Understanding corporation tax for small businesses
Everything Business Owners Need to Know About Corporation Tax
Corporation Tax is the tax that limited companies have to pay on their taxable profits, and it’s collected by HMRC. This means your business needs to pay Corporation Tax on profits from trading – which is your main business activity – money you make from investments and chargeable gains, meaning the money you make when you sell company assets. If your business is a limited company, a foreign business with a UK branch or office, or if it’s a club or co-operative, you’ll need to pay Corporation Tax. When you set up a limited business, you’ll have to register it with Companies House. But, this doesn’t mean that you automatically register to pay Corporation Tax. Instead, you’ll need to register with HMRC separately within three months of starting to do business, including selling, trading, purchasing stock and hiring people. If you don’t register on time, you might have to pay a fine.Corporation Tax Accounting Periods
Your business’ accounting period – which is usually your financial year, covering a 12 month period – is used to figure out Corporation Tax. You have nine months and one day after the end of your accounting period to pay your Corporation Tax bill.Current Corporation Tax Rates
The amount of Corporation Tax you pay depends on how much money your business makes. You will have a Corporation Tax rate of 19% if your business makes up to £50,000 and this increases to 25% if you make over £250,000. If your business’ profits are somewhere in between, you will pay the main tax rate of 25% but it’s reduced by marginal relief. This provides a gradual change in the Corporation Tax rate, depending on your business’ exact profits.Corporation Tax is Calculated on Taxable Profit
Corporation Tax is calculated on taxable profit, not revenue. This is worked out by taking your business’ income and deducting allowable expenses. What you’re left with is your taxable profit, and this figure is used to calculate Corporation Tax.What if a Business Loses Money?
You usually don’t have to pay Corporation Tax if your business loses money, but the loss can still be useful. You can get tax relief by offsetting the loss against your other business gains or profits in the same accounting period, and you can sometimes choose to carry the loss back. This can help with cash flow and to lower future debts.Requirements for Keeping Corporation Tax Records
In order to submit an accurate Corporation Tax return, you need to keep accurate financial records. This means keeping an accurate log of sales invoices, receipts for expenses, payroll records, bank statements, loan agreements and information on any assets your business has bought.By keeping good records, it’s a lot easier to calculate business expenses, spot mistakes early, avoid fines and penalties, and answer any questions from HMRC. These records need to be kept for six years, starting from the end of the business’ financial year they relate to.
Paying Corporation Tax Late
There are strict deadlines about paying Corporation Tax, and paying late can lead to penalties. There are set fines for submitting a late tax return and interest on late payments, and HMRC doesn’t look favourably on businesses that pay Corporation Tax late more than once. Even small Corporation Tax delays can add up to big costs over time.Tips for Effectively Handling Corporation Tax
Put Money Aside on a Regular Basis
Rather than trying to scramble around and find the cash to pay your bill when the deadline is looming, put money aside in the lead up. A lot of businesses put between 20% and 25% of their profits into a separate account, ready for when the time comes to pay.Keep an Eye on Profits Throughout the Year
Don’t wait until the end of the year to find out what you owe, as you could be in for a shock. Check your financial performance on a regular basis and stay aware of your profits throughout the year, so you don’t get any surprises.Plan Big Purchases the Smart Way
If capital allowances apply, buying equipment before the end of the year may lower your taxable profit. Before you jump into making a big business purchase, consider your Corporation Tax options.Claim Every Valid Expense
Use Software for Accounting
Digital bookkeeping lets you keep track of your income, expenses and estimated Corporation Tax bill in real time. There’s also less chance of human error when you use accounting software.Get Help From a Professional Accountant
A lot of businesses choose to hire a professional accountant to help with Corporation Tax, including ensuring compliance, help with planning to pay, optimising tax-efficiency and minimising the risk of mistakes.Common Mistakes Small Businesses Make When Paying Corporation Tax
- Not signing up for Corporation Tax on time
- Getting income and taxable profit confused
- Missing filing deadlines and being fined
- Not claiming all allowable expenses
- Keeping inaccurate or incorrect financial records
- Not gradually putting money aside to pay Corporation Tax
- Failing to prepare for changing Corporation Tax rates caused by growth
- Risking mistakes by not using accounting software
