Limited companies in the UK, along with certain other types of organisations, are required to pay corporation tax. Its is based on on how much money a company makes each year in profits.
You are required to pay taxes on any profits you make; however, there are deductions and allowances available to you that can help you lower the amount of taxes you owe as a result of your business activities.
The following are the aspects of a limited company that are subject to corporation tax in particular:
Earnings that are a result of conducting business, also known as trading profits
Gains that are subject to taxation can be realised from the sale of assets like land, property, shares of stock, and machinery.
Who has to Pay Corporation Tax?
Every limited company operating in the UK is subject to paying corporation tax. Sole proprietorships and partnerships are exempt from paying corporation tax; however, these types of businesses are required to file a tax return and pay income tax on any profits they make.
However, there are other organisations that may be required to pay corporation tax even though they are not structured as limited companies.
These organisations are not incorporated and are the following:
Associations requiring membership
Groups such as clubs and societies
How much is the government’s levy on businesses in the UK?
The primary rate of corporation tax in the UK is currently set at 19 percent, and this rate applies to all business profits. The rate will remain unchanged at its current level for the next two years, contradicting an earlier promise made by the government to lower it to 17 percent beginning in April 2020.
Changes to the Corporate Tax rate for April 2023
The forthcoming alterations to the corporation tax rate were announced by the government in the Budget 2021 document.
If your taxable profits are more than two hundred fifty thousand pounds after April 2023, you will be subject to an upper limit of twenty-five percent of those profits. If your annual profits are less than £50,000, you’ll be subject to a lower limit rate of 19 percent instead of the standard rate of 20%. If your profits fall somewhere in the middle of the lower and upper limits, then you will be subject to a marginal tax rate that is equivalent to 26.5 percent, but you will also be eligible for marginal relief.
How to Register for Corporation Tax
You will be required to register for corporation tax if you intend to begin operations through a limited company. You can make these changes by logging into the HMRC section of the Gov.uk website.
Among the information that will be required from you are the following:
Company Registration Number
Start Date of the Business
The primary address
Classification of a company
List of the directors along with their home addresses
You have got to get this done within the first three months of starting your business. It is the responsibility of the director of the company to complete the company’s tax return, submit it, and then pay the tax bill.
You have the option of hiring an accountant to handle this on your behalf; however, the director of the company is ultimately responsible for it from a legal standpoint.
Submitting a tax return for a company
Annually, you are required to prepare a company tax return using form CT600. Additionally, you are required to submit company accounts to HMRC as well as Companies House.
Your tax calculations, as well as the allowances and reliefs that you’ve made use of, are some of the things that you’ll need to include in the CT600. You’ll also need to include your turnover and profit for the reporting period.
After doing so, you will then be informed of the amount of corporation tax that you are required to pay.
Keep in mind that the deadline for filing the tax return for your company is one year after the end of the accounting period that the return covers.
You are required to file a CT600 to declare this situation regardless of whether or not your company is operating at a loss.
If your annual profits are greater than £1.5 million, you will be required to make your payments in instalments rather than all at once. The dates on which these payments are due are determined, among other things, by the size of your company as well as the duration of the accounting period.
Payments are typically expected to be made on the first, 15th, 30th, and 60th days of each quarter for a typical year-long period, with the last two payments due before the end of the accounting period.
The instalments will reflect an estimate of the corporation tax liability due to be paid for that accounting period, and a revision will be required once the ultimate liability is computed following the period’s conclusion.
When is the deadline for paying Corporation Tax?
The deadline for filing Corporation Tax is different from that of other taxes. It is required that you pay it before you file the tax return for your company. This indicates that the date by which it needs to be paid depends on the accounting period used for your corporation tax registration.
Your corporation tax bill must be paid in full nine months and one day after the close of your accounting period during the preceding fiscal year. If your accounting period ends on December 31 each year, then the due date for your bill is October 1.
According to the information presented in the preceding paragraph, you will be responsible for paying off your bill by the specified due date. Should you fail to comply with this requirement, you risk incurring fines and other penalties, which will be discussed further on in this post.
Relief you May be Entitled to
The following are some potential avenues to investigate in order to assist you in paying less in corporation tax to the government.
You are eligible to make a claim for certain specific business expenses because they contribute to the smooth operation of your company; consequently, you can calculate the profit of your business by deducting these expenses from your income.
As a direct result of this, you are exempt from paying tax on these items. Check out this post for a comprehensive list of business expenses that are acceptable to HMRC.
The Super Deduction
The Chancellor made the announcement regarding the Super Deduction in the 2021 Budget. This tax break could be available to you and your company if you invest some of the money that your company has set aside for other purposes. If that investment is in qualified plant and machinery after April 1, 2021, then you will be able to deduct that expense from your taxable profits at a rate of 130 percent. This benefit will apply to the cost of the expenditure.
This means that if you spend $100,000 on assets that qualify for the deduction, then you may be able to reduce your overall tax liability by $24,700.
Considering the modifications that will be made to the corporation tax beginning in April 2023, you and your accountant will need to consider the following:
What the future prospects are for the profitability of your business in the coming years
What kind of an effect will the Super Deduction have on the proportion of those profits that will be taxable as corporate income?
Is it worthwhile to bring forward your plans to make an investment?
R&D tax relief
Do you have any projects that are aimed at the creation of new products, processes, or services, or the improvement of those that already exist in such a way that they contribute to advances in science or technology?
If this is the case, you may be eligible for R&D tax relief; click on the link for further information about this topic.
In circumstances such as these, and depending on whether or not you are eligible for the SME scheme, tax relief may be provided in either of two ways.
If your company generates a profit, you may be eligible for tax relief in the form of an increased deduction from taxable profits at a rate of 130 percent of the qualifying R&D expenditure. This deduction helps reduce the amount of tax you owe.
In the event that your company generates a loss, you have the option of handing over all or part of the loss in exchange for a tax credit of 14.5 percent that is refundable from HMRC. This indicates that HMRC is able to make a payment to you in cash.
The Patent Box
If the success of your company can be directly attributed to patented goods, methods, or procedures, you may be able to reduce the amount of tax that you are required to pay.
For profits that can be attributed to patents that generate income in the UK and Europe, the Patent Box Tax Regime enables a reduction in the corporation’s tax liability to a rate of ten percent, bringing the total rate down to ten percent. You can learn more about this by following the link provided above.
The Annual Investment Allowance (AIA)
The Annual Investment Allowance is a tax deduction for capital expenditures, specifically the acquisition of apparatus in the form of tools and machinery. The way it works is that you can deduct this particular expenditure from your taxable profits for the year, but there is a cap on how much you can deduct.
Capital Allowances on Property
Capital allowances guarantee capital expenditure can be charged against your annual pre-tax income. In order to determine whether or not you are eligible for capital allowances, you should investigate the costs that you have incurred related to your commercial property.
Because of this, you are also able to look back at historical data, as the claim does not need to be submitted at the time that the costs were incurred. This indicates that you may be eligible to claim lost allowances dating back a number of years.
Share Schemes for Employees
If you participate in a qualified employee share plan, you might be eligible for a reduction in the amount of corporation tax you have to pay.
Be sure to get professional guidance regarding which programmes this pertains to and which option would be most appropriate for the conditions of your company.
Your company may be willing to pay for training as well as subscriptions to related materials if they are important to the operation of your business. This eliminates the possibility of your staff members having to pay income tax on the cost of these benefits. These expenses can be deducted from the company’s taxable income.
If you throw an annual staff party, say during the summer or at Christmas, and the cost is up to £150 per person, then your employees do not have to pay taxes on their pay for that party, and the company can deduct the cost from its taxes. These types of events serve as a thank-you to employees for their hard work and contribute to increased employee brand loyalty.
It is imperative that you make use of loss reliefs whenever they are applicable. Depending on the nature of the losses, they might be able to be carried over to a prior year, which would result in a tax credit, or they might be applied as a credit against future profits.
Penalties for both late filing and late payment
The following penalties will apply if a company’s tax return is filed later than required:
1 day late £100
3 months Another £100
6 months HMRC estimate your bill and add a 10% penalty on
to what they think your liability is
12 months An additional 10% is added to the estimated liability
If you are late with your payments, interest will be added to the total amount that you owe, and you may also be subject to additional fees or surcharges.
In addition to this, HMRC has the ability to pursue debt recovery via any of the following methods:
Use debt collection agencies
Taking the money out of your bank account or building society without going through an intermediary.
Sale of your personal possessions
Launching legal action in court
Close your business and/or make you bankrupt.
If it turns out that you made an error on your company’s tax return, the HMRC may assess a penalty against your business. It is dependent on the choice that they make.
In the event that you acknowledge that the mistake was made inadvertently, the proportion of your tax liability that is affected could range anywhere from 0 to 30 percent. If, on the other hand, HMRC discovers the error, the percentage will increase to between 15 and 30 percent.
When HMRC discovers that an error was made on purpose but was not concealed, the penalty ranges from 20% to 70% of the error’s original value depending on whether or not you disclosed it to them. If they reveal it, then the chances of that happening increase to between 30 and 70 percent.
Lastly, if the HMRC determines that an error was made on purpose and that attempts were made to cover it up, you will be subject to a charge that ranges from 30 to 100 percent, depending on whether you disclose the matter or not. If you don’t disclose the matter, you will be subject to a charge that ranges from 50 to 100 percent.
Alterations to your company’s tax return are also permissible; however, they must be made and submitted no later than one year after the original filing deadline.