NOTE: The following contains information about UK taxes. It was not written by tax professionals and must not be taken as authoritative nor as tax or accounting advice. Consult a local licensed professional for authoritative advice.
In the UK the body responsible for tax collection is HM Revenue and Customs (HMRC).
GNUCash and UK businesses
Whatever the form of business, the basic principle is that net profits are liable to tax. Deductions from gross profits are allowed for most revenue expenses incurred 'wholly, exclusively and necessarily' in the course of trade. There is also a system of capital allowances, but only when using traditional accounting.
Businesses sometimes have the option of moving profits and losses between reporting years. Tax calculations can be complex: even the smallest business can often benefit from an accountant to maximise the benefit of the various reliefs.
Income tax is paid by most trusts, and by individuals. For individuals the basic principle is 'progressive taxation': there is a tax-free 'personal allowance' of around £13,000, a 'basic rate' of 20% on the next £37,000 of income (to ~£50,000), and rates of 40% and 45% above that.
Income tax is payable by sole traders. It is also payable by members of partnerships, including limited liability partnerships (LLPs), despite those being corporate bodies. A partnership (including an LLP) pays no tax itself, but must nonetheless submit a tax return; members then submit their own tax returns stating their share of the profit (or loss) as dictated by their partnership agreement.
Smaller businesses (<£150,000 turnover) can opt to use cash basis accounting. Partnership tax can be very complex, and an accountant is almost certainly needed even when using cash basis.
Corporation tax is the tax payable on the business profits of most corporate bodies (usually, but not always, these are companies). Corporations are obliged to use 'traditional accounting' to show a true and fair view (with the exception of smaller CIOs).
The corporation tax rate is currently (FYE2022) 19%, and is due to rise over the next few years. The calculation can be complex, especially where capital expenses and receipts are involved. For any reasonably-sized business, or for companies having more than one share class or directors' loans, an accountant is likely needed.
Not-for-profit unincorporated associations are also liable to corporation tax. Many of these will be eligible for mutual trading exemptions on some or all of their profits. Not all will be, and not all profits qualify: the basic test is whether those whose trade gave rise to the surplus are identical with those entitled to any distribution of it.
Value-added tax (VAT) is the tax payable on goods and services. It is charged on the buyer and collected by the seller. The rate is 20% of the selling price. Seller businesses pass the tax collected to HMRC periodically (usually every 3 months).
Businesses that charge VAT to their customers can reclaim the VAT paid by the business on its own inputs. The net effect is that only the 'value added' by a business is taxed (i.e., outputs less inputs).
On the standard scheme, businesses reclaim their own VAT paid at the same 20%. Other VAT schemes exist that can simplify the accounting. E.g., one scheme allows a business to charge VAT at 20% but pass to HMRC only 18%. The business keeps the difference but is not allowed to reclaim its own VAT paid. See https://www.gov.uk/vat-registration.
Businesses need register for VAT only if their turnover is above a certain value (currently £85,000). Below this turnover a business has the option.
Businesses with a high level of paid inputs, such as manufacturing and retail, can benefit from registering and reclaiming the VAT they themselves pay. Pure service businesses with few paid inputs, such as professional consultants, often aim to keep their turnover below the threshold as they have little to reclaim and much to charge their clients.
Businesses with a turnover above £85,000 are required to submit VAT returns using the HMRC Making Tax Digital API (MTD). Legislation requires that the VAT returns are calculated from ("linked to") account records directly. Thus, they cannot just be manually created in a spreadsheet.
Every business that is not 'dormant for tax' is required to submit annual accounts and a tax return to HMRC. This allows an assessment of the tax liability. As with all tax records in the UK, the information is not published.
Companies that are not 'dormant for Companies House' must also submit statements of account to Companies House for publication on the web. As a minimum the accounts must include a balance sheet, and this is enough for smaller companies. 'Full accounts' include an income statement in addition to the balance sheet. Other matters may be required to be disclosed, particularly accounting policies, such that the accounts give a 'true and fair view'.
The rarer forms of corporation, such as Cooperative Societies and Charitable Incorporated Organisations, have regimes that are similar, but not identical.
Accounting reference date
When a business is registered, an annual filing period end date is selected marking the end of the period a business should report on. One quirk of the system is that a company's first reporting period is usually set at just over 12 months (1 year plus the remaining part of the month in which the business was registered). A second rule is that a corporation tax statement must not be longer than 12 months. The result is that businesses need to file two corporation tax statements in the first year, one for the full year, and one for the remaining part of a month.
In previous times, businesses would file corporation tax statements using the CT600 paper form or electronic equivalent. CT600 is now used only in exceptional circumstances.
The level of reporting in the Companies House accounts filing depends on the nature of a business. Very small businesses ("micro-entities") are required to submit only a highly summarised balance sheet, and will likely not be required to undergo an independent audit. For the largest businesses, the report will include a director's report and an auditor's report along with detailed financial accounts.
Practical aspects of filing
Businesses are largely required to forego paper filing and use electronic interfaces. In most cases, Companies House require accounts to be published in iXBRL format using an XBRL taxonomy published by the Financial Reporting Council (FRC) which is the body that regulates financial reporting in the UK and the Republic of Ireland.
- standard company accounts (iXBRL using an FRC taxonomy)
- a corporation tax statement (iXBRL using an HMRC corporation tax taxonomy)
- a detailed profit-and-loss statement (iXBRL using an HMRC detailed profit-and-loss taxonomy)
For smaller businesses with simpler affairs, the HMRC's online web filing service can be used to create the filings to HMRC and Companies House from account information entered by the business administrator, without the need to create iXBRL reports. Larger businesses will typically have accountants prepare and submit the filing.
Accounting with GNUCash
Keeping accounts for company accounts and corporation tax filing is possible. HMRC's web tool can be used to submit accounts and corporation tax filing for eligible businesses. Accountants can be used to manage the filing for other businesses. You may need an accountant to help understand what to record, and how to present the information for compilation of accounts.
VAT accounting is less straightforward:
- For a business which is not required to register for VAT and maintains less than £85,000 turnover, there is no VAT returns to file.
- For a business which is VAT-registered but has turnover less than £85,000, there is presently no need to use the Making Tax Digital (MTD) APIs, and HMRC's web interface can be used to submit VAT returns, although the MTD requirement is going to be exteneded.
- For businesses required to use the MTD API, there is a requirement that the VAT return is derived from GNUCash accounts electronically. See https://www.gov.uk/vat-record-keeping/making-tax-digital-for-vat. One interpretation of the rules is that it is not permitted to keep VAT records in GNUCash and manually submit the VAT return using a spreadsheet.
In order to get access to the MTD API, developers are required to register a developer account with HMRC and get their application approved before production credentials are issued. Production credentials may not be shared (e.g. included in an open-source project).
GnuCash does not support the VAT MTD API, nor the corporation tax API, although there are third-party projects which support the filing protocols. These tools are not supported, nor endorsed by GNUCash developers.
gnucash-uk-vatallows a VAT return to be submitted derived from GnuCash accounts. As an open-source project there are issues around sharing the application secrets which HMRC have made available for the project. This project has been used successfully to file VAT returns. See https://github.com/cybermaggedon/gnucash-uk-vat.
gnucash-ixbrlallows iXBRL reports to be created from GnuCash accounts. It is taxonomy-neutral, but comes with some sample configuration files to produce UK account filing, and a combined corporation tax statement / detailed profit-and-loss account. See https://github.com/cybermaggedon/gnucash-ixbrl.
gnucash-uk-corptaxinteracts with the corporation tax API to submit the corporation tax filing consisting of company accounts plus corporation tax statement using iXBRL payloads. This project has no interaction with GnuCash at all, but has only been tested with the output of
gnucash-ixbrl. This takes care of the HMRC filing requirement, a business would still need to file accounts to take an iXBRL account statement and file to Companies House using web filing. See https://github.com/cybermaggedon/gnucash-uk-corptax.