What is VAT, PAYE, and Corporation Tax, and how is it Collected by HMRC?

As a company director, you are legally obliged to pay certain taxes to HM Revenue and Customs. Even business that is struggling still have to pay their taxes. That is why HMRC is by far the most common creditor for the directors of limited companies and limited liability partnerships across the UK.

There are two kinds of corporation tax. Larger and small company tax rates. Large companies are defined as having profits over £1.5m, and smaller companies are defined as having profits under £300,000. Here is our guide to the main taxes small businesses have to pay to help you understand your obligations as a company director.

Corporation Tax

Corporation Tax must be paid on all taxable profits made by UK limited companies. The companies themselves are responsible for calculating their corporation tax liability. This is likely to be the job of the company’s accountant, although it is the ultimately the responsibility of the company directors to make sure accurate returns are filed and paid on time.

A Corporation Tax return (otherwise known as form CT600) must be filed with HMRC 12 months after your accounting period for corporation tax ends. This is normally the same 12 months as the company financial year covered by your annual accounts.

The deadlines for corporation tax to be paid are:

  • Taxable profits of £1.5 million or less
    – You will be required to pay your Corporation Tax bill nine months and one day after the end of your Corporation Tax accounting period. For example, a company with a year end of 31 March will have to pay its Corporation Tax by 1 January.
  • Taxable profits of more than £1.5 million
    – You will usually have to pay your Corporation Tax in four instalments.

The current rate of Corporation Tax for a small company is 20 percent of taxable profits for all companies, although this is set to fall to 17 percent by 2020.

VAT

No matter what kind of business you run, whether it’s a sole trader, partnership, LLP or limited company, if your income for any 12-month period exceeds the VAT threshold (currently £83,000), you must register to pay VAT. Be aware the VAT threshold is reviewed annually.

Value Added Tax (or VAT) is a tax charged on the sale of goods and services by UK companies. Most business-related goods and services are subject to VAT. The standard rate of VAT is 20 percent, although there is also a reduced rate – 5 percent; and a zero rate – 0 percent. Some items are also VAT exempt.

For smaller companies with £150,000 VAT turnover, they can take part in the government’s flat rate scheme. Essentially as VAT is claimed and paid it allows the smaller company to simply pay the midrange VAT rate you can learn more here.     

All VAT registered businesses are required to keep adequate records so that they can accurately record VAT. Once registered; all VAT businesses must submit online returns and pay any VAT due electronically. The deadline for submitting your return is normally one calendar month and seven days after the end of your quarterly VAT period.

You will normally be required to pay your VAT bill on the same day it is due, and you must pay your bill electronically if you file your return online.

PAYE and National Insurance Contributions

PAYE (Pay As You Earn) is the system HMRC uses to collect income tax and National Insurance contributions (NICs) from employees’ pay as they earn it. If you run your business as a sole trader, then you are self-employed and not affected by PAYE. However, if you run a limited company and draw a salary, then even if you have no other employees, you are effectively an employee and must pay PAYE and NICs.

If you are an employer, you have a legal obligation to deduct PAYE tax and NICs from the pay of your employees every pay period. You also have to pay Employer’s Class 1 NICs if your employees earn above a certain threshold. The thresholds change annually and vary considerably, and you can read more here.

The amount of tax deducted from an employee’s pay is determined by their tax code, and all payroll data must now be submitted to HMRC in ‘real time’, rather than simply at the end of each month.

You must pay your PAYE bill to HMRC by:

  • The 22nd of the next month if you pay monthly;
  • The 22nd after the end of the quarter if you pay quarterly.

Read more about HMRC Tax Problems

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