Taxation matters are dealt with by Her Majesty’s Revenue & Customs (HMRC). There are thousands of pages of tax legislation, but no general anti-avoidance rules. There is generally no system of prior clearance regarding the tax treatment of a particular event or procedure, although there are telephone helplines that can provide verbal advice. However, unless given in writing the advice may not actually be honoured by them! The normal procedure is that tax returns are submitted, and are then subject to checks.
There are a large number of different taxes in the UK, but this overview of UK taxes concentrates on the three main ones that a UK business is exposed to.
- Levied on the taxable profits of a business (for a Limited Company or Branch).
- Rates vary between 19% and 28% (marginal rates are higher).
- The lower rate would apply to a small company with taxable profits up to £300,000.
- The higher rate would apply to a company with taxable profits in excess of £1,500,000. These profit limits are reduced proportionally by the number of associated companies in a group, such that a larger group could easily be paying tax at 28% on a relatively low UK profit.
- Taxable profits are calculated after adding back disallowable costs such as depreciation and most entertaining, but after allowing for capital allowances on wasting asset purchases (such as machinery and computers).
- The total tax has to be paid nine months after the year end, with the tax return itself being due 12 months after the year end. Larger companies may have to pay the tax in advance by quarterly instalments.
More on UK Corporation Tax here.
Value Added Tax (VAT)
UK VAT is charged on sales (known as outputs) and currently stands at 20%. This is not the same as a sales tax.
When dealing with businesses, they would expect VAT to be added to prices. However, unlike a sales tax, the VAT incurred on purchases (input VAT) can generally be recovered by offsetting those amounts. The net amount is then paid over to HMRC, usually on a quarterly basis. Most businesses generally can recover the VAT from HMRC in full, although there are some exceptions such as banks and insurance companies.
For businesses a reverse charge must be made in the accounts and VAT returns in respect of goods and services being received from abroad. This takes into account recent changes that have been introduced as a result of carousel fraud, which involved cross-border transactions of high-value items and incomplete payments.
When dealing with the public, VAT has to be included in the price, unless your terms of trade (which could be on your website for on-line sales) state that VAT will be added.
VAT Registration must be applied for, and there are rules around when this should happen. This is explored further here.
Employers National Insurance (NI) [social security]
This is effectively a payroll tax.
People in the UK have to pay various taxes – mainly income tax – on their earnings from employment and other sources of income. Current rates of income tax start at 20% (10% on savings) and go up to 45% (more on a marginal basis). Employees also have to pay NI at up to 11% (there are allowances to mitigate this effect and caps).
Some employers prefer to use self-employed people, often operating through their own one-man band limited companies, to save employers NI. This is open to challenge by HMRC, particularly where the self-employed person does not work for other companies and is therefore considered by HMRC to really be an employee.
Penalties for tax evasion are outside this general note. This is a complex area!
We process a number of payroll’s for our clients. For further information on this please see our payroll section.