothing and shoes
* public transport

Items not covered by VAT

Exempt items and items which are outside the scope of VAT are not covered by VAT.

Items which are exempt from VAT include the following:

* insurance
* providing credit
* education and training, if certain conditions are met
* fund-raising events by charities, if certain conditions are met
* subscriptions to membership organizations
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