Taxes can be incredibly complex to understand. Our small business accountants have answered some of the common questions regarding tax for you here. There’s a lot of information about VAT, including how to register and charge for VAT. We’ve also looked at questions about Corporation Tax, Self Assessment, Capital Gains Tax and Stamp Duty.
What is VAT?
VAT or Value-added Tax is the tax that certain businesses are required to charge on their supply of goods or services. The businesses act as the agents for the government in collecting the tax. The current standard rate of VAT is 20% which relates to the majority of goods and services. There is also a reduced rate of 5% in some instances, for example with home energy, and a zero rate on, for example, most food and children’s clothes.
When would I be exempt from VAT?
If all your sales are exempt, then you won’t be able to register for VAT. Partial Exemption is possible, whereby a business provides both exempt and taxable supplies. The Partial Exemption method is applied to any input tax to work out how much can be reclaimed.
What does a VAT number look like?
A standard VAT number has the country code, ‘GB’, followed by a 9 digit number in blocks: 3 digits, 4 digits and 2 digits.
How do I find out my VAT office?
The easiest way is to contact HMRC. You can do this using information on the following link: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/vat-enquiries
Do I have to include VAT information on my website?
Yes, it is a requirement of the Electronic Commerce Directive Regulations 2002.
What items is VAT charged on?
You must register for VAT when you go over the £85,000 turnover threshold or know that you will. The turnover threshold is the total of everything sold that isn’t VAT exempt.
VAT is not charged on ‘exempt’ or ‘out of scope’ items.
Exempt goods or services are supplies that you: can’t charge VAT on and you can’t claim back any input VAT relating to these supplies. Examples of exempt goods and services:
- Most supplies of land.
- ‘Second hand’ residential properties and residential property rental.
- Postal services.
- Professional subscriptions.
- Sports competitions.
- Some charity fundraising events.
- Cultural activities.
Out of scope items are outside the ‘VAT tax system’ so you can’t charge or reclaim the VAT on them – e.g. charitable donations, goods sold as part of a hobby.
What is a VAT return?
A VAT return is a report sent to HMRC which summarises VAT on sales and VAT on purchases for your business for a given period (usually a quarter). You will either need to make a payment to them or receive a refund.
How do I do a VAT return?
A standard VAT return adds up all the VAT on sales (output tax) and all the VAT on purchases (input tax) for a given period, usually a quarter. An easy way to do this is by using bookkeeping/accounts software that automatically summarises the relevant information on a report for direct submission to HMRC.
How often would I need to file my VAT returns?
Typically, VAT returns are filed quarterly. You must file the return and pay anything you owe within one month and 7 days after the end of the quarter.
The Annual Accounting Scheme can be adopted if the business turnover is less than £1.35m. Only one return is filed in the year but payments are made towards it based on the previous year’s amount, or an estimate if it is the first year of business.
What is the Cash Accounting VAT Scheme?
You can only adopt the Cash Accounting Scheme if your turnover is £1.35m or less. You only put transactions on your VAT return if you have been paid by the customer or you have paid the supplier. This may help cash flow if you have late paying customers.
What is the VAT Flat Rate Scheme?
You can only adopt the Flat Rate Scheme if your turnover is £150,000 or less. You just pay a flat percentage rate on your gross turnover. It can be combined with the Annual Accounting scheme with just one return per annum. This scheme simplifies the record keeping of sales and purchases within the business. The flat rate you apply is the one that applies to your business sector.
What is Corporation Tax?
Corporation Tax is the tax imposed on the profits of a Limited Company. It also applies to foreign companies with UK branches/offices and clubs, co-operatives or other unincorporated associations.
When you start a business you must register for tax. You are required to keep accounting records and prepare a Company Tax return to work out how much tax to pay. The tax needs to be paid within nine months and one day of the year end and the Corporation Tax Return needs to be filed within 12 months of the year end.
What is the current rate of Corporation Tax?
For profits of £300,000 or less, the rate of Corporation Tax from 1st April 2019 is 19%. Not all business expenses can be included in calculating this profit – for example, entertaining expenditure and depreciation. Tax is calculated therefore on adjusted profit, not necessarily accounting profit.
What is Capital Gains Tax?
It is the tax charged when you sell or dispose of an asset that has made a profit. There are certain assets that are tax free – e.g. your car or your main home. You only have to pay tax if the ‘gain’ is above your annual allowance, which from April 2019 is £12,000. You may also be able to reduce a gain by offsetting a capital loss you have incurred.
The tax rates charged depend on whether you are a basic or higher rate tax payer and whether the gains are from residential property or other chargeable assets.
What is Stamp Duty?
Stamp Duty Land Tax, to give its official title, must be paid if property or land is purchased over a certain value. A different tax called Land and Buildings Transaction tax applies in Scotland.
Stamp Duty is paid when you buy or are transferred, freehold or leasehold property.
For a freehold property:
- Nothing is paid for the first £125,000.
- 2% is paid on the next £125,000.
- 5% is paid on the next £675,000.
- 10% is paid on the next £575,000.
- 12% is paid on anything above £1.5million.
Different rules apply to leaseholds.