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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)
Zero rate = 0%
Main items include:
Most food (except where supplied in the course
Standard rate = 20%
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
Lower rate = 5%
aids for disabled people
Mainly for domestic heat and power (but also includes children's car seats & certain renovations, Books and newspapers (but not stationery)
Water supplies conversation, and alteration - VATA Sch 7A)
Sales and long leases of new houses
Each person in the chain between the first supplier
Each person in the chain between the first supplier and the final consumer is charged VAT on taxable and the final consumer charges VAT on taxable supplied to him/her.
supplies made by him/her.
e.g. A brickmaker buys clay costing £1,000 + VAT
e.g. The brickmaker sells bricks to builders merchant from a quarry (input tax = £200)
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
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.
VATA Sch 2 & s.4(2)
VATA Sch 9
Exempt supplies are broadly supplies of:
Goods = All supplies of goods (including goods taken Selling, leasing and letting land and buildings for own use by a business proprietor) which involves
(but not lettings of garages, parking spaces or the transfer of the whole property, are taxable hotel and holiday accommodation)
supplies apart from items which are specifically
Postal Services (but not telephone)
Certain education and training
Supplies = All supplies which are not supplies of
Betting Lotteries and Gaming (but not gaming goods but which are for consideration are supplies machine takings, admission to premises, club of services apart from those which are specifically subscriptions)
Services of doctors and dentists
Certain supplies by undertakers
Provision of credit
Registration for VAT
You must register for VAT with HMRC if your
If the turnover is less than £85,000, unless business' VAT taxable turnover is more than everything you sell is exempt, you may still register.
£85,000. On registration, you receive a VAT
However, this brings certain responsibilities, namely registration certificate which confirms:
the VAT number
charge the right amount of VAT
when to submit the first VAT Return and
pay any VAT due to HMRC
submit VAT Returns
the 'effective date of registration' - i.e. the date keep VAT records and a VAT account.
the business went over the threshold, or the date of request to be registered if it was voluntary.
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.
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.
Source of Income
Example of Income
(employment income, pensions
Salary, company or state pension, benefits in kind, less
& certain social deductible expenses security benefits -
Self-Employed (partner/sole Profits of trade, profession or vocation, less
(ITTOIA Pt 2)
Rents and other receipts from land
(ITTOIA Pt 3)
Investment Income Deposits, annuities, shares
Interest, share dividends and annuities
(ITTOIA Pt 4)
Casual profits not otherwise
Commission / settlement income deemed that of taxable/deemed income
Income (ITTOIA Pt settler under anti-avoidance 5)
= Statutory/Total Income
These are items that can be deducted from total income so as
Less 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 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%
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
Deductible a self-employed person under ITTOIA Pt 2.
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 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).
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.
For individuals earning above £100,000, the personal allowance reduces by £1 for every £2 of income above
For individuals earning the £100,000 limit. So taxpayers with an income of
£100,000 or less, the personal
£123,700 or above will not have a personal allowance.
allowance is £11,850 (in the
Income−£ 100,000 current tax year).
2 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%).
Income Tax Band
Basic rate taxpayer
Higher rate taxpayer
Additional rate taxpayer
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:
Income Tax Band
Dividend Income Rate
Basic rate taxpayer
Higher rate taxpayer
Additional rate taxpayer
Basis of Assessment
Employees are paid weekly or monthly and therefore, in the case of monthly paid
Employment employees, their income tax bill for the tax year 2018/2019 is calculated on their
wages/salary paid in the months April 2018 to March 2019.
The rule is that the profits on which partners/sole traders are charged income tax are the profits that they make in their accounting year that ends in the current
(corresponding) income tax year. If a trader has an accounting year of 1 February 2018
to 31 January 2019, he will use his trading profits from that accounting year for the income tax year 2018/2019.
Calculating Income Tax 1 Calculate Taxable Income as above.
Deduct savings and dividend income from the Taxable Income figure. This gives you the IESD (Income 2 Except Savings and Dividends).
Calculate income tax on IESD in 'slices' - e.g. if IESD is £160,000, the first £34,500 will be taxed at 20%,
3 the next £115,500 will be taxed at 40%, and the remaining £10,000 will be taxed at 45%.
Savings Income. Deduct the PSA depending on income band (£1,000, £500, or £0). Calculate tax on the 4 remaining savings income also based on income band (20%, 40%, or 45%).
Dividend Income. Deduct the dividend allowance of up to £2,000. Calculate tax on the remaining 5 dividend income depending on income band (7.5%, 32.5%, or 38.1%).
6 If relevant, deduct any income tax paid or credited through PAYE system.
7 Add up all the tax liability to get the balance of income tax due.
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