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Corporation Tax

Find out what you need to know about forming a UK company

What is Corporation Tax?

Corporation tax is similar to the income tax; the only difference is that corporation tax applies only to the registered company, not to an individual. Corporation tax is charged on all profits made by a company each year. If you want to start a limited company, then you are legally responsible for paying corporation tax for your profits. But, the rate of corporation tax is very favorable than the rate of income tax.

In the UK, the rate corporation tax is low as compared to other countries; ultimately this is lower than the rate of income tax charged on every individual. For 1 April 2016, the main principle rate of corporation tax is set at 20%. And for 1 April 2017, this rate is set at 19%. The same rate will be set for 1 April 2018 and 1 April 2019. Whereas, the rate of corporation tax is 20% for 1 April 2020, which means it will be decreased by 2% by 2020.

Corporation Tax Basics

As a private limited company, you have to pay corporation tax only on your taxable profits. These taxable profits include any capital gains where the company’s assets are sold for a profit, investment profits, and trading profits. An annual charge for this tax depends on the total accounting period of 12-months of your financial year. The proper dates of your trading year can be decided from the date you have started your company or if you decide to change your finance year-end.

The main rates and small profits of corporation tax were allied to become the same rate. Currently, for all profits made during the years of 2015/16 and 2016/17, the rate of applied corporation tax is 20%, in spite of the size of your business. The exact amount of tax payable depends on the profits earned by the company. 

You can be liable to two different corporation tax rates depending on when the financial year of your company starts or ends. For example, as in April 2017, the rate of corporation tax will be reduced to 19%. If the financial year of your company will be up to this date then you have to pay 20% one part of your profit and 19% for the another part of your profit.

Legally, you need to keep an accurate and detail records of the corporation tax logging your income and spending. The period within which you have to submit your corporation tax return is 12 months. Also, you need to pay your corporation tax bill within nine months of the end of the accounting period for your company. All you need is submit your return with HM Revenue & Customs requirements. If you are making a profit of £1.5m in your business then you can pay this corporation tax on installments.

To improve the efficiency and making the tasks easy for the company, many companies in the UK prefer to hire an accountant to manage all their corporation tax obligations. Hiring an accountant for your company can be very beneficial to you, as with expertise in this field, he can give you better advice and options to reduce the bill of your corporation tax.

The document titled ‘Making tax easier, quicker, and simpler for small businesses’, outlines how the government and HMRC plans to make the tax system easier and simpler for small businesses to understand and deal with. You will be able to view your tax transaction and make secure payments. As per this new plan, companies will be able to work out their tax on a cash basis with basic and precise rules relating to small and mid-sized businesses. The new personal tax accounts will cover all aspects of the business such as Corporation Tax, Self Assessment, PAYE and VAT for employers.

Corporation tax reliefs and allowances

Corporation tax reliefs and allowances can help you to reduce your corporation tax liability. For this, you need to understand the different ways in which the annual investment allowance, capital allowances, and allowable expenses are treated.

Investment allowances and capital allowances can normally be deducted from your business income while calculating your taxable profit. But purchases of possessions (machinery, essential tools, and equipment expenses) are not allowable to reduce.

Capital allowances can be claimed in a case when you need to purchase various plant and machinery equipment. There are different types of expenditure that qualify for different capital allowances.

In a few specific cases, you can claim capital allowances in relation to capital expenditure on premises, for example, by adding insulation. From 1 January 2016, the annual investment allowance is £200,000. In this case, if your total capital expenditure is less than a specified annual investment allowance (AIA), you can claim the full amount as a capital allowance in the first year. And, if your capital expenditure crosses the annual investment allowance, then capital allowances are claimed as writing-down allowances, allowing you to claim a percentage of the cost each year.

There are special capital allowances rules that apply in some cases. For example, if you have company cars, the capital allowances for these company cars depend on the emissions level of the car. Also, cars fall under short-life assets that are expected to last no longer than four years. Enhanced capital allowances are available for a few environmentally friendly technologies. So, most of the companies are investing in these technologies. This allows you to claim up to 100% in the first year.

What are regular allowable expenses?

Allowable expenses are also known as ordinary business expenses. These expenses can generally be set against profits, provided the expense is necessary and is totally and exclusively for the business purposes. There are a few exceptions such as professional and entertainment fees for the company formation. Your accountant can advise you on where exactly you can use these allowable expenses. Allowable expenses on the fuel in company’s vehicles and provide uniform to your staff are the obvious examples.

While dealing with the matter of contribution to pension scheme of employees, you need to pay attention. In general words, contribution to employees’ pension scheme comes in allowable expenses, but the amount paid towards this scheme must be acceptable to HM Revenue & Customs in business term. For example, HM Revenue & Customs might question disproportionately high pension contributions for the benefit of shareholding directors as compared to other employee contributions. So, it is an important area for tax planning and you should take advice for this.

Other corporation tax reliefs

There are a number of other corporation tax reliefs which can help you reduce liability for your corporation tax. Corporation tax relief is also available on qualifying research and development (R&D) costs. If your business invests a lot in R&D, then you can be eligible for corporation tax relief. This R&D tax relief allows you to both deduct these costs from your trading income and claim up to an additional 130% as a corporation tax relief to be deducted from trading profits. On qualifying all these reductions, the total you will get is 230%.

This is a great option for several loss-making companies. They can use R&D corporation tax relief to increase their losses or claim a cash tax credit. These companies can claim corporation tax relief to set against other income like income from investments, past profits, or can be kept safe for future profits. When a number of companies work together, losses made by one company in that group of companies are be set against the profits of another group member.

Corporation tax relief can also be applicable if, within some companies, employees are allowed to buy shares in the company for less than their market value as well as if the company is involved/make gifts to charity.

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