A guide to the U.K.'s flat rate VAT

The U.K. Flat Rate VAT scheme was introduced in the year 2002 and it provides the small businesses in the UK with the chance to simplify VAT accounting. In order for the business to qualify for the scheme, certain requirements must be fulfilled.

• An yearly exclusive VAT taxable turnover of £100,000.

• An yearly VAT exclusive turnover that is inclusive of the value of the exempted supplies and also other incomes that are non taxable up to an amount of £125,000.

• The annual VAT inclusive turnover of the business should not exceed an amount of £150,000. If this happens, the business is required to exit the scheme since it will prove costly.

The working principle

Companies with zero expenses

For example, if the turnover of the business is £51,000, the VAT will be charged as below:

£51,000 x 0.175 = £8,925.

The total revenue will therefore stand at £59,925. The percentage of the VAT flat rate is applied directly to the figure mentioned. For example, if there is an assumption that the flat rate percentage is 15 percent, then the calculation will be as follows: £59,925 x 0.15 = £8,988.75.

The amount of £8,988.75 must be paid of to the HM customs and Excise as tax. Notably, there is a difference of £63.75 between the total amount that is charged for the supply of the services and goods (£8,925) and the amount that is paid in the form of tax (£8,988.75). This implies that if the company has got minimal or no expenses, it would have gained £63.75 by the close of the financial year.

Companies with several expenses

In the situation whereby the company has got numerous expenses during the year, it is wise to avoid the VAT Flat Rate Scheme. This is due to the fact that the business would be in a position to offset the VAT that was paid on the costs against the amount of VAT that was received for supplies of both services and goods.

For instance, if the company makes a sales turnover of £50,000 and incurs expenses of £15,000, the expenses will be as follows:

£15,000 plus £2,625 = £17,625

It is possible to offset the figure of £2,625 against the amount of £8,988.75 that was charged for services and goods.

The £2,625 can be offset against the £8,750 of VAT charged for the supply of goods or services: £8,925 - £2,625 = £6,30. Therefore, the amount of money that is paid out in form of tax would be £6,125. This figure is less that the £8,988.75 that was paid as the VAT Flat Rate that was shown in the example. In such a situation, the company should avoid being in part of the Flat Rate VAT Scheme.

It is therefore important for the company to seek the services of professionals who are better placed to provide the best advice about VAT tax related issues. Otherwise, without a clear understanding of how the figures are arrived at, it may become rather difficult to make the best decision.

About the author: Isaac writes for Drummond Bookkeeping & Accountancy Services LLP, Drummond provide their services to the wider South West region but focus on providing bookkeeping in Plymouth for small and medium sized businesses.

How Apple Inc. Legally Evades Paying Billions In Taxes

Image attribution: Nk; CC BY-SA 2.5

The statutory federal corporate tax rate in the U.S. is 35 percent, but Apple Inc. does not pay anywhere close to this amount, and it is legal. This is largely due to profits earned overseas that have not been repatriated to the U.S., but also because of tax strategies such as issuing stock options, accelerated depreciation of capital investments and avoiding state income tax via business subsidiaries.

Complete article link: http://www.helium.com/items/2320614-how-apple-inc-avoids-taxes

Tax Aspects of S Corporations

An 'S' Corporation is a small business that has filed a Form 2553 with the U.S. Internal Revenue Service. The Form 2553 is an official corporate document representing a 100% shareholder approval of the desire to become recognized as an 'S' Corporation as governed by Section 1362 of the U.S. tax code Title 26 . Both new and pre-existing companies regulated by different tax statutes may become S corporations provided they meet the requirements.

Qualification to become an S Corporation

Form 2553 must be filed before March 15 of a given year to qualify as an S corporation for that year.
To Form a S corporation, there may only be 99 or less owners/shareholders. The Shareholders must also be legal U.S. residents. If an existing company is filing the Form 2553, that company may not be a 'C' Corporation i.e. a more formal business subject to different tax regulations.

Tax benefits and taxation of S Corporation:

S Corporations are able to avoid what is known as 'double taxation'. Double taxation is when profits a company earns are taxed, and then the profits distributed to the owners are taxed again on their individual tax forms. S corporations avoid this by not always having to pay tax on earnings. Instead, as with Limited Liability Corporations, those earnings or losses are either added to or deducted to the shareholder's personal income.

Another tax benefit of S corporations is the ability of the corporation to pay dividends. Dividends are profits that are passed on from companies to shareholders. Since dividends are not taxed the same way as employee income, S corporations can avoid paying extra federal employment taxation, thus saving money.

IRS tax forms for S Corporations:

The tax forms required of S corporations by the Internal Revenue Service include the following. These requirements can be viewed at the Internal Revenue Service website.

Form 1120S: The company's tax documentation form
Form 941 or 943: Employment taxes withholdings
Form 940: Additional employment withholdings such as social security, Medicare etc.
Form 1040: Individual Tax documentation for shareholders

TIPS on Becoming an S Corporation:

Check State laws regarding S Corporations, as they may not recognize S corporations the same way the Federal Government does, thereby excluding them from the same taxation rules applied at the Federal level.

Paralegal services may be all that is needed to set up an S corporation if a company does not do so independently. Tax accountants and/or attorneys specializing in taxation law may also be of assistance in certain situations.

According to Title 26, Code 1362 of the U.S. tax code, an S corporation is no longer a S corporation if the company no longer meets the requirements of a S corporation or if the company earns a specific amount of income after 3 years i.e. more than 25% of total revenue over 3 years.

Forecasting your corporations growth, needs, size and capitalization requirements may be useful when determining if an S corporation is the right classification for your business. This may be beneficial as if the company outgrows itself, it may have to change its tax status causing added complications in the future.

If a company pays out all its earnings as dividends, it may not have to withhold income tax if there are no salaried employees, thereby avoiding double taxation. This would make formation as an S corporation not as attractive if it is formed entirely on the premise of avoiding double taxation.

Deciding whether or not to form an S corporation or switch to an S corporation from an LLC or sole proprietorship may not be a decision one makes in a couple of minutes over a coffee. There are several aspects of earnings distribution, taxation code, number of employees and corporate forecasting that may all impact the benefits of such a decision. S corporations are generally have less responsibility in terms of IRS regulations than do C corporations. In spite of this, C corporations may have its unique advantages over an S corporation such as charitable contributions tax deductions exclusive to the C corporation.