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Corporation Tax – The Basics

A basic introduction to Corporation Tax for Limited Companies…………..

 

What is Corporation Tax?

  • It is basically the equivalent of income tax but for Limited Companies.
  • It is a tax on the profits of the Company.

 

Does it apply to me?

  • If you are running an active Limited company then yes!
  • Your company will need to submit a Corporation Tax Return every year, regardless of whether profits or losses are made.
  • The exception to this is if you are not yet trading, or are no longer trading. Non-trading companies are not required to complete Corporation Tax Returns.

 

How is it calculated?

  • In order to work out a company’s Corporation Tax liability, the first thing which needs to be done is calculating the taxable profits of the company.
  • This involves adding back on to the normal profit or loss of the company certain items which HMRC don’t allow for the purposes of Corporation Tax.
  • Examples of items not allowed are: business entertaining, clothing which cannot be classed as a uniform, depreciation of company assets…
  • But you can deduct other items which are allowed, such as capital allowances: money spent on big value items.
  • You can also offset any trading losses from past years.

 

Lost at this point?

  • Don’t worry! This is where your accountant and/or FreeAgent come in!
  • When it comes to calculating what profits are actually taxable it can get messy if you’re not trained, well read, or experienced in doing so.
  • I would always recommend getting help on this unless you are really confident that you know what you’re doing. Even if it’s just someone ‘in the know’ to cast an eye over your calculations.
  • The FreeAgent bookkeeping software keeps track of the expenses and items which are not allowed by the way you have classified things, and automatically calculates your taxable profits based on the information you have entered.

 

What are the current rates of Corporation Tax?

  • There are 2 set rates of Corporation Tax.  Plus an extra ‘grey area’ rate.
  1. 1.    Small Profits Rate          20%                        For companies with less than £300,000 yearly profit.
  2. 2.    Main Rate                        24%                        For companies with profits over £1,500,000.
  3. 3.    Marginal Rate                variable                For companies with profits between £300,000 and £1,500,000. It is calculated based on the profit you have made.
  • The rates do change, not necessarily every year, but fairly often. The rates above are correct for the year 1st April 2012 to 31st March 2013.
  • A link to the marginal rate calculator on HMRC website is here
  • The profit bands can differ if you have what is known as an Associated Company.

 

What is an Associated Company?

  • Broadly speaking, if the Director of a company is also the Director of another company those two companies are considered to be Associated. Or if one company has control over another.
  • Companies can also be associated if, for instance, a husband and wife each had a company and one company had loaned the other money. The people are associated, and the companies are financially linked, therefore the companies are considered to be associated.
  • You can have any multiple of associated companies.
  • The two (or more) associated companies have to share the profit allowance if both were trading for any part of the year.
  • So if the taxable profits of two associated companies are more than £300,000 they will need to be charged at either marginal or main rate, even if each company’s profit was lower than £300,000.
  • This is quite a complex bit of legislation – take advice if you’re unsure whether you have any associated companies. And also on what effect this will have on your company’s tax affairs.

 

How are the rates applied to taxable profits?

  • The rates and profit limits apply from 1st April to 31st March each year.
  • This is called the Corporation Tax accounting period.
  • This is not the same as your company tax year which may run from any month to any month.
  • If you have a January to December company accounting year, you will need to apply one set of profit bands and rates to the January to March profits, and another to the April to December profits.
  • You would assume that profits were made at an equal rate throughout the year.

 

  • For example,

Total profits of company X January to December                   £120,000             

Profits for January to March rate (£120,000÷12×3)            £  30,000

Profits for April to December rate (£120,000÷12×9)            £  90,000

 

When and how is it reported and paid to HMRC?

  • You will need to submit a Corporation Tax return within 12 months of the end of your company’s accounting period.
  • But you need to pay your Corporation Tax within 9 months and 1 day of the end of your company’s accounting period (for small companies).
  • So it’s quite usual for companies to do their return and make payment within the 9 months and 1 day deadline.
  • Corporation Tax returns need to be filed online via the HMRC website.
  • Payment to HMRC can be made online via the Billpay system.

 

I want to change my company’s accounting dates – can I do this?

  • Yes!
  • You need to inform Companies House (online) of the change to your company’s financial year.
  • The change in this information will automatically filter through to HMRC.
  • You will then be able to select the relevant period or periods to file returns for.
  • If the new end date makes the total period being reported less than 12 months you can do one Corporation Tax Return.
  • If the new end date makes the total period being reported longer than 12 months you will need to do two Corporation Tax Returns: one for the first 12 months, and another for the extra months.

 

This all seems like an awful lot of faff for small, one-man-band companies!

  • You’re right, it is!
  • The good news is that HMRC are looking at how they can make the whole tax system simpler, easier to understand, and easier to deal with for small businesses.
  • There are some proposed changes to the existing systems which HMRC have set out in a document. You can read this here 

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