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VAT and Tax returns ensure HMRC compliance

Everyone must submit a Tax return, but VAT is only paid if your gross income reaches a certain threshold (currently £82,000). If this is the case then you will have to complete and submit a VAT return to HMRC, usually each quarter.

Even if you are not required to, it can sometimes be beneficial to register voluntarily for VAT and deciding this can be confusing. We can talk this through with you and ensure that you receive the best advice.

Too busy? Here’s VAT & Tax in 30 seconds.

  • VAT is an indirect tax charged on goods and services
  • You must register for VAT if turnover exceeds £82,000
  • Different goods are charged at different rates (20, 5 and 0%)
  • Income tax is paid on earnings and most rent income, pensions, interest and state benefits
  • You need to submit accounts for Tax and VAT to HMRC
  • Companies must submit differently to the self-employed

Whatever type of business you have, a sole trader, partnership or limited company, a Tax Return must be completed to declare your income to HM Revenue and Customs to let them know how much tax is due. VAT returns are due if your turnover exceeds £82,000. This will mean both paying VAT and charging VAT to customers.

When the appropriate return is not submitted on time, this results in considerable penalties and interest being accrued. This is why it is extremely important to put arrangements in place early to ensure everything is completed punctually.

Being on top of your tax and VAT returns has other benefits, as it lets you will know how much you owe in advance with a good amount of time to pay your balance to HMRC.

What to do in the event of a Tax Investigation

Don’t panic, HMRC routinely conduct random checks on businesses. As long as you have exercised ‘good business practice’ rules you will have nothing to worry about.

HMRC may ask for your records for a specific period, some select transactional information or several years worth of books. This will depend on how you answer their initial questions.

Their investigation could take a few minutes and require no further action or several hours, even days, if you are not prepared.

At Hammond & Co we understand this process having dealt with a number of tax investigations for our clients. We will represent you FREE OF CHARGE in any investigation as long as you have exercised the good business practice rules that we require.

VAT

VAT is an indirect tax charged on goods and services paidby the final consumer. It is based on European law and is administered by HM Revenue and Customs.

Businesses charge VAT on their taxable supplies (output tax) and reclaim VAT on their taxable purchases (input tax).

The standard rate of VAT is currently 20% but there is also a lower rate of 5% and a zero rate.

VAT is notoriously complex and keeping track of what rate applies can be very difficult. Presently Energy Efficient materials, some domestic and residential fuels and mobility aids are charged at 5%, while baby clothes, food and domestic water are zero-rated (0% VAT).

These are just some examples, many other items are lower-rate, zero-rated or exempt. You can read more about VAT rates here.

A business is liable to register for VAT if it makes taxable supplies and its turnover exceeds the threshold (currently £82,000). It can also register voluntarily under the threshold. Once registered the business will have to add VAT to the amount they charge the customer.

There are three schemes, Flat Rate Scheme, Cash Accounting Scheme and Annual Accounting Scheme. Ordinarily a business would use the Cash Accounting Scheme. In certain circumstances a business can apply for one of the other schemes. However, they should seek proper advice before applying to ensure they don’t register for a scheme they are not eligible for or increase their VAT bill unnecessarily.

Income Tax (Individual)

Income Tax is a tax you pay on various forms of earnings. You don’t have to pay tax on all types of income. You pay tax on things like:

  • money you earn from employment
  • profits you make if you’re self-employed – including from services you sell through websites or apps
  • some state benefits
  • most pensions, including state pensions, company and personal pensions and retirement annuities
  • interest on savings and pensioner bonds
  • rental income (unless you’re a live-in landlord and get £4,250 or less)
  • benefits you get from your job
  • income from a trust
  • dividends from company shares.

Self Assessment

Self Assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax.

Tax is usually deducted automatically from wages, pensions and savings. People and businesses with other income must report it in a tax return.

You must register as self-employed with HMRC and they provide login and account details. You can then fill in your self-assessment online. You are still able to submit on paper but the deadline to do so is much sooner.

Corporation Tax

You must pay Corporation Tax on profits from doing business as:

  • a limited company
  • any foreign company with a UK branch or office
  • a club, co-operative or other unincorporated association, e.g. a community group or sports club

You don’t get a bill for Corporation Tax. There are specific things you must do to work out, pay and report your tax.

  1. Register for Corporation Tax when you start doing business or restart a dormant business. Unincorporated associations must write to HMRC.
  2. Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
  3. Pay Corporation Tax or report if you have nothing to pay by your deadline – this is usually 9 months and 1 day after the end of your ‘accounting period’.
  4. File your Company Tax Return by your deadline – this is usually 12 months after the end of your accounting period.

Summary

As you can see, there are different taxes, rates and requirements depending on how you trade, what you sell, how much you earn and more. You can find a lot of information on Tax and Vat from the .gov site.

You need to submit the right figures at the right time to ensure you avoid fines, but you should also claim the allowances you are entitled to. For example, people who work from home can claim a percentage of their domestic fuel bills. Tax law is constantly changing; what you can claim for under which circumstances and what you must pay for various types of goods.

Not being sure of how to register or what to claim can mean mistakes, lead to paying too much Tax or VAT or not claiming back your full entitlement. This is why recommending an accountant isn’t just a sales ploy. More often than not your accountant will AT LEAST save you as much as they cost, making for an effectively free service and giving you peace-of-mind.

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We’ll answer any questions you have, or even better, we can manage your returns so that you can rest easy knowing they are taken care of.

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