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. Thus, your company is technically collecting the VAT on behalf of HMRC. Then, you report this output tax collection in your VAT return.

Corporation tax

Your company pay corporation tax on when there is a profit. 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. Basically, you collect VAT on behalf of HMRC from your customers. And, your VAT is excluded from your corporation tax computation.

No EC Sales list after Brexit

No EC sales list after Brexit for VAT registered businesses in the UK. EC stands for European Community.

However, since UK government is still working on Brexit deal at the moment and UK is not yet leave EU, your business must continue to complete and file your EC Sales List with the HM Revenue and Customs.

Not all VAT registered businesses in the UK must file EC Sales list with the HM Revenue and Customs. You would only need to complete and file an EC sales list if your business supply goods or services to EU VAT registered customers.

The EC Sales list administration applies to exporters, freight forwarders, fast parcel operators, customs agents and traders who move their own goods from UK to the EU.

EC Sales list forms

These are the forms to use.

Form TypePurpose
VAT101EC Sales list
VAT101AEC Sales list continuation sheet
VAT101BEC Sales list correction sheet

You have two options on how to deliver your EC Sales list to HMRC. You can do it online or you can complete the form on screen then print it.

Thereafter, you send your completed EC Sales list to the following HMRC address.

HMRC
ESL Team
HM Revenue and Customs
BX9 1QT

VAT registration

UK company may opt to register for VAT voluntarily any time. However, some companies would wait until their sales reach the VAT registration threshold.

Generally, once you have registered for VAT, you must add 20% on top of your usual selling price.

When to register for VAT

If you already foresee your company is likely to make sales exceeding the VAT threshold in the first year of trading then you opt to register for VAT straight away.

HM Revenue and Customs requires companies to apply for a VAT number within one month of your company’s sales exceeding the VAT registration threshold.

VAT registration administration

Subsequently, your company may apply to join the VAT cash accounting scheme, flat rate scheme, annual accounting scheme if it is beneficial to your business to do so.

You must put in place a proper VAT accounting system to record your VAT transactions.

For example, the information you must enter into your sale invoice from your sales transactions. There are many easy ways to manage this. You may use online accounting software which comes with VAT invoice template. All you have to do is to fill in the information. The best part is that if you forgot any important details the software will prompt you to enter it. GOV.UK website recommends commercial software that meet the VAT return accounting.

Correspondingly, your company must submit VAT returns with HM Revenue and Customs. Usually, the submission deadline is within one month from the end of your VAT return quarter. The submission must be done online.

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