Corporation tax is basically the same as income tax, but it is the name of the tax applied to registered companies rather than individuals. It is based on the profits that incorporated businesses generate each year, so if you trade as a limited company, you will be liable to pay corporation tax on your profits, however the rate of corporation tax is much more favourable than income tax.
The UK rate is relatively low when compared to other countries, and is significantly lower than personal income tax rates. The Corporation Tax main principle rate for 1 April 2016 is set at 20%. The rate for 1 April 2017 is 19% and sets it at this rate for 1 April 2018 and 1 April 2019. The rate for 1 April 2020 is set at 18%, reducing the Corporation Tax main rate by 2% by 2020.
Corporation Tax Basics
As a company, you will pay corporation tax on your taxable profits, this includes any capital gains where assets have been sold for a profit, trading profits and most investment profits. An annual charge is made on the 12-month accounting period for your financial year. The exact dates for your year of trading will depend on when your started your company, or if you decide to change your financial year-end.
In April 2015, the small profits and main rates of corporation tax were aligned to become the same rate. Corporation tax is currently charged at a rate of 20% for all profits made during the 2015/16 and 2016/17 tax years regardless of the size of your company. The exact amount of tax you will pay will depend on your profits.
Depending on when your company financial year starts and ends, you could be liable to two different corporation tax rates. For example, the corporation tax rate will be reduced to 19% in April 2017, so if your company financial year spans this changeover date, then you will be charged 20% on one part of your profit, and 19% on your latter part of your profit.
You are legally required to keep accurate corporation tax records logging your income and expenditure. You must file your corporation tax return within 12 months and you will be required to pay your corporation tax bill within nine months of the end of your company accounting period, and submit your return online in accordance with HM Revenue & Customs requirements. For businesses with profits exceeding £1.5m, you can pay on instalments.
Many UK companies will employ an accountant to take care of all their corporation tax obligations, finding this easier and more efficient. Having an accountant is useful because they will be able to advise you about the options available to reduce your corporation tax bill. With plans going ahead for online personal tax accounts for all small businesses and personal tax payers from April 2016, it is hoped that the tax system will be simplified, and make it easier for you to view your tax transactions, and make secure payments at any time. The new personal tax accounts will cover all aspects of business tax, including Self Assessment, Corporation Tax, VAT and PAYE for employers.
Corporation tax reliefs and allowances
There are certain legal options available that allow businesses to minimise their corporate tax liabilities. Capital allowances and annual investment allowances can be deducted from the businesses income, therefore reducing the amount of corporation tax payable, but assets purchases such as essential tools, machinery and equipment expenses are not allowable.
In such cases where you need to buy essential plant and machinery equipment, then you can claim these as capital allowances. There are different types of expenditure that can qualify for different capital allowances, so it is worth checking to see if you can claim against these types of expenses.
The annual investment allowance is £200,000 from the 1st January 2016, so if your total capital expenditure is less than this in your first year, you should be able to claim the full amount paid out as a capital allowance. If your capital expenditure was to exceed this level, then your capital allowances can be claimed back as a percentage each year under 'writing-down' allowances.
There are certain rules that relate to some capital allowances. For example, if you have company cars, the allowance will depend on the car's emissions levels, and generally cars will also fall under allowances for short-life assets, meaning that they will not be expected to last any longer than four years. Many companies are now investing in more environmentally friendly technologies, so may qualify for enhanced capital allowances that allow you to claim up to 100% of the costs back in the first year.
What are regular allowable expenses?
Allowable expenses are for things that can normally be set against profits, as long as the expense is necessary or essential, and is for business purposes only. An obvious expense for be for fuel for company vehicles, or to supply your staff with a company uniform for example.
Care must be taken when dealing with contributions to employers' pension schemes. Generally speaking, pension contributions will be treated an allowable expense, however the amount paid must be justifiable in business terms to HM Revenue & Customs. Questions might be raised if for example pension contributions paid for the benefit of shareholding directors were disproportionately high in comparison with other employee contributions.
If your company invests a lot of money into research and development (R&D), then you can qualify for corporation tax relief on your qualifying costs. Under the R&D tax relief, you can deduct your costs from your trading income, and also claim an extra 130% on top as a corporation tax relief taken from your trading profits. In total that comes to 230% in qualifying reductions.
Should a company make a loss, they can increase their losses using this tax relief, or claim a cash tax credit. Loss-making businesses can claim corporation tax relief to set against other income, such as past profits, income from investments, or it can be carried forward to set against future profits. Where a group of companies work together, losses made by one company within that group can be set against the profits of another member.
Within some companies, employees are allowed to buy company shares for less than their market value. Corporation tax relief can also be applied in these circumstances, as well as when a company is involved in charitable gift-giving.