Business Tax
The taxes a business meets
Business tax introduces the main UK taxes affecting a business: corporation tax on company profits, VAT on supplies, and PAYE/NIC on employment, plus capital allowances and (for unincorporated businesses) income tax. You must understand how taxable profit is derived from accounting profit by adjusting for disallowable expenses and capital allowances, and how VAT is charged, collected and recovered.
VAT mechanics and registration
Know output tax (on sales) versus input tax (on purchases). A VAT-registered business charges output tax, recovers input tax on business purchases, and pays the difference to HMRC. Registration is compulsory above the registration threshold (check the current figure in your exam materials - treat it as given, not memorised). Be able to handle zero-rated and exempt supplies and standard-rated items, and to compute the VAT payable for a period.
Capital allowances and adjustments
Spending on plant and machinery is capital, so it is not deducted as an expense; instead claim capital allowances (e.g. annual investment allowance, writing-down allowance). Add back disallowable items (e.g. entertaining, depreciation) to accounting profit, then deduct capital allowances to reach taxable profit.
Traps to watch
- Depreciation is added back and replaced by capital allowances - do not double-count.
- Business entertaining is generally disallowable; staff entertaining is usually allowable.
- Exempt supplies do not carry input tax recovery in the same way as zero-rated supplies.
- Input tax is only recoverable on business purchases, supported by valid VAT invoices.
Worked rule of thumb
VAT payable = output tax − recoverable input tax. If output tax is £18,000 and input tax is £11,500, the business pays £6,500 to HMRC for the period.