A Small Business Owner’s Guide to VAT and Corporation Tax in the UK

When doing any business, you are bound to pay taxes. In the UK, Value Added Tax (VAT) and Corporation Tax are two types of taxes businesses will be subjected to. Corporation tax is subject to limited companies only, whereas VAT is subject to any business as long as it exceeds the VAT threshold.

These two taxes can significantly affect a business’s profitability, making it vital for business owners to understand their ins and outs. This guide aims to provide a comprehensive overview of VAT and Corporation Tax and how they work to help small businesses in the UK remain compliant.

Understanding VAT and Corporation Tax

VAT is a consumption tax added to goods and services at each stage of the production and distribution stage. This means customers will pay tax on the value added to the goods and services from the production to the distribution stage. Businesses act as middleman distribution. Businesses serve as intermediaries in the collection process, while customers are responsible for paying the tax.

Not every business charges for VAT. Businesses should register their VAT number if their taxable turnover exceeds the VAT threshold of £90,000 for the last 12 months or if they expect the turnover to exceed £90,000 in the next 30 days.

Regardless of taxable turnover, you will be required to register for VAT if:

–          you are based outside the UK

–          your business supplies any goods or services to the UK

–          your business is based outside the UK

You can also choose voluntary registration if your business taxable income is less than the VAT threshold of £90,000   to register for a VAT number. Once you are VAT registered, you must pay HM Revenue and Customs (HMRC) any VAT you owe from the date they registered you.

Corporation Tax is subjected to limited companies, overseas companies with a UK branch or office, club, co-operative, or other unincorporated association. After incorporating a company, you must register for Corporation Tax within three months of starting to do business. Icon Offices, the best company formation agent in the UK, can guide you through this entire process – from incorporation to ensuring your Corporation Tax registration is handled correctly and on time.  You will need your Unique Taxpayer Registration (UTR) number to register with HMRC.

Corporation Tax is paid to HMRC on profits during the accounting period. The amount paid depends on how much profit your company will make. Company taxable profits include profits, investments, and chargeable gains on selling assets. Some companies may be required to pay Corporation Tax on all their profits from the UK and abroad according to how it is classed. Companies classed as UK residents for tax purposes must pay Corporation Tax on all their profits whereas, companies not classed as UK residents for tax purposes but have an office or branch here, only pay Corporation Tax on profits from their UK activities.

The difference between VAT and Corporation Tax is that companies are automatically liable for Corporation Tax and must file annual tax returns from their first year of incorporation.

Registration thresholds

A threshold in the business world refers to the limits that a business must not exceed to avoid fines, penalties, and other legal implications. Between VAT and Corporation Tax, VAT is the only tax that has a threshold registration. Corporation Tax has a profit threshold.

The VAT registration threshold is the sales limit that determines when you need to register for VAT. The VAT registration threshold was changed on 1st April 2024 from £85,000 to £90,000.

In the last 12 months, if your business exceeds the VAT threshold, you must register for VAT. Additionally, if your business expects its turnover to exceed £90,000 in the next 30 days, it will also have to register for VAT.

You may also be forced to register for VAT if your business takes over a VAT-registered existing business. Businesses that sell goods that are exempted from EU VAT-registered suppliers and whose taxable turnover is more than £90,000 will have to register for VAT.

Tax rates

The current VAT tax rates depend on the products and services your business offers. Some goods and services are zero-rated, others are at a reduced rate and standard rate.

–          Most food and children’s clothes fall under the rated category.

–          Specific children’s items such as car seats and home energy fall under the reduced rate which is 5%

–          Most goods and services fall under the standard rate which is 20%

For Corporation Tax, the current standard rate in the UK is 19%. The rate your company pays applies to the profits threshold. If your company made more than:

–          £250,000 profit, you’ll pay the main rate of Corporation Tax.

–          £50,000 or less, you’ll pay the ‘small profits rate’, which is 19%.

–          £50,000 and £250,000 you may be entitled to ‘marginal relief’

Companies can claim tax credits on Corporation Tax.

Deadlines

VAT returns are filed through Making Tax Digital (MTD) software. VAT returns are filed every quarter of the year, that is every 3 months.  The deadline for VAT return will be the same day you registered plus an additional seven days after the end of your reporting period. The dates are:

1 quarter: January 1st to March 31st. Deadline May 7th.

2 quarter: April 1st to June 30th. Deadline August 7th.

3 quarter: July 1st to September 30th. Deadline November 7th.

4 quarter: October 1st to December 31st. Deadline February 7th.            

For the VAT number registration deadline, businesses should register 30 days after their annual total VAT taxable turnover exceeds the threshold of £90,000.

The corporation tax return (CT600) deadline is 12 months after the end of your company’s accounting period. For example, if your company’s end of financial year is June 18, 2024, your Corporation Tax return must be filed by June 30, 2025.

Limited companies will need to pay corporation tax payments 9 months and one day after the end of the accounting period. Using the same accounting period, if your financial year ends on May 15, 2024, the Corporation Tax must be paid by March 1, 2025.

Filing processes

Virtually all VAT-registered businesses are required by law to submit their returns via functional-compatible software and pay electronically. See VAT Notice 700/21 for more information.

If you are required to submit a VAT return using functional compatible software, the software provider you choose will give guidance on how to submit your return using their product.

If you are exempt from this requirement to keep digital records, you do not have to submit a software return. See VAT Notice 700/21 about exemptions from digital record keeping. If you do not have to submit a return using software, you can do it online. However, if you cannot file online HMRC will offer you an alternative. If you’re entitled to file a paper return, we will send you one.

Companies must file their Corporation Tax Return online with HMRC. The documents which must be submitted alongside the CT600, are the accounts and Corporation Tax calculations.

Companies must register with HMRC to file online and obtain a user ID and password. You may like to ask your accountant to deal with this on your behalf.

Accounts must also be filed with Companies House either online or via the post (online filing is not yet compulsory). To file online companies must obtain an authentication code from Companies House (this is completely different from the one from HMRC).