If you own or manage a limited company then you should be familiar with corporation tax. Corporation tax is calculated upon the net profits of the business. If HMRC send you a notice to file a company tax return you must file a return even if you have no CT to pay.
Table Of Contents
- Top tips to decrease Corporation Tax Summary
- What is Corporation Tax?
- Corporation Tax Rates
- Example Corporation Tax Calculation
- Expenses not deductible for tax purposes
- Capital Allowances
- When do I pay Corporation Tax?
- Beware of overdrawn director loans
Unless your CT responsibilities are very straight forward you may wish to appoint an Accountant or Tax Agent to deal with them on your behalf.
We recommend that you use a qualified accountant to prepare your corporation tax return and statutory accounts, as the rules for calculation are complex and are regularly amended. However, it is useful to understand some of the fundamentals.
What is Corporation Tax?
Becoming a company carries a new range of legal commitments and responsibilities. Corporation Tax (CT) is one of those responsibilities. When you register as a limited company, you as a company director are subject to PAYE tax and National Insurance (NI) if you take a salary from the company.
If you are also a shareholder, you may choose instead to take dividends from the company. This can be more tax efficient, but you should take advice on how to go about this. You also need to file a personal self assessment tax return. Your company is viewed separately for taxation purposes. It is liable for Corporation Tax on taxable profits or surpluses.
Corporation Tax affects
CT is not just a tax on the taxable profits of limited companies. It also applies to PLCs, unincorporated associations, and some other organizations like clubs, societies and membership organizations.
Taxable profits include trading profits and investment income. They also include capital gains which are known as chargeable gains for CT purposes.
If your company is based in the UK, it will usually be liable for CT on all its taxable profits – even if those profits come from elsewhere in the world- although some companies may be able to exempt profits realised by overseas branches. If your company is not based in the UK but operates here from an office or branch, it will only be liable for CT on profits from its UK activities.
How to Pay Corporation Tax
If your company is liable for CT you need to tell HMRC. You need to pay the correct amount of CT electronically and on time. You also need to file a company tax return online at the right time.
CT and Accounting Periods
With CT the payment and filing deadlines are different. The filing deadline is 12 months after your accounting period ends. The payment deadline however is only 9 months and 1 day from when the accounting period ends (except for some large companies, which have to pay their tax by quarterly instalments). So, the deadline to pay your CT comes BEFORE the deadline for filing your company tax return. You must normally file your company tax return 12 months after the end of your CT accounting period.
A CT accounting period is usually 12 months long, but it can be shorter than this. For example if your company accounts cover a period of less than 12 months, then the CT accounting period can be the same. And you will normally file a company tax return for that period. A CT tax period cannot be longer than 12 months though. If your company accounts cover a period longer than 12 months and your company is active throughout, you will have to file 2 company tax returns – because you will have 2 CT accounting periods.
Corporation Tax Rates
For profits earned from 1 April 2015, all companies (except some with oil related profits) will pay corporation tax at a uniform rate of 20%. For small companies, the 20% rate has applied for some time, but larger companies used to pay corporation tax at higher rates.
|Small profits rate*||20%*||20%*||20%*||20%*|
|Small profits rate can be claimed by qualifying companies with profits at a rate not exceeding||£300,000||£300,000||£300,000||£300,000|
|Marginal Relief Lower Limit||£300,000||£300,000||£300,000||£300,000|
|Marginal Relief Upper Limit||£1,500,000||£1,500,000||£1,500,000||£1,500,000|
|Main rate of Corporation Tax*||26%*||24%*||23%*||21%*|
|Special rate for unit trusts and open-ended investment companies||20%||20%||20%*||20%*|
Main rate of Corporation Tax
The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply.
From 1 April 2015 the small profits rate will be unified with the main rate, so there will be only one Corporation Tax rate for non-ring fence profits – set at 20%.
Corporation Tax on chargeable gains
Indexation Allowance allows for the effects of inflation when calculating the chargeable gains of companies. Other exemptions and reliefs may reduce tax on gains, for example there is a “substantial shareholding exemption” that may apply when a trading company or group sells shares in another trading company.
Example Corporation Tax Calculation
Corporation Tax is applied to the taxable net profits of a limited company. Simplistically, the net profits are calculated by deducting tax deductible expenses from sales and including any other income.
|Net Profit **||£135,000|
|C.T. @ 20%||£27,000|
** Net profit is calculated before deducting dividends paid by the company, and dividends received are generally non taxable
Expenses not deductible for tax purposes
Some expenses may be included a company’s accounts, however, are excluded from taxable net profit. Here are the main ones that we come across:
- Amortisation (with the exception of some goodwill, but check with your accountant for clarification)
- Some business gifts
- Some legal fees, e.g. those relating to the purchase of a building or the company’s share structure
- Pension contributions, unless actually paid in the accounting period
There are special rules for capital expenditure, and depending on the current capital allowances rules a company will pay less corporation tax depending on the amount of capital allowances allowed.
These depend on the type of asset and the rules can change massively year on year. For example, until 31 December 2015, 100% of expenditure on equipment costing up to £500,000 a year is tax deductible, but in the recent past the maximum was as little as £25,000.. Therefore it always sensible to get up to date advice before purchasing large capital items as the timing could critically change the timing of your tax payments.
Also ensure your accountant keeps you up to date with special incentives e.g. 100% capital allowances on fuel efficient cars and other environmentally friendly equipment.
A particular issue is the purchase of land and buildings, for which no capital allowances are generally available. However, plant and machinery within a building, such as electrical and plumbing systems, can qualify, and it is important to be able to quantify these costs. When purchasing a building from a previous owner, the rules on capital allowances are especially complicated and may require the seller to enter into an election, so it is important to consider this in advance.
When do I pay Corporation Tax?
Except for those large companies which have to pay quarterly, corporation tax should be paid 9 months and 1 day after the company year or period end.
If you have a filing period more than 12 months you will need to file 2 corporation tax returns for it, the first always being the 12 month period, and therefore will have two deadlines for the payments.
A little confusing is the fact that the corporation tax return doesn’t have to be filed until 12 months after the period. If corporation tax is paid late it incurs a 3% annual interest charge (as compared to the 0.5% paid to you on tax overpaid or paid early!)
Beware of overdrawn director loans
If a director (who is also a shareholder) borrows money from the company and it is not repaid within 9 months of the year end the company may incur a 25% tax charge (repayable when the loan is cleared), and the director may also be liable to income tax.
Check with your accountant to ensure you are managing money extraction from your business efficiently.