VAT and corporation tax

VAT and corporation tax is two different taxes administered by HM Revenue and Customs.

Your limited company is legally required to pay corporation tax if your company has made a profit and submit your corporation tax return with HM Revenue and Customs (HMRC).

If your limited company is registered for VAT with HMRC then your company is legally required to charge VAT to your customers and submit VAT returns to HMRC.

VAT

Let say, your company is selling children clothing, the applicable VAT rate is zero percent, your price for a pair of child’s trouser is £20 and the VAT rate for children’s clothing is zero percent. Your customer will pay you £20.

If your are selling website coding services, you would charge a standard VAT rate of 20% to your customers. Say, your project fee is £1000 and your invoice to your customer would be £1000 + 20% VAT and the final invoice price is £1200. The £200 collected is VAT. This amount is called output tax.

The £200 belongs to HMRC. Thus, your company is technically collecting the VAT on behalf of HMRC. Then, you report this output tax collection in your VAT return.

Corporation tax

Your company pay corporation tax on when there is a profit. Let use the website coding services business to illustrate how corporation tax is computed. Let say, your company only have one sale that is £1000 + 20% VAT equal to £1200.

When preparing your company account, you book only £1000 as your sale, not the whole £1200 because the £200 of VAT belongs to HRMC and it is not your earning. Then you deduct any expenses you incurred to deliver the website coding services, say the stationery cost of £150 (excluding VAT). Your profit is £850 (£1000 less £150). The current corporation tax rate is 20%, your corporation tax liability would be £170. Your company would report this tax liability in your corporation tax return called CT600 and submit it to HMRC.

HMRC published the current corporation tax rates.

No double counting of taxes

As you can see from the illustration above, your company would not pay double taxes on your business income. Basically, you collect VAT on behalf of HMRC from your customers. And, your VAT is excluded from your corporation tax computation.

Companies House filings

Besides, delivering your corporation tax return and VAT return to HMRC, your company must also submit your Confirmation Statement and company accounts to Companies House promptly to avoid a late filing penalty.

VAT registration

UK company may opt to register for VAT voluntarily at any time. However, some companies would wait until their sales reach the VAT registration threshold.

Generally, once you have registered for VAT, you must add 20% on top of your usual selling price.

When to register for VAT

If you already foresee your company is likely to make sales exceeding the VAT threshold in the first year of trading then you opt to register for VAT straight away.

HM Revenue and Customs requires companies to apply for a VAT number within one month of your company’s sales exceeding the VAT registration threshold.

VAT registration administration

Subsequently, your company may apply to join the VAT cash accounting scheme, flat rate scheme, annual accounting scheme if it is beneficial to your business to do so.

You must put in place a proper VAT accounting system to record your VAT transactions.

For example, the information you must enter into your sale invoice from your sales transactions. There are many easy ways to manage this. You may use online accounting software which comes with the VAT invoice template. All you have to do is to fill in the information. The best part is that if you forgot any important details the software will prompt you to enter it. GOV.UK website recommends commercial software that meets the VAT return accounting.

Correspondingly, your company must submit VAT returns with HM Revenue and Customs. Usually, the submission deadline is within one month from the end of your VAT return quarter. The submission must be done online.

HMRC telephone helpline

HMRC telephone helpline if you have any questions about your corporation tax, self assessment, VAT, PAYE and payroll compliance, tax credits and so on.

HMRC stands for HM Revenue and Customs. They are the official Tax Authority in the United Kingdom. HMRC provide dedicated telephone helpline for specific tax related subject matters to help businesses and companies to deal with their tax matters efficiently.

Ensure you dial the correct numbers to avoid being transferred from department to department to reach the right person to speak to.

For general help, you may tweet with @HMRCcustomers.

HMRC department contact details

HMRC DepartmentTel Helpline
Self Assessment general enquiriesTelephone:
0300 200 3310
Textphone:
0300 200 3319
Outside UK:
+44 161 931 9070

Postal:
Self Assessment
HM Revenue and Customs
BX9 1AS
United Kingdom
Tax credits general enquiriesTelephone:
0345 300 3900
Textphone:
0345 300 3909
Outside UK:
+44 02890 538 192

Postal:
Complaints or change of circumstances
Tax Credit Office
HM Revenue and Customs
BX9 1LR
United Kingdom

New tax credit claims
Tax Credit Claims
HM Revenue and Customs
BX9 1HE
Child benefit general enquiriesTelephone:
0300 200 3100
Textphone:
0300 200 3103
Outside UK:
+44 161 210 3086

Postal:
HM Revenue and Customs
Child Benefit Office
PO Box 1
Newcastle Upon Tyne
NE88 1AA
United Kingdom
Income tax general enquiries and Marriage AllowanceTelephone:
0300 200 3300
Textphone:
0300 200 3319
Outside UK:
+44 135 535 9022

Postal:
Pay As You Earn and Self Assessment
HM Revenue an Customs
BX9 1AS
United Kingdom
National Insurance general enquiriesTelephone:
0300 200 3500
Textphone:
0300 200 3519
Outside UK:
44 191 203 7010

Postal:
PT Operations North East England
HM Revenue and Customs
BX9 1AN
United Kingdom
Employers general enquiriesTelephone:
0300 200 3200
Textphone:
0300 200 3212
Outside UK:
+44 151 268 0558
Fax:
03000 523 030

Postal:
PT Operations North East England
HM Revenue and Customs
BX9 1BX
United Kingdom
VAT general enquiriesTelephone:
0300 200 3700
Textphone:
0300 200 3719
Outside UK:
+44 2920 501 261

Postal:
HM Revenue and Customs
VAT Written Enquiries Team
Portcullis House
21 India Street
Glasgow
G2 4PZ
United Kingdom
Construction Industry Scheme general enquiriesTelephone:
0300 200 3210
Textphone:
0300 200 3219
Outside UK:
+44 161 930 8706

Postal:
PT Operations North East England
HM Revenue and Customs
BX9 1BX
United Kingdom

Courier documents to HMRC

Lastly, if you are going to use a courier service to deliver your documents to HMRC with PO Box and BX postcodes.

Please use the address below instead:

HM Revenue and Customs
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ
United Kingdom

HMRC online service

Broadly, HMRC has dedicated technical support helpline to help with any filing problems you face.

If you have any technical issues please call 0300 200 3600. The number for textphone is 0300 200 3603. If you are calling from outside the United Kingdom call +44 161 930 8445.

VAT margin scheme

VAT margin scheme introduced by HM Revenue and Customs for second hands goods businesses.

You can use the margin scheme if you are selling:

  • Second hands goods
  • Arts
  • Antiques

There are special rules for selling:

  • Used cars
  • Horses and ponies
  • Houseboats and caravans

You cannot use the margin scheme for :

  • precious stones
  • precious metals
  • investment gold
  • item you bought for which you were charged VAT

The VAT margin scheme allows you to calculate VAT on the difference (or margin) between your purchase cost and your selling price. You must maintain detailed records of your transactions.

Calculate the VAT under the scheme

Say, you bought a second-hand painting for £20,000 and you sold it for £35,000. Using the margin scheme, you pay VAT on the £15,000 profit at the current VAT rate of 20%.

You calculate the VAT payable to HMRC using the VAT fraction of one-sixth (1/6) on the profit. In percentage, it is 16.67%. In this case, the VAT payable to HMRC is £2,500.

On the other hand, if no profit is made because you sold the second-hand item at a loss then no VAT is payable.

Thereafter you use these figures to complete your VAT return.

Global Accounting Scheme is the simplified version of the Margin Scheme

You may use the Global accounting scheme if you sell high volume and low priced second-hand goods. The Global Accounting Scheme would benefit your business especially since maintaining a detailed accounting record of every transaction is impossible. In short, the Global Accounting Scheme is the simplified version of the VAT Margin Scheme.

The difference between the VAT Margin Scheme and the Global Accounting Scheme is that the standard Margin Scheme you account for VAT on the profit (margin) you made on the sale of a second-hand item.

Whereas for the Global Accounting Scheme you account for VAT on the margin you made between your TOTAL eligible purchases and TOTAL eligible sales in an accounting period.

Contact HMRC directly if you have any questions about the second-hand goods VAT scheme.

Other VAT schemes

There are other VAT schemes available for businesses in the United Kingdom. The most popular VAT schemes for small businesses are cash accounting and annual accounting schemes.

VAT cash accounting is beneficial for small businesses that grant credit terms to their customers because your business does not have to pay HMRC before you actually received the cash from your customers.

Whereas for VAT annual accounting your business only has to submit a VAT return once a year.

Companies House filings

Besides, maintaining good VAT accounting records and filing, if your VAT registered business is a limited company, you must deliver company accounts and confirmation statement to Companies House.

If you require any help with your VAT returns, company accounts and confirmation statement filing, feel free to contact our accountants, they will be more than happy to assist you to comply with your filing requirements.

When not to charge VAT

A business has registered for VAT in the United Kingdom must know when to charge and when not to charge Value Added Tax (VAT) to your customers. Generally, you cannot charge VAT on exempt and out of scope products and services.

Out of scope of VAT

Generally, a transaction that is classified as out of scope is excluded from VAT return. This basically mean the transaction is outside the scope of VAT in the United Kingdom. For this transaction, you cannot charge 20% VAT on sales or reclaim any VAT paid to your suppliers.

Examples of transactions classified out of scope of VAT UK are as follows:

  • Where you provide transportation services to a UK and European Unions (EU) customers but the place of the services to be rendered is outside Europe, say in Russia or Malaysia or China or USA.
  • Government statutory fee like London Congestion Charge.
  • Donations to charity.

Zero rated VAT transactions

Selling to customers based in the EU countries are zero rated sales if your customers can provide you with their EU country VAT registration number. In this situation, you put 0% VAT on your sale invoice. This transaction must be included in your VAT return and you must also complete your EC sales List.

You must include your customers’ VAT number on the EC Sales List. Remember to check the EC VAT number for their validity.

Products classified as zero rated in the United Kingdom includes books, newspapers, children’s clothes and shoes and motorcycle helmets. Please do not include these sales in the EC Sales list.

Standard rated VAT

If you are selling to UK customers then you would require to charge VAT on your sales.

An exception is when the services are to be rendered is outside Europe, say a taxi service at Hong Kong airport transfers. This falls under the out of scope category.

Exempt VAT

Some goods and services are exempt from VAT. In other words, no VAT is charged on sales. Examples are insurance, stamps, postage and health care services provided by hospitals.

VAT notice 741/A explains how to determine the place of supply of your services and how to deal with supplies of services which you receive from outside the United Kingdom.

Companies House filings

If your business is registered as a limited company, you must deliver company accounts and confirmation statement to Companies House.

%d bloggers like this: