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.

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.

Stamp duty land tax for residential property

Stamp duty land tax for residential property

You must pay stamp duty land tax (SDLT) when buying a residential property in the United Kingdom. Below is the current stamp duty land tax applicable for buying a UK dwelling.

If you buy a FREEHOLD property using a person’s name, Let say, your property purchase price is £2,500,000.

Stamp duty land tax for first property

Purchase price bands %SDLT Due
Up to £125,000 00
Above £125,000 and up to £250,000 2£2,500
Above £250,000 and up to £925,000 5£33,750
Above £925,000 and up to £1,500,000 10£57,500
Above £1,500,000 + 12£120,000
Total SDLT due £213,750

Stamp duty land tax for second property

Purchase price bands%SDLT due
Up to £125,0003£3,750
Above £125,000 and up to £250,0005£6,250
Above £250,000 and up to £925,0008£54,000
Above £925,000 and up to £1,500,00013£74,750
Above £1,500,000 +15£150,000
Total SDLT due£288,750

For LEASEHOLD property, the SDLT rates on your lease premium is the same as above. You also have to pay SDLT on your rent according to your lease, up to £125,000 is zero and above £125,000 is at 1%.

Use the GOV.UK Stamp Duty Land Tax Calculator to work out how much stamp duty you have to pay for your property.

There are different SDLT rules if you are buying your property using a limited company. Property purchased using a limited company may subject to Annual Tax on enveloped dwellings tax.

Annual tax on enveloped dwellings

Annual tax on enveloped dwellings

Limited company owns residential property in the United Kingdom with the property valued more than £500,000 is required to pay an Annual Tax on Enveloped Dwellings (ATED). Below are the annual charge payable based on the value of your property.

ATED for 2019 and 2020

Property value1 April 2019 to 31 March 20201 April 2018 to 31 March 2019
More than £500,000 up to £1 million£3,650£3,600
More than £1 million up to £2 million£7,400£7,250
More than £2 million up to £5 million£24,800£24,250
More than £5 million up to £10 million£57,900£56,550
More than £10 million up to £20 million£116,100£113,400
More than £20 million£232,350£226,950

ATED for 2017 and 2018

Property value1 April 2017 to 31 March 20181 April 2016 to 31 March 2017
More than £500,000 up to £1 million£3,500£3,500
More than £1 million up to £2 million£7,050£7,000
More than £2 million up to £5 million£23,550£23,350
More than £5 million up to £10 million£54,950£54,450
More than £10 million up to £20 million£110,100£109,050
More than £20 million£220,350£218,200

ATED for 2015 and 2016

Property value1 April 2015 to 31 March 20161 April 2014 to 31 March 2015
More than £500,000 up to £1 million
More than £1 million up to £2 million£7,000
More than £2 million up to £5 million£23,350£15,400
More than £5 million up to £10 million£54,450£35,900
More than £10 million up to £20 million£109,050£71,850
More than £20 million£218,200£143,750

Your company must complete the Annual Tax on Enveloped Dwellings return and submit it with HM Revenue and Customs.

Seek accountants advice if you are not familiar with ATED.

Replacement of domestic items relief

Replacement of domestic items relief

Replacement of Domestic Items relief is introduced in residential property business to replace the 10% wear and tear allowance that has been abolished. The relief is available for the tax year from 6 April 2016 onward.

Domestic items

If you are calculating your income tax for rental income falls in period prior to 6 April 2016, you may claim the 10% wear and tear allowance.

From 6 April 2016, you may be able to claim a relief for the cost of replacing furniture and fittings, also called the domestic items, in your buy to let properties. The relief covers the following domestic items.

  • Movable furniture for example beds, free-standing wardrobes
  • Furnishings for example curtains, linens, carpets, floor coverings
  • Household appliances for example televisions, fridges, freezers
  • Kitchenware for example crockery, cutlery

The Replacement of Domestic Items relief is available and apply to unfurnished, part furnished or fully furnished residential property.

Replacing old furniture – beyond repair

You may claim the replacement of domestic items relief when you replace, say, a piece of broken and beyond repair furniture in your buy to let property. You buy a new furniture for your property for use by your tenants in that property.

This relief only available for replacement of domestic items not the initial cost of getting the items for your property.

Upgrade of old furniture – modern furnishing

If you are replacing your broken furniture in your buy to let, an upgrade version, say, a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference.

When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.

Changing the functionally, say from a sofa to a sofa bed, means the replacement is not substantially the same as the old item.

Changing the material or quality of the item also means the replacement is not substantially the same as the old item. Say you upgrade from synthetic fabric carpets to woolen carpets, the replacement is not substantially the same as the old item so there has been an improvement.

If the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.

In the example above, if you later purchase a replacement sofa bed for use in that buy to let property, you would be able to claim the full cost of this new sofa bed. This is provided there was no improvement on the old sofa bed and the old sofa bed is no longer available for use in that property.

Calculate the replacement of domestic items relief

When calculate the relief, you must take into account if your old domestic item is sold or part exchanged for the new item, and also the incidental costs of disposing of the old item or acquiring the replacement item.

The formula to work out the relief for the new item is as follows:

  • The cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
  • The incidental costs of disposing of the old item or acquiring the replacement less
  • Any amounts received on disposal of the old item

An Example

Sheila has replaced a single, wooden framed bed in her rental property with a new double divan bed. The new double bed is an improvement on the old bed and Sheila paid £400 for it which is significantly more than the £150 it would have cost if she had replaced the old bed with a new equivalent wooden framed bed. Therefore Sheila cannot claim more than £150 of the purchase cost as a deduction. Sheila also paid an additional £20 to have the new bed delivered but managed to sell the old bed online for £30.

Sheila needs to work out how much he can claim as a deduction:

  • Cost of new replacement item limited to the cost of an equivalent new item £150
  • Add the delivery charges £20
  • Less proceed from selling the old bed £30
  • Amount deductible under Replacement of Domestic Items Relief is £140.

Furnished holiday Let

If you replace a domestic item in a property which qualifies as a Furnished Holiday Let, Replacement of Domestic Items relief is not available. You will continue to be able to claim capital allowances on these items.

Rent A room

If you use the Rent a Room Scheme, Replacement of Domestic Items relief is not available.

10% Wear and Tear allowance

You cannot claim the 10% Wear and Tear allowance while also utilizing the Replacement of Domestic Items relief.

Wear and tear allowance

Wear and tear allowance

Wear and tear allowance is abolished after 5 April 2016. A new relief called Replacement Domestic Item relief is introduced to replace the wear and tear allowance.

You can still claim the wear and tear allowance in your income tax return up to 5 April 2016.

Calculate wear and tear allowance

You may claim wear and tear allowance if you paid for the following items in renting out of your property.

  1. Bed
  2. Sofas
  3. Televisions
  4. Fridge, freezer, washing machine, dryer (including other white goods)
  5. Carpets and floorings
  6. Curtains, linen
  7. Crockery or cutlery
  8. Portable/movable furniture and fittings like table and chairs and cupboards

The wear and tear allowance is 10% of the net rent. The net rent is rental income less any costs and expenses incurred for the property. You must not include expenses paid by your tenants such as council tax bill, gas, electricity and water etc.

If you claim the 10% wear and tear allowance, then you cannot claim the cost of repairing or replacing the furniture and fitting for that property such as missing cutlery or broken cupboard door.

If you rent your a residential property from a landlord and then sublet it to another tenants, you cannot claim wear and tear allowance if you did not furnish the property for the tenants.

Seek accountants advice if you are not familiar with the income tax rules for property lettings business.