VAT and corporation tax

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. Your company is technically collecting the VAT on behalf of HMRC. You report this output tax collection in your VAT return.

Corporation tax

Corporation tax is payable if your company has made a profit only. 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 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. You collect VAT on behalf of HMRC and it excluded from your corporation tax computation.

Register a company

Register a company

Register a company in the United Kingdom with Companies House directly can be done through an accountant or you may do it yourself if you wish.

If you are going to do it yourself. Ensure your incorporation application with Companies House include the following documents.

Companies House form IN01

The form IN01 is an application form to register a limited company with Companies House.

This is the latest company incorporation form according to Companies Act 2006. It took effect from 1 October 2009.

The form 10 and form 12 required for company incorporation under Companies Act 1985 are superseded by form IN01.

You must complete the form IN01, to give details of your:

  • Directors,
  • Company secretary (this is optional unless you are forming a public limited company),
  • Shareholders,
  • Registered office address
  • Share structure.

The form is 18 pages long.

Under the Companies Act 2006, your director is required to provide a service address. The service address is for public record. The service address can be your registered office address or your home address. However, your director’s residential address can still be obtained via credit agency that providing credit check services to public.

Registration Fees

There is a standard fee payable to Companies House for registering a limited company. Please contact Companies House directly.

Other Incorporation Documents required

You must also include your memorandum of association and Articles of association with your incorporation form IN01.

1) Memorandum of Association

This should state your company name, the intended location of the registered office and the objects of your company.

2) Articles of Association

This should have the detailed rules about internal management of your company. If you don’t draw up your own articles, you may adopt the standard article (Table A) set out in the Companies Act 2006.

Companies House Certificates

You cannot start trading until you have obtained a certificate of incorporation for your private limited company issued by Companies House.

For registration of a public limited company, you must obtain a trading certificate before starts trading.

Company incorporation documents

Company incorporation documents

Company incorporation documents required to register a private limited company with Companies House in the United Kingdom.

Memorandum of Association

The memorandum is a form of contract with the world in general. It states:

  • Your company’s name, the situation of its registered office in England (if it is not in Wales or Scotland),
  • The objects for which your company is formed and the powers taken by your company,
  • The liability of your shareholders is limited
  • The share capital and classes of shares and nominal value of each share
  • The names and address of your original subscribers (shareholders) and number of shares taken by your subscribers.

Articles of Association

It sets out the regulations governing your company’s internal affairs such as how shares will be allocated, your directors and secretary and the meetings will be governed. Once your company is incorporated any changes can only be made if 75% of voting rights is obtained.

Statement of first Directors and Secretary and Intended situation of Registered Office

The statement sets out the prescribed details of your first directors and company secretary (it is optional unless your company is a public limited company) and your registered office.

Declaration of Compliance with the Requirements on Application for Registration of a Company

This can be made by a director or sectary named in the statement of first directors and secretary.

The statement of first directors and secretary and intended registered office and declaration of compliance are no longer required since the Companies Act 2006 was implemented.

Registered office for Limited Liability Partnership

Registered office for Limited Liability Partnership

Registered office for your limited liability partnership (LLP) must be a physical location. Companies House does not accept P O BOX address as a valid registered office address for your LLP.

HM Revenue and customs and Companies House will send reminders and letters to your registered office by hand or by post. This includes legal notices.

Your registered office address need not be a place where you run your business. Some businesses use their accountants’ office as their registered office so that their statutory mails can be dealt with promptly.

If for any reason you are unable to access to mails delivered to your LLP’s registered office address, it is time to change your registered office address.

You must inform Companies House of the change of your registered office address by submitting the form LL_AD01.

Your LLP may be struck off the register if Companies House received mails sent to your registered office being returned to them and they are unable to contact your LLP partners.

Registered office location

If your LLP is registered with Companies House in England and Wales, your registered office must be situated in England or Wales.

For example, If your LLP has been registered as only being situated in Wales then your registered office cannot be situated outside of Wales.

If your LLP is registered with Companies House in Scotland, your registered office must be situated in Scotland.

Similarly, If your LLP is registered with Companies House in Northern Ireland, your registered address must be situated in Northern Ireland.

Contact us if you require help with changing your registered office with Companies House.

Corporation tax

Corporation tax

Limited company is required by law to pay corporation tax on their profit. The HM Revenue and Customs (HMRC) will send the CT600 forms to your company registered office address. This serves as reminder to your company directors to submit your corporation tax return, the CT600.

You company must assess your company profits and pay corporation tax to HMRC nine months after your accounting year ended.

Your must submit your corporation tax return, tax computation together with your company accounts no later than 12 months after the accounting year ended to state your final corporation tax bill.

Automatic late filing penalty will be issued to your company if failed to file the return on time with HMRC. There will also be penalty interests on any outstanding corporation tax amount.

Corporation tax for Large Company

A company with an accounting profit of more than £1.5 million is classified as large company by HMRC and therefore is required to pay its corporation tax in advance in four installments within a twelve-month period.

There is an exception. Where your company’s accounting profit exceeded £1.5 million but less than £10 million for the first time in your trading year, your company will not have to pay your corporation tax by installments.

Where there are associated companies or companies within a group, that £10 million threshold will be divided by one plus the number of associates at the end of the previous accounting period.

Accounting records

The onus is on your company to estimate your accounting profits for the purpose of making corporation tax payments. Therefore, it is important your company to have a proper accounting system in place to monitor your profits and business transactions.

Notify HMRC when your company profit is likely to exceed the thresholds. Start making quarterly installment payments. The unpaid installment payments carry penalty interest at a special rate imposed by HMRC, from the due date to the date of payment.

Oversight

There is no excuse for first time oversight. The HMRC will back date the penalty interest payable based on your final corporation tax return CT600 submitted.

Quarterly Instalments Payments

Installments are due at the intervals of three months commencing 6 months and 13 days from the start of your accounting period and culminating 3 months and 14 days from its end.

Therefore, for 12 month accounting period there will be 4 installments.

For a company with a 12 month accounting period starting on 1 January, Quarterly Installment Payments will be due on 14 July, 14 October, 14 January and 14 April.