What is corporation tax? Everything you need to know as a small business

If you run a small business or are thinking of starting one, you might be asking yourself this question. In this blog, we’ll tell you everything you need to know about corporation tax. What is Corporation Tax All you need to know is a small business.

What is corporation tax?

Corporation tax is a tax that public limited companies must pay on their profits. The tax is applied after salaries and other expenses have been deducted from the company’s income, but before dividends are paid.

All corporations are subject to corporation tax, whether large or small. Independent traders, on the other hand, do not pay corporation tax.

You will also have to pay corporation tax on profits from commercial activity as:

  • A foreign company with a UK branch or office
  • A cooperative, club or other unincorporated association, such as a sports club or community group

Businesses must pay corporation tax on the profits they make from:

  • Doing business (business profits)
  • Selling assets for more than cost (taxable gains)
  • Investments

UK-based companies will pay corporation tax on all their profits, whether they are UK or overseas.

Foreign-based companies that have an office or branch in the UK will only have to pay corporation tax on the profits of their UK business.

You must register for corporation tax as soon as your company starts doing business. Most companies do this at the same time as registering with Companies House.

You must register for corporation tax within three months of starting your business, otherwise you risk a penalty. “Doing business” includes any sale or purchase, advertising, rental of property or employment of anyone.

If you don’t know what matters to start doing business, you can check here.

What is the corporation tax percentage?

The corporate tax rate for corporate profits is currently 19%. This is set to increase to 25% from 2023 for businesses over £250,000.

You will pay corporation tax at the rate that applied during your company’s accounting period for corporation tax. Your accounting period is the period covered by your corporate income tax return.

The corporate tax rate has been 19% since the fiscal year began on April 1, 2017. In 2016 and 2015, it was 20%. For profits made before April 1, 2015, the rate you pay depends on the size of your profits.

If more than one rate applies to your accounting period, you will need to determine the number of days for each rate applied, and then determine the amount of tax due for each.

For example, if your accounting period was from January 1, 2017 to December 31, 2017:

  • The first 90 days of your accounting period would fall in the fiscal year beginning April 1, 2016 (January 1, 2017 to March 31, 2017). You would pay the 2016 rate for those 90 days (20%)
  • The remaining 275 days of your accounting period would fall into the fiscal year beginning April 1, 2017 (April 1, 2017 to December 31, 2017). You would pay the 2017 rate for those 275 days (19%)

Company tax allowances and rebates

There are allowances and deductions that you can claim on your corporation tax.

You can deduct the costs of running your business from your pre-tax profits. If you or any of your employees derive personal use from anything, you should treat it as a benefit.

Some expenses are not eligible for corporation tax – for example, entertaining clients. These costs must be added back to your profits when preparing your corporation tax return.

You can claim capital cost allowances on assets you buy to keep and use in your business. This may include:

  • Machinery
  • Equipment
  • Vehicles, for example cars, trucks or vans

You may also be able to request other relief, including:

  • Aid for research and development (R&D)
  • Creative Industries Relief (CITR) if your business profits from film, television, theatre, video games or animation
  • The Patent Box if your business benefits from patented inventions
  • Disincorporation Relief if you close your business to become a sole proprietorship, limited partnership or ordinary general partnership
  • Relief on goodwill and other relevant assets, such as unregistered trademarks and customer relationships
  • Commercial losses
  • Terminal, capital and property income losses

You may be able to claim marginal relief, but only if your business made profits between £300,000 and £1.5 million which were either:

  • From oil or extraction rights in the UK or on the UK Continental Shelf
  • Before April 1, 2015

Paying corporate tax: when and how?

To pay your corporation tax bill, you will need to:

  • Keep accounting records and prepare your business tax return to determine how much tax you owe
  • Pay your tax before the deadline. The deadline will be nine months and one day after the end of your accounting period. If you have nothing to pay, you must also report it before the deadline
  • File your business tax return before the deadline. The deadline is usually 12 months after the end of your accounting period

The above time limit does not apply to companies with chargeable profits of more than £1.5 million. These companies will follow a different process and pay in installments.

It’s a good idea to seek advice from an accountant to make sure you’re meeting your obligations and running your business in a tax-efficient way.

If you are concerned that your business is in financial difficulty, we can help. We have many years of experience helping struggling businesses. Get in touch with Hudson Weir today https://www.hudsonweir.co.uk/ – they are always happy to chat.

This article was originally published here.

Luisa D. Fuller