Any company that is registered for Value Added Tax (VAT) and has qualifying employees must pay VAT and operate a Pay As You Earn (PAYE) scheme to pay income tax and National Insurance contributions to HMRC.
Also, any limited company, even if it has no employees, must also operate a PAYE scheme to report the pay of a company director.
The way VAT and PAYE are reported to HMRC and paid is very different. We’ll take you through the key differences to help you better understand your obligations for each. In both cases however the tax is collected on behalf of HMRC and to be forwarded by the company. If the money is not forwarded, it can lead to accusations of fraud or misuse of HMRC funds.
This is different to say corporation tax which is a tax on company profits so owed by the company and not collected on behalf of HMRC.
VAT registered businesses charge their customers VAT on most supplies of goods and services, but they can also reclaim VAT on most purchases. Businesses that are not registered do not charge VAT and also cannot reclaim the VAT they pay.
All VAT registered businesses must submit their returns online. They then pay HMRC if the VAT they received was greater than the VAT they paid out. Alternatively, if the VAT a company paid out was more than it received, it will be able to claim a tax refund from HMRC.
- VAT Returns
All businesses of every size must submit their VAT returns online and make any payment electronically. VAT returns typically have to be submitted via a business’s HMRC account (also known as the ‘Government Gateway’) every three months (quarterly). You must submit a VAT return even if you have no VAT to pay or reclaim.
- VAT Payments
You will need to pay your VAT bill by the deadline shown on your VAT return. You can also find your VAT payment deadline here. Your deadline will depend on when you registered for VAT and when your accounting period begins and ends. However, you’ll normally have a full calendar month plus seven days from the end of your accounting period to complete your VAT return and make the payment. There are some different ways you can pay your VAT bill.
The way income tax and National Insurance contributions are reported, paid and accounted for is very different. Pay As You Earn (PAYE) is the scheme used by HMRC to collect income tax and National Insurance contributions at source from any remunerations made to company employees – and that includes company directors. You don’t need to register for PAYE if none of your employees is paid £112 or more a week, receive expenses and benefits, have another job or receive a pension. However, you must keep payroll records.
- PAYE Returns
Employers must report their employee’s pay, payments and deductions to HMRC monthly, on or before each payday. You’ll need to do this using a Full Payment Submission (FPS). If you have payroll software, it will generate the required reports and submit your payroll information online to HMRC.
- PAYE payments
You will be able to see how much you owe HMRC on your Full Payment Submission or based on the calculations made by your payroll software. You will then have to pay HMRC every month. If you’re a small employer who expects to pay less than £1,500 a month, you can arrange to pay quarterly by calling HMRC’s Payment helpline.
To summarise, companies collect PAYE and VAT on behalf of HMRC, so there is the potential for fraud – this is a key reason why HMRC treat these two taxes differently.