For company directors, they are legally required to pay taxes to HM Revenue and Customs. This includes businesses of all shapes and sizes, with the amount varying depending on how the company is set up. Some factors include having employees, premises and business assets. This guide will provide all you need to know about VAT and corporate tax.
What Is VAT?
VAT is the tax applied to purchases of services, goods and other taxable supplies. For most businesses, some example taxable areas are as follows:
- Sales of your goods and/or services.
- Sale of business assets
- Staff sales.
- The hiring of your goods.
- Business goods that you use personally.
VAT is paid by the customers, meaning the tax is not directly on the business. Yes, businesses do pay VAT to HMRC, however, the actual amount is paid by the customers during the purchase of the goods or services.
What Does VAT Stand For?
VAT stands for value-added tax. It is the most common form of consumption tax worldwide that is used in over 160 countries. Check out this list from Way2Vat of VAT around the world, showcasing each countries similarities and differences when it comes to value-added tax.
What Are VAT Rates?
Current UK VAT rates are stated in the table below
|Rate||% of VAT||Applies to|
|Standard||20||Most goods and services.|
|Reduced||5||A secretion of goods and service.|
|Zero||0||Zero-rated goods and services.|
Examples of Reduced and Zero Rated Items –
Reduced rate example items:
- Sanitary hygiene products.
- Domestic fuel and power.
- Children’s car seats
- Installing energy-saving materials.
Selling zero-rated goods or services still count as taxable supplies. However, companies don’t add on any VAT to the selling price. This is due to the VAT rate being 0 per cent.
Zero rate example items:
- Public transport.
- Newspapers and books.
- Food (not including meals in restaurants or takeaways)
- Children’s clothing.
You will find that some items are exempt from VAT. Some examples include:
- Education and training.
- Fundraising events by charities.
- Providing credit.
- Membership subscriptions.
How Do I Pay My VAT Bill?
By using the VAT payment deadline calculator, you can make sure you give yourself enough time to make the payment on time. There may be extra charges if you don’t make the payment to HMRC on time. Some payment methods include:
For same or next day payments:
- Online or telephone banking.
For 3 working days payments:
- Direct Debit.
- At your bank or building society.
- Standing order.
- Online by debit or corporate credit card.
What Can I Reclaim VAT On?
For goods or services used for businesses needs, companies can actually reclaim VAT. An example of some of the ways possible for claiming VAT back include:
- Vehicles used solely for business.
- Mobile plans only used for business calls.
- Staff travel and transport.
- Fuel and maintenance for company vehicles.
- Utility bills for home businesses.
What Are The Advantages And Disadvantages Of VAT?
There are both pros and cons of VAT. Explore Insider have created an in-depth list of both advantages and disadvantages of VAT.
|Can be reclaimed after payment.||Can be completed.|
|Cash flow planning opportunities.||VAT is required to be accurate.|
|Enhances company credibility.||More effort for record keeping of transactions.|
What Is Corporation Tax?
UK businesses pay corporation tax, the amount is based on their annual profits. Corporation tax is similar to income tax which individuals pay. Since 2016, corporation tax has been 19% for all limited companies. All profits a company makes are taxable, without any tax-free allowances. However, there are various deductions and expenses that companies can claim which will decrease the overall bill.
Who Has To Pay Corporation Tax?
All UK limited companies will pay corporation tax. For sole traders or partnerships, corporation tax won’t have to be paid. Rather than corporation tax, they will pay income tax that is based upon profits made, then calculated through a self-assessment tax return.
Company directors have the responsibility of making sure the correct amount of corporation tax is paid, along with it being paid on time, within the set deadline. Some companies have accountants; however, they only calculate and provide the amount needed to pay.
Some of the following companies that are not incorporated may have to pay corporation tax:
- Trade associations.
- Members clubs.
- Housing associations.
- Groups of individuals (co-operatives) carrying out a business.
- Societies and associations.
What Are Corporation Rates?
Companies that create a profit of £50,000 or under will be taxed at 19%. This is roughly 70% of companies in the UK. For businesses with profits higher than £50,000, there will be a tapered rate, with companies seeing profits of £250,000 or higher will have a 25% tax rate.
Corporation tax rates:
| ||Financial year 2020-21||Financial year 2021-22||Financial year 2022-23||Financial year 2023-24|
|Small profits rate||N/A||N/A||N/A||19%|
How Can I Pay Corporation Tax?
Like VAT, there are different ways that you can pay your corporation tax. Again, there are deadlines to making your corporation tax payment, with HMRC giving fines for late payments. For payments that have their deadline on a bank holiday or weekend, they must be delivered to HMRC on the last previous working day before.
For same or next day payments:
- Online or telephone banking
For 3 working days payments:
- An already set up direct debit.
- At your bank or building society
- Online payment by debit or corporate credit card
For 5 working days payments:
- A direct debit that hasn’t been set up.
It should be noted that businesses can no longer pay with a personal credit card.
What Is The Deadline For Paying Corporation Tax?
Corporation tax bills must be submitted between the statutory filing date and the date of your company year-end. The statutory filing date is whatever comes first, 12 months after the year-end or three months post receiving a notice that you have to submit a return from HMRC.
However, there are cases where companies may have to pay their corporation tax bill before the return is due. For companies that have seen taxable profit of amounts leading up to £1.5m, they are required to pay their corporation tax bill within nine months and one day after the end of their accounting year.
Example – For companies with an accounting year ending on March 31st, the due date for the corporation tax payment will be due the following year on January 1st. The tax return is then due three months after January 1st.
For companies that have a profit of over £1.5m, corporation tax is required to be paid in instalments.
What Happens If I Don’t Pay Corporation Tax?
For payments that have been made late, or if the information given is inaccurate, then HMRC can fine you. The person held responsible for the mistake is the company director. Even if the accountant has calculated and submitted the return, the company director will be the person that will be liable.
The penalties for late payment fees that have been set out by HMRC are:
|Missed Deadline Time||Basic Rate Penalty||Penalty if you have already failed the deadline, 3 consecutive periods|
|Missing the filing deadline||£100||£500|
|6 months||10% of the total unpaid tax amount||10% of the total unpaid tax amount|
|12 months||10% of the total unpaid tax amount||10% of the total unpaid tax amount|
HMRC can use numerous enforcement methods to return any money which is owed to them. Some of the methods include:
- Collecting overdue payments through your pension or earnings, using debt collection agencies.
- Collecting overdue payments by selling items or possessions that you own (only in England, Wales or Northern Ireland).
- Collecting overdue payments by taking money from your bank or building society accounts (only in England, Wales or Northern Ireland).
- HMRC can take you to court, which has the possibility of making you bankrupt or even closing down your business.
For companies and businesses that can’t afford to pay the corporation tax bill, it is suggested to contact HMRC as soon as possible. They can help to arrange a payment plan that can keep you on track of payments. If you have already missed the payment date, it is suggested to contact the Self Assessment helpline on 0300 200 3822.
Is Corporation Tax Based On Turnover Or Profits?
Corporation Tax must be paid based on profits. These are businesses that operate as:
- A limited company
- Foreign companies that have a UK office or branch.
How Can I Reduce My Corporation Tax?
With times being tougher than ever before, every little way to save money and reduce corporation tax bills is going to help. Blog Shorts have created a useful list of 15 ways to reduce your corporation tax bills. Some of the listed methods include:
- Avoid missing deadlines.
- Claim all business expenses.
- Work from home allowance.
- Claiming patent box tax relief.
- Benefit from Annual Investment Allowance.
- Claiming R&D tax relief.