VAT and Corporation Tax are separate taxes, but they affect each other more than most directors realise. Whether you're newly VAT-registered, using the flat rate scheme, or wondering how VAT adjustments hit your CT600, this guide explains the connection.
The basic principle: VAT-exclusive figures on your CT600
If your company is VAT-registered, your CT600 should report income and expenses exclusive of VAT (i.e., the net amounts). The VAT element isn't your income or your cost — it belongs to HMRC.
This means:
- Sales/turnover on your CT600 = invoice totals minus the VAT charged
- Expenses on your CT600 = purchase amounts minus the VAT you recover (input tax)
- The VAT you collect from customers and pay to HMRC is not part of your profit calculation
Example
You invoice a client £1,200 (£1,000 + £200 VAT at 20%). On your CT600:
- Turnover: £1,000 (not £1,200)
- The £200 VAT collected flows through your VAT return, not your CT600
Similarly, if you buy software for £240 (£200 + £40 VAT) and reclaim the VAT:
- Expense on CT600: £200 (not £240)
When you can't reclaim VAT: it becomes a Corporation Tax deduction
Not all VAT is recoverable. If your business makes exempt supplies (certain financial services, insurance, education, healthcare), you may be unable to reclaim some or all of the VAT on your purchases. This irrecoverable VAT becomes part of the cost of the item.
Partially exempt businesses
If your company makes both taxable and exempt supplies, you use a partial exemption method to determine how much input VAT you can reclaim. The non-recoverable portion:
- Gets added to the cost of the related expense on your CT600
- Increases the cost of fixed assets (and therefore the base for capital allowances)
Example: Your company makes 60% taxable and 40% exempt supplies. You buy office equipment for £6,000 + £1,200 VAT. You can reclaim 60% of the VAT (£720), leaving £480 irrecoverable. On your CT600:
- Cost of equipment for capital allowances: £6,000 + £480 = £6,480
The VAT flat rate scheme and Corporation Tax
The VAT Flat Rate Scheme (FRS) is where VAT and Corporation Tax interact most visibly — and where many directors get confused.
How the flat rate scheme works
Under the FRS, you charge VAT to customers at the standard rate (20%) but pay HMRC a lower flat rate percentage based on your trade sector. You keep the difference.
Common flat rate percentages:
| Business type | Flat rate % |
|---|---|
| Computer and IT consultancy | 14.5% |
| Management consultancy | 14% |
| Architect, civil and structural engineer | 14.5% |
| Accountancy or bookkeeping | 14.5% |
| Publishing | 11% |
The FRS "profit" is taxable
The difference between the VAT you charge customers and the amount you pay HMRC under the flat rate scheme is taxable income for Corporation Tax purposes.
Example: An IT consultant invoices £120,000 + £24,000 VAT = £144,000 total. Under the flat rate scheme at 14.5%:
| Item | Amount |
|---|---|
| VAT collected from clients | £24,000 |
| Flat rate payment to HMRC (14.5% × £144,000) | £20,880 |
| FRS surplus (taxable) | £3,120 |
That £3,120 is additional taxable profit on your CT600. Many directors overlook this, leading to an underpayment of Corporation Tax.
How to report FRS surplus on your CT600
The FRS surplus is typically included as other income or added to your turnover figure. There's no separate box for it — it simply forms part of your taxable trading profit.
Some directors net it within turnover. Either approach is acceptable, as long as the total taxable profit is correct.
Limited cost trader rule
If your company spends less than 2% of turnover on relevant goods (or less than £1,000 per year), you're classified as a limited cost trader and must use the flat rate of 16.5%. This significantly reduces the FRS benefit:
| Item | Standard FRS (14.5%) | Limited cost trader (16.5%) |
|---|---|---|
| VAT collected (on £144,000) | £24,000 | £24,000 |
| Payment to HMRC | £20,880 | £23,760 |
| Surplus | £3,120 | £240 |
Many service-based companies fall into the limited cost trader category, making the flat rate scheme barely worthwhile.
VAT registration threshold and timing
The current VAT registration threshold is £90,000 (from 1 April 2024). You must register if your taxable turnover exceeds this in any rolling 12-month period, or if you expect it to exceed £90,000 in the next 30 days alone.
Impact on Corporation Tax when you register
Before VAT registration, your expenses include VAT that you can't reclaim. Once registered, you can reclaim VAT on purchases. This means:
- Pre-registration: expenses on your CT600 include the gross (VAT-inclusive) amount
- Post-registration: expenses on your CT600 are the net (VAT-exclusive) amount
You can also reclaim VAT on goods purchased up to 4 years before registration (if still held) and services purchased up to 6 months before registration. These adjustments should be reflected in your CT600 for the period in which you make the claim.
VAT deregistration and Corporation Tax
When you deregister from VAT, you may need to account for VAT on assets still held. HMRC treats this as a deemed supply. The VAT cost becomes irrecoverable and should be included in your CT600 figures.
Bad debt relief — VAT and CT interaction
If a customer doesn't pay an invoice, you can potentially claim relief under both taxes:
- VAT bad debt relief: Reclaim the VAT on debts outstanding for more than 6 months (and written off in your accounts)
- Corporation Tax bad debt deduction: Deduct the net (ex-VAT) amount of the bad debt as an allowable expense
Make sure you don't accidentally deduct the gross amount (including VAT) on your CT600 if you've already reclaimed the VAT element through your VAT return.
Annual accounting and cash accounting schemes
If you use the VAT annual accounting scheme or cash accounting scheme, the timing of when VAT is recognised may differ from when income and expenses appear on your CT600. Your CT600 follows accruals accounting (when income is earned and expenses incurred), regardless of which VAT scheme you use.
Common mistakes
- Including VAT in CT600 turnover — if you're VAT-registered, turnover must be VAT-exclusive
- Forgetting to tax the flat rate scheme surplus — the difference between VAT collected and flat rate paid is taxable profit
- Double-counting bad debts — reclaiming VAT on a bad debt AND deducting the gross amount on your CT600
- Using VAT-inclusive expense figures — after registration, expenses should be net of recoverable VAT
- Ignoring partial exemption — if you make exempt supplies, some input VAT is irrecoverable and increases your CT600 costs
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