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LPC Law Notes Business Law and Practice Notes

Tax Notes

Updated Tax Notes

Business Law and Practice Notes

Business Law and Practice

Approximately 649 pages

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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

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...

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