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What Is It Exactly That You Need to Know About Corporation Tax?


If you manage or own a limited company, then you definitely have to be familiar with what corporation tax implies.

Since the rules for calculation are complex and regularly amended, we strongly recommend that you hire a qualified accountant to calculate and prepare your statutory accounts and corporation tax return. Nonetheless, we consider that understanding some of the basic might benefit your business.

Corporation Tax: how is it calculated?

The current rate for a small business is 20% and it is calculated upon the respective limited company’s net profits. Here is an example:

EXAMPLE                                                                         Amount

Sales                                                                                £500,000

Expenses                                                                        (£420,000)

Net Profit **                                                                      £80,000

C.T. @ 20%                                                                     £16,000

** Keep in mind that net profits must be calculated before deducting dividends.

There are certain expenses that cannot be included in a business’ accounts, but which are excluded from taxable net profits. The most common such types of expenses are:

• Depreciation

• Gifts worth more than £50

• Entertainment

• Amortisation (there are some exception, so contact your accountant for further information)

• Travel between business place and home

• Personal expenditure that has no relation to the business

The basics of Capital Allowances

There is a special set of rules when it comes to capital expenditure, rules that considerably change from one year to another. Depending on the types of purchased assets and the current capital allowances, you may pay less or more corporation tax. This is the reason why it is highly important for you to keep up to date with the latest regulations before purchasing important capital items.

Deadlines for Corporation Tax payments

Corporation Tax payments are usually due by nine months and one day after your business’ accounting period ends. For example, if your Company Tax Return is covering an accounting period that ranges from January 1st 2011 to December 31st 2011, then your Corporation Tax has to be paid no later than October 1st 2012. It is your company’s responsibility to calculate how much Corporation Tax must be paid and pay it on time. Otherwise, HMRC will have you pay interest.

Decreasing the Corporation Tax bill

There are several strategies that can help you lower your bill:

1. Making employer pension contributions. Pension contributions are tax deductible, hence tax efficient. However, you must ask for advice from your accountant in order to make sure that you are choosing the best options.

2. Investing in capital equipment, thus utilising capital allowances.

3. Investing in your business for future growth. Though they might reduce your profit, these expenses are tax deductible and might generate greater profits in the near future.

4. If you own multiple companies, you might want to consider grouping them for tax considerations. However, if one of them is causing you losses, you might want to ask for your tax advisor’s or your accountant’s advice.

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