#16642 - Tax - Business Law and Practice

VALUE ADDED TAX [VAT]

VAT is collected by businesses when they supply their goods or services Also charged on good and some services that are imported from outside the EU and on goods imported from another EU member state. Value Added Taxes Act 1994 [VATA] & EU Directives 67/227, 77/388/EEC An estimate/quotation for costs or price which does not mention whether VAT is included will be presumed to be VAT-inclusive. Failure to make timely and accurate returns VAT payments in relation to chargeable supplies to HMRC will lead to substantial financial penalties and criminal offences.
Rates of VAT (three rates)
Standard rate = 20%	Zero rate = 0% Main items include: Most food (except where supplied in the course of catering, or a non-essential item e.g. chocolate, ice cream, alcoholic drinks, crisps) Young children’s clothing & footwear Transport (but not taxis or hire cars) Drugs and medicines on prescription and many aids for disabled people Books and newspapers (but not stationery) Water supplies Sales and long leases of new houses
Lower rate = 5% Mainly for domestic heat and power (but also includes children’s car seats & certain renovations, conversation, and alteration – VATA Sch 7A)
Input Tax Each person in the chain between the first supplier and the final consumer is charged VAT on taxable supplied to him/her. e.g. A brickmaker buys clay costing 1,000 + VAT from a quarry (input tax = 200)	Output Tax Each person in the chain between the first supplier and the final consumer charges VAT on taxable supplies made by him/her. e.g. The brickmaker sells bricks to builders merchant for 2,500 + VAT (output tax = 500)
Output Tax – Input Tax = Excess to HMRC (if Input Tax > Output Tax, can recover excess from HMRC) e.g. 500 – 200 = 300 owed by the brickmaker to HMRC
Recoverable Expenses Input tax can be recovered on goods acquired for resale, expenses (i.e. telephone, stationery, photocopying), and capital items. Such expenditure must be incurred in the course of business and must not be excluded by legislation (e.g. entertainment expenses are excluded).
How is VAT Charged? VAT is charged on the value of taxable supplies made in the course or furtherance of business by a taxable person and on the import of goods and certain services.
“Taxable Supplies” VATA Sch 2 & s.4(2) Goods = All supplies of goods (including goods taken for own use by a business proprietor) which involves the transfer of the whole property, are taxable supplies apart from items which are specifically exempt. Supplies = All supplies which are not supplies of goods but which are for consideration are supplies of services apart from those which are specifically exempt.	“Exempt Supplies” VATA Sch 9 Exempt supplies are broadly supplies of: Selling, leasing and letting land and buildings (but not lettings of garages, parking spaces or hotel and holiday accommodation) Insurance Postal Services (but not telephone) Certain education and training Betting Lotteries and Gaming (but not gaming machine takings, admission to premises, club subscriptions) Services of doctors and dentists Certain supplies by undertakers Provision of credit
Registration for VAT
Compulsory Registration You must register for VAT with HMRC if your business’ VAT taxable turnover is more than 85,000. On registration, you receive a VAT registration certificate which confirms: the VAT number when to submit the first VAT Return and payment the ‘effective date of registration’ – i.e. the date the business went over the threshold, or the date of request to be registered if it was voluntary.	Voluntary Registration If the turnover is less than 85,000, unless everything you sell is exempt, you may still register. However, this brings certain responsibilities, namely to: charge the right amount of VAT pay any VAT due to HMRC submit VAT Returns keep VAT records and a VAT account.
Tax Invoices Where a business makes taxable supplies to another taxable person which is not zero rated, that business must provide a copy of a “tax invoice” within 30 days of the time of the supply and keep a copy.
VAT Accounts, Tax Periods, and Tax Returns The VAT results for each tax period must be summarised in a VAT account. Form VAT100 (return form) is received from HMRC for each tax period (usually 3 months). The return must be completed and returned within one month from the end of the tax period together with payment for any VAT due (either by cheque or electronically). If input tax > output tax for the tax period, a claim for repayment should be made.
Penalties A person who fails to comply with VAT legislation is liable to a range of criminal and civil penalties in addition to being required to pay any unpaid tax with interest. Examples of offences are: Fraudulent evasion of tax Failure to register Mis-declarations on Form VAT100

VAT is collected by businesses when they supply their goods or services
Also charged on good and some services that are imported from outside the EU and on goods imported from another EU member state.
Value Added Taxes Act 1994 [VATA] & EU Directives 67/227, 77/388/EEC
An estimate/quotation for costs or price which does not mention whether VAT is included will be presumed to be VAT-inclusive.
Failure to make timely and accurate returns VAT payments in relation to chargeable supplies to HMRC will lead to substantial financial penalties and criminal offences.

Rates of VAT (three rates)

Standard rate = 20%

Zero rate = 0%

Main items include:

Most food (except where supplied in the course of catering, or a non-essential item e.g. chocolate, ice cream, alcoholic drinks, crisps)
Young children’s clothing & footwear
Transport (but not taxis or hire cars)
Drugs and medicines on prescription and many aids for disabled people
Books and newspapers (but not stationery)
Water supplies
Sales and long leases of new houses

Lower rate = 5%

Mainly for domestic heat and power (but also includes children’s car seats & certain renovations, conversation, and alteration – VATA Sch 7A)

Input Tax

Each person in the chain between the first supplier and the final consumer is charged VAT on taxable supplied to him/her.

e.g. A brickmaker buys clay costing 1,000 + VAT from a quarry (input tax = 200)

Output Tax

Each person in the chain between the first supplier and the final consumer charges VAT on taxable supplies made by him/her.

e.g. The brickmaker sells bricks to builders merchant for 2,500 + VAT (output tax = 500)

Output Tax – Input Tax = Excess to HMRC

(if Input Tax > Output Tax, can recover excess from HMRC)

e.g. 500 – 200 = 300 owed by the brickmaker to HMRC

Recoverable Expenses

Input tax can be recovered on goods acquired for resale, expenses (i.e. telephone, stationery, photocopying), and capital items.
Such expenditure must be incurred in the course of business and must not be excluded by legislation (e.g. entertainment expenses are excluded).

How is VAT Charged?

VAT is charged on the value of taxable supplies made in the course or furtherance of business by a taxable person and on the import of goods and certain services.

“Taxable Supplies”

VATA Sch 2 & s.4(2)

Goods = All supplies of goods (including goods taken for own use by a business proprietor) which involves the transfer of the whole property, are taxable supplies apart from items which are specifically exempt.

Supplies = All supplies which are not supplies of goods but which are for consideration are supplies of services apart from those which are specifically exempt.

“Exempt Supplies”

VATA Sch 9

Exempt supplies are broadly supplies of:

Selling, leasing and letting land and buildings (but not lettings of garages, parking spaces or hotel and holiday accommodation)
Insurance
Postal Services (but not telephone)
Certain education and training
Betting Lotteries and Gaming (but not gaming machine takings, admission to premises, club subscriptions)
Services of doctors and dentists
Certain supplies by undertakers
Provision of credit

Registration for VAT

Compulsory Registration

You must register for VAT with HMRC if your business’ VAT taxable turnover is more than 85,000. On registration, you receive a VAT registration certificate which confirms:

the VAT number
when to submit the first VAT Return and payment
the ‘effective date of registration’ – i.e. the date the business went over the threshold, or the date of request to be registered if it was voluntary.

Voluntary Registration

If the turnover is less than 85,000, unless everything you sell is exempt, you may still register. However, this brings certain responsibilities, namely to:

charge the right amount of VAT
pay any VAT due to HMRC
submit VAT Returns
keep VAT records and a VAT account.

Tax Invoices

Where a business makes taxable supplies to another taxable person which is not zero rated, that business must provide a copy of a “tax invoice” within 30 days of the time of the supply and keep a copy.

VAT Accounts, Tax Periods, and Tax Returns

The VAT results for each tax period must be summarised in a VAT account.
Form VAT100 (return form) is received from HMRC for each tax period (usually 3 months).
The return must be completed and returned within one month from the end of the tax period together with payment for any VAT due (either by cheque or electronically).
If input tax > output tax for the tax period, a claim for repayment should be made.

Penalties

A person who fails to comply with VAT legislation is liable to a range of criminal and civil penalties in addition to being required to pay any unpaid tax with interest. Examples of offences are:

Fraudulent evasion of tax
Failure to register
Mis-declarations on Form VAT100

INCOME TAX

Income tax is levied on income from sources such as salary, rental profits, profits of a trade, profession or vocation, and interest and dividends. Income Tax Act 2007 [ITA], Income Tax (Earnings & Pensions) Act 2003 [ITEPA], Income Tax (Trading & Other Income) Act 2005 [ITTOIA]
Income Tax Years The income tax year runs from 6 April to the following 5 April. The income tax rate and personal reliefs apply to income tax years.
Taxable Income
Income Type		Source of Income		Example of Income
Earned Income (employment income, pensions & certain social security benefits – ITEPA)		Job (employee)		Salary, company or state pension, benefits in kind, less deductible expenses
Trading Income (ITTOIA Pt 2)		Self-Employed (partner/sole trader)		Profits of trade, profession or vocation, less deductible expenses
Property Income (ITTOIA Pt 3)		Landlord		Rents and other receipts from land
Savings & Investment Income (ITTOIA Pt 4)		Deposits, annuities, shares		Interest, share dividends and annuities
Miscellaneous Income (ITTOIA Pt 5)		Casual profits not otherwise taxable/deemed income under anti-avoidance legislation		Commission / settlement income deemed that of settler
=			Statutory/Total Income
Less			Allowable Payments These are items that can be deducted from total income so as to reduce the amount that is eventually charged to income tax, e.g. payments of interest on a loan to invest in a partnership or a close trading company.
=			Net Income
Less			Allowances The most common allowance is the personal allowance of 11,850. This changes if the taxpayer earns 100,000 or more.
=			TAXABLE INCOME to which income tax rates are applied, taking into account any applicable savings and dividend allowances
Income Tax Rates
Basic Rate Band			0 – 34,500
Non-dividend income rate			20%
Higher Rate Band			34,501 – 150,000
Non-dividend income rate			40%
Additional Rate Band			150,001 and above
Non-dividend income rate			45%
Deductible Expenses	Trading Income: An expense is only deductible if it is of a revenue (income) nature and has been incurred ‘wholly and exclusively’ for the purposes of the trade. There are deducted from total sales for an accounting period in order to calculate the net profit of a self-employed person under ITTOIA Pt 2.
Deductible Expenses	Employment Income: An employee may deduct an expense from his earnings (thereby reducing his taxable income), if the expense is incurred ‘wholly, exclusively and necessarily’ in the actual performance of his duties.
Gross Income	Gross income must be used when calculating total income for tax return. Tax is deducted at source from an employee’s salary under the PAYE system BUT does not take into account National Insurance Contributions and personal reliefs. HMRC will issue a P60 (certificate of tax paid) – the gross figure stated on the P60 is the figure to be included in the taxpayer’s return. Once a taxpayer’s income tax liability has been calculated based on gross income, credit is given for any income tax deducted at source (the tax credit).
Personal Allowance	This allowance is not transferable. Once personal reliefs have been deducted from total income what is left is taxable income to which the income tax rates are applied to calculate the income tax liability, taking into account, savings and dividend allowances.
Personal Allowance	For individuals earning 100,000 or less, the personal allowance is 11,850 (in the current tax year).			For individuals earning above 100,000, the personal allowance reduces by 1 for every 2 of income above the 100,000 limit. So taxpayers with an income of 123,700 or above will not have a personal allowance. $$\pounds 11,850 - \ \frac{Income - \pounds 100,000}{2}$$
Personal Savings Allowance [PSA]	A PSA can be set against savings income. The amount of PSA to which a taxpayer is entitled depends on whether the taxpayer is a basic, higher, or additional rate taxpayer. The remaining savings income is taxed at the usual tax rates (20%, 40%, or 45%).
Personal Savings Allowance [PSA]	Income Tax Band Basic rate taxpayer Higher rate taxpayer Additional rate taxpayer				PSA 1,000 500 0
Dividend Allowance	The first 2,000 of a taxpayer’s dividend income is free from tax. All taxpayers receive this allowance, regardless of their income. Any remaining dividend income is taxed at the following rates:
Dividend Allowance	Income Tax Band Basic rate taxpayer Higher rate taxpayer Additional rate taxpayer				Dividend Income Rate 7.5% 32.5% 38.1%
Basis of Assessment
Employment Income (PAYE)	Employees are paid weekly or monthly and therefore, in the case of monthly paid employees, their income tax bill for the tax year 2018/2019 is calculated on their...

#16642 - Tax - Business Law and Practice

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