By Alan Gregory | April 8, 2021 | 7 minutes of reading
This guide takes you through the fundamentals of UK corporation tax, helping you understand an essential part of business taxation and answering your questions.
Whether you’re a start-up facing corporation tax for the first time, an established business looking to better understand your finances, or an accountant wanting to give clients an easy-to-understand overview, this helpful tax guide on companies answers you – to know in detail.
By breaking down the key facts in bite-sized segments, we walk you through the essentials step-by-step to ensure that tackling this important business tax is feasible and not intimidating.
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What is corporate tax?
Corporation tax is a UK business tax that limited companies, as well as some clubs and societies, must pay to HMRC based on their annual profits – the money earned after deducting overheads and expenses. It must also be paid on the profits that companies make from their investments or from the sale of fixed assets at a price above their cost. As soon as your business starts making a profit, you start paying corporation tax (unless the business has already reported losses).
In a nutshell, corporate tax is like an income tax for businesses; except that businesses do not benefit from tax exemption, so all profits are taxable. This tax is not new, it has existed since 1965, with rates previously peaking at 52% in 1982! What is the corporate tax rate today? Fortunately, it is significantly lower than 19%, which is the lowest rate in the G7 (the Group of Seven includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States -United).
How much is the corporate tax?
Currently, there is a standard corporate tax rate on company profits, at 19%. In simple terms, if a company makes a profit of £50,000, the eligible tax on this would be £9,500. However, if the business makes a loss but previously generated a profit, it may be entitled to a tax refund by carrying that loss forward to the previous year.
In the 2021 budget, An overhaul of corporate tax rates has been announced and will come into force in 2023. SMEs with profits of £50,000 or less will fall into a new small profits category and will continue to pay the 19% rate. Those with profits above £50,000 and up to £250,000 will pay a decreasing rate of corporation tax. The rate of corporation tax paid will increase to 25% for businesses with profits above £250,000.
How it is calculated
Understanding how to calculate corporate tax is crucial to meeting the requirements, and an accountant or tax advisor can advise or take care of this for businesses that need help. Accurate recordkeeping is essential and knowing tax breaks is beneficial to ensure your business overpays in taxes.
Here’s how to calculate corporate tax in five basic steps:
- Calculate sales and revenue using a profit and loss statement. Include all sales and interest earned.
- Determine overheads and expenses – you can only claim expenses that HMRC classifies as “wholly and exclusively” for business use. Deduct this amount from income to get the profit.
- Establish capital deductions. Fixed assets that have been part of the business for several years depreciate in value – but depreciation is not an allowable expense and must be added back into the tax calculation. However, most capital asset purchases will qualify for tax relief from the annual investment allowance, which can be used to reduce the amount of taxable profit.
- Consider entertainment costs. Costs related to entertaining customers and suppliers are not tax deductible.
- Calculate the tax due. Add any depreciation and customer receipt charges to profit before totaling the accounts, then subtract any capital deductions. This gives you the sum of profits subject to corporation tax.
Who pays corporate tax?
All UK limited companies must pay corporation tax, regardless of their size. Also liable are overseas companies with a branch or office in the UK, as well as organisations, including clubs, societies, associations and co-operatives (even if unincorporated). Sole traders or partnerships do not pay corporate tax.
When setting up a limited company, registering for corporation tax with HMRC should be at the top of your to-do list and should be completed within three months of commencing trading . Understanding this tax obligation is vital for any business from the start, which is why it is taken into account and comes as no surprise.
When is this due?
The deadline for paying corporate tax differs depending on your accounting period, making it a more complicated tax than others. The payment deadline is nine months and one day after the end of the financial year of your previous financial year. Even if your business is loss-making and no tax is due, it still needs to be reported to HMRC.
So, when should you pay? Corporation tax must be calculated and paid to HMRC before filing a corporation tax return, which must be made within 12 months of the end of the financial year. For example, if your exercise was 1st January-31st December 2018, your tax must be paid before the 1st October 2019. The corporate tax return must be filed before 31st December 2019. If this is a new business, two accounting periods for corporation tax can be defined to ensure that the accounting period does not exceed 12 months.
How to pay corporate tax
Registering for corporation tax is the first task, even if you don’t pay until some time later. A business or designated accountant must prepare and file a corporate income tax return, also known as Form CT600, each year. A ‘Business Tax Return Notice’ from HMRC should remind you of this. Whether or not the company owes tax, the return must be filed.
You must either pay the tax due or declare that there is nothing to pay – but either outcome must be done before your corporation tax deadline. Consider the time it will take for your payment to reach HMRC, depending on your payment method; the money must be received before the deadline to avoid a fine. Our software for accountants and tax advisors can help you prepare and file a corporate tax return (CT600).
How to reduce your professional tax
Before you continue reading, it is imperative to understand that it is illegal to evade any kind of tax. Corporate tax is a compulsory professional tax; but there are legitimate ways to reduce the amount you have to pay for tax evasion. This particular tax is often one of the biggest bills a business faces, so taking steps to reduce it can be extremely helpful and is completely legal.
Here are four potential steps to reducing corporate taxes:
- Report eligible expenses incurred solely for business use. Salaries and employer network cards also count as a business expense. By deducting this, we reduce the amount owed in tax and reduce the bill.
- Draw a salary. As above, a salary and employer NICs are business expenses. Many business owners also choose to pay themselves dividends, but these are not a business expense.
- Offset business losses with capital gains. Get tax relief by offsetting the loss against other gains or profits in the same accounting period – and you can choose to carry the loss back.
- Pay HMRC early. If you pay your bill early, HMRC will refund part of it in the form of interest. This is generally calculated from the payment date until the payment deadline. The earliest date from which they pay interest is 6 months and 13 days after the start of your accounting period.
Conclusion
So, what is corporate tax? It is an unavoidable and completely unavoidable part of running a business – and a tax that generates substantial revenue for the government. Support from accountants and tax advisors can help businesses navigate this and save money by reducing liability, but many businesses are successful in going it alone.
Remember, the corporate tax rate is expected to change in 2022 and 2023. Make calculating your corporate tax easier by keeping accurate accounting records – business accounting software can help you with this. Make sure you pay on time and, finally, don’t pay more taxes than necessary by looking at legitimate ways to reduce payments.
IRIS can help you tax and accounting software which helps businesses and practitioners stay compliant and manage corporation tax simply and efficiently. Need more? View our full range of tax software Today!