Basics of Corporation Tax

Calculation of corporation tax is not a process with which most entrepreneurs have significant experience. It is, nonetheless, important to understand a company’s obligations to pay this tax, and the different rates which apply to small and large businesses.

Corporation tax is paid by almost all limited companies, and is assessed on the basis of taxable profits. Unlike the ‘normal’ tax year, the company tax year runs from 1st April to 31st March, and this often catches out inexperienced small business owners. The first thing to do is to check that your accounting year runs to the same date as your company tax year. If it doesn’t, you will need to average out your profit and apportion it accordingly to the company tax year. In order to do this, of course, you will need to calculate your taxable profits. This is not a process which is simple to explain, and it will be best to employ a professional to talk you through the various steps that you need to take. Your taxable profit is not the same as the pre-tax profit which appears on your bottom line each year, as various allowances and deductions have to be made in order to reach the figure payable to HMRC. These include deductions for qualifying expenses, and for so-called ‘capital allowances’, which reflect the cost of buying capital assets.

Corporation tax attracts a 20% rate on taxable profits, and this ‘small profit’ rate applies up to £300,000 of profit. The ‘main rate’, which applies to all profits above the £300,000 limit is currently 24%, although it will be reduced to 23% by the Chancellor from April 2013 onwards. It is also possible for businesses to claim marginal tax relief on profits between £300,000 and £1.5 million, which means that a sliding scale of tax is paid within this band. The exact amount of this sliding scale will need to be calculated by an accountant, and exists to encourage growth in the medium size sector of businesses.

In order to comply with your corporate obligations to HMRC, you will need to file a company tax return each year, which is usually done online. Confusingly, this is not the same as the deadline to actually pay your corporation tax. You must pay by 9 months after the end of the corporation tax accounting period, but your company tax return does not need to be filed until 12 months after the end of the accounting period. In order to simplify matters, however, it is best both to pay and to file your return at the same time. If you are a large enough business to attract the main rate of corporation tax, it is usually possible to arrange payments by instalments.

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