While corporate tax may seem overwhelming, particularly if it’s new to you, it really pays to know how it works and what you can do to lower your tax bill legitimately.
Corporation tax is something that most businesses and organisations need to pay; and the most prevalent of which are limited companies. However, it also applies to foreign companies with UK branches, as well as co-operatives, clubs or other unincorporated associations (such as sports clubs, community groups or voluntary groups).
At Tax Agility, our tax accountants have been working with SMEs across London on tax issues pertaining to small businesses. In this article, we hope to explain corporate tax in an easy-to-understand manner so you can fully understand corporate tax.
What is corporation tax?
One of the best ways to conceptualise corporate tax is that it is just like income tax – except it’s for companies. As soon as your company starts making a profit, you need to start paying corporate tax.
The term profit here encompasses money earned from:
- Doing business (trading profits)
- Selling assets and making chargeable gains, these can include land, property, machinery, equipment and shares in the company
If your company is based in the UK, then it pays corporate tax on all of its profits derived from domestic and abroad.
If your company is based elsewhere but has an office here, then it only pays corporate tax on profits derived from its UK activities.
While registered charities are generally exempt from corporate tax, they do pay tax on money that is not used for charitable purposes (aka non-charitable expenditure), as well as on dividends received from UK companies before 6 April 2016, profits from developing land or property and purchases (although special VAT rules apply). Charities also pay business rates on commercial buildings which are a form of tax, although they get an 80% discount.
Corporate tax rates
Corporate tax rates are standardised across all businesses at 19% for 2018-2019 and 17% for 2019-2020. That means that for a business that has an annual profit of £100,000 for 2018-2019, they’ll have to pay £19,000 in corporation tax. From 2019-2020, that figure would be £17,000 in corporation tax from the same annual profit of £100,000.
While there are no plans for this to yet change after these dates, the government has shown a commitment to keeping the rate at 20% or lower. Also, given the current political situation, we may see the rates drop even further to boost growth and drive foreign investment.
When is the corporate tax due?
Corporation tax has to be paid before the company tax return is filled and the exact date will depend upon a company’s corporation tax accountancy period and the size of taxable profits.
For example, your accounting period ends on 31st March and the taxable profits are less than £1.5 million. Accordingly, you must pay your corporate tax nine months and a day after your accounting period ends.
However, it’s worth noting that if your small business has just been started, then you may cross two accounting periods for corporation tax as your accounting period can’t be longer than 12 months. Talk to your accountant and they should be able to help with any corporate tax enquiries. Alternatively, you can call us too.
If your taxable profit is more than £1.5 million, then you must pay corporate tax in instalments electronically.
Lastly, even if your company is loss-making, you still need to declare it with the HMRC – even if there is no corporation tax due.
Registering for corporation tax
When you are first setting up a small business, your accountant generally helps you with the process of registering for corporate tax. If you haven’t worked with an accountant, then you can start the process by visiting the gov.uk website and register within three months of your company beginning to ‘trade’.
The term ‘trade’, and when your company is viewed to have begun trading, is defined as when your business buys, sells, rents property, advertises or employs someone. As soon as your business has performed one of these actions, then the three-month countdown begins, which is why it is imperative that you register for corporate tax right away.
Reducing your bill through allowances and reliefs
Small businesses across the UK can lower their corporate tax bills legitimately by claiming allowances and reliefs. Again, this is something where your tax accountants can assist or call us on 020 8108 0090 if you are in need of a trusted independent small business accountant in London.
Capital allowance allows you to deduct some or all of the value of the assets used in business from your profits before you pay tax. These assets include equipment, machinery, cars, vans and lorries that are used for business.
You can also deduct the following costs (as part of the business costs of your limited company):
- Day-to-day running costs
- Items that you buy and sell
- Interest payments or financial costs for buying assets
In terms of reliefs, they are:
- Research and development (R&D) relief if your company works on innovative tech and/or science projects.
- Creative industries (CITR) relief for film, TV, video game and other creative companies for larger deductions when calculating profit to be taxed.
- Disincorporation relief allows a company to transfer assets to shareholders without a corporation tax charge on assets (often occurring when companies turn from limited companies to partnerships or sole traders).
- Marginal relief is available to companies that have between £300,000 and £1.5 million in profits before certain tax years.
- The Patent Box sees to it that profitable, patented inventions (and some other inventions) are taxed at a lower rate of corporation tax.
- Terminal, capital and property income losses.
- Trading losses.
Please note that anything you or your employees use and get something from must be treated as a benefit and not a relief to be deducted from profits before tax. Only expenses that are ‘wholly and exclusively’ for the purpose of the business can be deducted. In addition, there are some costs that aren’t allowed – such as the entertainment of clients.
It’s worth mentioning here that to fully take advantage of the corporate tax system, you, the business owner, should pay yourself a salary which will reduce your profits and your corporate tax obligation accordingly.
If you are paying yourself a low salary on purpose and you use dividends to make up the majority of your income, then you would know that dividends are drawn directly from profit and are subject to a different (lower) tax rate than salaries which are drawn before profits. To find out which approach works best for your situation, it is best discussing this with a professional accountant first.
Another thing worth knowing is that if you pay HMRC your tax bill a bit early, you’ll actually get some of it back in the form of interest – meaning you can actually save money being nice to the taxman. The earliest HMRC will pay interest from is six months and 13 days after the start of your accounting period.
When in doubt, get a professional to account
As a business owner, you are juggling multiple tasks and worrying about HMRC deadlines and if you have missed any reliefs should not be your top priority. Instead, your accountant should be working on them for you, helping you to maximise your income and lower your corporate tax bill legitimately.
Talk to Tax Agility today, our team of chartered accountants work with small business owners across London saving them time and money. Our full range of services include:
- Accounting and bookkeeping for small business
- VAT specific to small businesses
- Payroll services
- Management consultancy
Contact us today on 020 8108 0090 or get in touch via our contact us page to arrange a complimentary, no obligation meeting.
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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.