Here is your one-stop guide to corporation tax.
What is Corporation Tax?
If you run a business, you are bound by law to file your corporation tax returns and then pay the federal government a tax on the amount of profits you have made in the fiscal year.
While you use accountant to prepare your tax returns and to calculate the tax liability you have, it is important not to ignore it and leave everything to the end of the year. The way you manage and finance your business can have a significant impact on how the final bills appears.
Here are the important things to take care of when dealing with corporation tax.
1. Calculating the Taxable Profit
All the profits made during a specific accounting period are to be subjected to corporation tax. Profits for the business can be made from different sources, as mentioned below
- Trading Profits: This is the income made by the company by indulging in trading activities. It includes the less allowable expenses like raw material and labour costs
- Capital Gains: These are the profits that are made from selling some assets of the company. For instance, if you sell a factory and make profit through it, the profit will be subjected to taxes unless you have reinvested the money in something else. However, the capital gains that are earned in a trading subsidiary through the sale of shares can be exempted.
- Income you make from letting out buildings or land
- Interest you are earning on any money that is held as deposit.
- Any other forms of capital gain or income, for example, profits made on currency movement or the share of income in partnership
You need to calculate the profits from each source of income separately as the rules of income and expenditure are different for each.
2. The Accounting Period
A company is subjected to corporation tax on the profits it makes in an accounting period.
- The accounting period, in most cases, runs to the financial year of the company
- If the company is ceasing to trade or is going into liquidation, it triggers the end of an accounting period for the firm
- In cases where the tax year and the accounting period of the company does not coincide, profits need to be time apportioned so that the rate applied can be decided
3. How Much Tax?
The rate of corporation tax for companies was set to 20% on all profits since 2015. However, for the accounting period of 2017/18, the rate has been set to 19%.
It is the responsibility of the company to make sure that they file their corporation tax in time and that the due payment is also made on time. In most cases, companies are required to pay their corporation tax within nine month and a day of their accounting period.
- The rule is applied to companies that are small or medium sized
- It is mandatory to pay the tax amount in full at the date it is due, regardless of whether or not the figures shown on the return are challenged by the HMRC
- In case of late payment, interest in charged
In case of larger companies, the following apply
- The tax can be paid in quarterly instalments
- The first instalment is to be paid within 6 months after filing
Two payments are to be made within three months and the remaining balance is to be paid within 3 months and 14 days before the end of the accounting period