Corporation tax is charged on profits earned by companies. There are many ways to reduce the amount you pay in corporation tax. You might want to look into some of them.
Which businesses must pay corporation tax?
Limited companies must pay corporation tax regardless of where they are based. This includes companies incorporated in the UK, Ireland, Jersey or Guernsey. They must pay corporation tax on any income earned in the UK. However, they don’t have to pay it on profits generated outside the UK.
Companies trading in the UK must still pay corporation tax, even though they aren’t registered here. A limited company must file accounts every six months with HMRC. These accounts show whether the company has paid any corporation tax. If it hasn’t, it could face penalties.
Any organisation that makes profits in Britain must pay corporation tax. This includes charities, public bodies and many businesses.
Who is exempt?
A sole trader doesn’t have to pay corporation tax – even if they’re not making any money. A charity doesn’t have too either. And if you’ve shut up shop and haven’t made any profits, you’ll still have to tell HM Revenue & Customs (HMRC).
The rules around paying corporation tax are fairly straightforward. You must make a profit, and you must declare it. But what happens if you’ve gone into liquidation? What if you’ve just closed down and haven’t been able to sell anything? How do you know whether you’re making a profit?
If you’ve got no employees, there’s no way of knowing how much you’re earning. So, if you’re a sole trader, you won’t be able to claim expenses like rent or utilities. And if you‘ve got no customers, you can’t charge anyone for anything.
But HMRC says you still have to pay corporation tax. Even if you’ve closed down and aren’t making any money. They say you have to keep track of your income and outgoings, because you might be entitled to a refund later.
So, if you’ve had no sales since January 2017, you’d better start keeping a close eye on your bank account.
Who is accountable for payment?
Corporation tax is an obligation of each company, no matter whether it pays dividends or does not pay dividends. You are entitled to claim deductions against your income tax return for corporation tax paid out of profits. This is called ‘carry forward’. If you don’t carry forward your corporation tax liabilities, you’ll end up owing money next year.
You must keep records of your corporation tax liabilities throughout the year. This includes information such as:
• What type of business do you run?
• How much did you earn during the year?
• Did you make any distributions to shareholders?
• Was there any dividend declared?
• How much was the dividend per share?
Profits subject to tax up to £1.5 million
The tax year runs from April 4th to March 31st, and corporations must file their accounts on or before June 30. If you are expecting to make over £1.5 million in taxable profit during the tax year, you should consider filing an annual return. This includes self-employed people, sole traders, partnerships, limited companies and trusts.
taxable income in excess of £1,500,000
If you make over £150,000 per annum, you are likely to have some form of self-assessment tax liability. If you do, it’s important that you meet the deadline for filing your tax return. This is because HM Revenue & Customs (HMRC) will begin to assess your tax liability based on the information contained in your return. Failing to submit a return on time could mean penalties and interest charges.
The deadline for submitting a return is 31 January 2020. However, there are exceptions to this rule. For example, if you are exempt from paying tax under certain circumstances, such as being retired or having no UK earnings, you don’t have to file a return.
You must file an annual return if you have taxable profits of more than £151,850 in the current financial year. A profit is defined as money received from selling goods or providing services. Profits include cash, shares, dividends, royalties, rent, interest and bonuses. Any amount paid out to shareholders is considered to be a dividend.
Profits aren’t always easy to calculate. In fact, many people find it difficult to work out how much they earned in total. Fortunately, HMRC provides a calculator online that allows you to estimate your profits. Simply enter the figures into the tool and press Calculate. The tool will provide you with a figure that represents your net profit.
However, if you want to know exactly what you earned in the previous financial year, you will need to complete Form P11D. This document asks you about every source of income you had during the year. It includes amounts received from investments, pensions, dividends, rental property, loans, gifts, prizes, awards and commissions. You will also have to declare any capital gains you made, including those arising from the sale of assets.
In addition, you will need to report any expenses incurred while running your business. These include costs associated with running your premises, advertising, office supplies, travel and entertainment. Finally, you will need to list any payments made to employees.
Ways to pay
HM Revenue & Customs (HMRC) has announced it will no longer accept payments via pre-paid cards, such as Mastercard PayPass, Visa Checkout and American Express Serve. Instead, customers must now use either debit or credit card payment methods. This change applies to both online and telephone transactions.
The move follows the introduction of new rules aimed at increasing tax compliance. These include a requirement for businesses to report VAT invoices within three weeks of receiving them, and the ability for HMRC to access data held by third parties to help identify undeclared income.
In addition, the government has introduced a range of measures designed to make paying taxes easier for individuals. These include allowing people to apply for an Individual Voluntary Arrangement (IVA), and making it possible for someone to claim back some of their tax liability if they are unable to work due to illness or disability.
Frequently Asked Questions
How much is company tax in the United Kingdom?
The corporation tax main rate in Great Britain is set at 19%, according to HM Revenue & Customs. This applies to businesses that earn profits over £150,000 per annum (£1 million annually). Businesses with annual turnover of under £15,000 don’t pay any corporation tax.
The rate will remain at this 19% level for the next 2 fiscal years, thereby reversing a prior promise by the previous Conservative/Liberal Democrat coalition government to cut the rate to 17% from April 2022.
From April 2023, if a business’ taxable profits exceed £250,000 then they will be taxed at 25%. However, if a business’ total income is less than £50,000 then the maximum amount of tax they will owe will be 19%.
What are the corporation tax reliefs?
There are corporation tax reliefs that you might want to consider, depending on what kind of company you run. Here we look at five of the most common ones.
Research & development (R&D) Relief : you may be able see this if your company works in R&D. In general terms, if you spend money developing something new, you can deduct 25% of the amount spent against your corporation tax liability. This applies to both research carried out by employees and contracts awarded to suppliers. If you don’t qualify for R&D relief, you still have another option – the Patent Box. A lower rate of corporation tax may be available on profits earned from patents.
Creative Industry Tax Reliefs : this allows companies working in the creative industries (such as film, TV, video games, etc) to claim deductions based on the value of their intellectual property. For example, if you invest in music production equipment, you may be able to deduct up to 50% of the cost against your corporation tax bill. You must meet specific criteria to qualify for this type of relief.
Disincorporation Relief : this allows a company to transfer its assets to its shareholders (e.g. when it changes from being a limited company to becoming a sole trader or partnership). The company doesn’t pay corporation tax on the disposal of those properties.
Terminal, Capital and Property Income Losses, and Trading Losses : there are limits on how much of these types of losses you can carry forward each year. These include losses from trading, the sale of a capital asset or the disposal of property.
Marginal Relief : this allows companies to take a tax break if they have profits between £300,00 and £1.5m that were generated before 1 April 2015. This includes dividends from shares held for less than three months, interest payments, royalties and gains from the disposal of assets such as land or buildings.