Corporate Tax definition

What is corporation tax

Taxes can be a source of confusion and frustration for business owners. The world of taxes is a complex one, but it is vital that entrepreneurs understand how to pay their taxes correctly, as the consequences for unpaid taxes can be significant – even if it was an honest mistake. Her Majesty’s Revenue and Customs (HMRC) can take ‘enforcement action’ against those who fail to pay their owed taxes – this could include fining you, taking you to court or even closing down your business.

If you are a business owner, there are a number of different taxes you should be aware of. You will need to pay Income Tax, Value Added Tax and Business Rates, as well as National Insurance. But let’s take an in-depth look at Corporation Tax. What is it and who is liable to pay it?

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What is Corporation Tax?

First of all, Corporation Tax mainly applies to limited companies, which are companies that have their own legal identity, separate from the business owner. Sole traders – that is, people who are officially classed as self-employed and stand to lose their own personal assets if their business fails – are exempt from paying Corporation Tax. HMRC specifies that you must also pay Corporation Tax if you operate a foreign company with a UK branch or office, or a club, co-operative or unincorporated association, such as a community group or sports club.

While some might assume that a business should calculate their tax based on their income gained from trading alone, this is not the case. In reality, businesses are required to pay taxes on the money made through investments and selling assets for more than their original price (‘chargeable gains’), as well as trading profits. As soon as the business starts making money, they must pay Corporation Tax.

So, how much money do you stand to lose when you pay Corporation Tax? Well, it is calculated as a percentage of your total income. This percentage has changed over the years; this year, it’s set at 19 percent, but the government has announced that it plans to decrease the tax rate to 17 percent in the next tax year, which starts in April 2020.

The Process

Paying tax can be complicated. Luckily, HMRC offers lots of information, which should make the process easier when the time comes. Here is a short checklist for paying Corporation Tax:

  1. When you start a business (or re-start a dormant business), keep accounting records and register your company with Companies House to receive a ten-digit Unique Taxpayer Reference (UTR) within 14 days.
  2. Register for Corporation Tax. You can do this online via the HMRC website. To register, you will need to have your UTR, your company’s registration number, the date you started to do business and the date your annual accounts are made up to.
  3. HMRC will tell you the deadline for paying your Corporation Tax. Complete a company tax return to work out how much Corporation Tax you are liable to pay.
  4. Pay the total amount of tax required by the deadline. This is nine months and one day after the end of your ‘accounting period’.
  5. Submit your tax return. The deadline for this is 12 months after the end of your ‘accounting period’. You must do this even if you have no tax to pay.

Corporation Tax Deadlines

These deadlines are strict and there are serious consequences if you do not adhere to them. By neglecting their tax responsibilities, business owners risk incurring substantial monetary fines, and losing more money than they would have done by paying the tax itself. HMRC states that businesses that do not submit their tax return by the deadline will be fined £100 the following day. After three months, another £100 will be charged. If you have already missed your tax return deadline twice previously, these £100 payments are increased to £500. After six months, HMRC will create an estimate of your tax bill and add a ten percent penalty on top. After twelve months, another ten percent of any unpaid tax is added to the sum.

It is vital, therefore, that you ensure you pay your tax timely and correctly. This will avoid substantial amounts of money – and stress – in the long run.

Small Business Corporation Tax Definition

Small businesses are responsible for paying the same rate of Corporation Tax as large businesses. However, there is a way to legally reduce the amount of money the company loses through taxation. All business owners should consider their business expenses from the past year. This is because these can be deducted from the business’ profits before tax is taken. In other words, purchases that are essential for the business, such as equipment, machinery and automotive vehicles, can be paid for out of the company’s profits, lowering the tax the company will have to pay. Just remember the rule: these expenses must be ‘wholly and exclusively’ for business use.

Salaries also count as an allowable business expense, so be sure to take your salary out of the company’s profits before tax is taken. This will lower the overall profit of the company and, therefore, the amount of tax it is liable to pay.

Can I get a corporation tax refund?

It is possible for HMRC to refund tax you have paid and pay you interest of 0.5 percent on it, as if it were a loan. This will happen if you pay more tax than your company owes (referred to as ‘repayment interest’) or you pay your tax too early (referred to as ‘credit interest’).

Corporation Tax Help HMRC

Many people struggle to understand their tax obligations, but there is plenty of help out there if you look for it. Meeting with an accountant or tax advisor can be extremely useful if you need someone to look over your business and suggest action. However, you might prefer to use HMRC’s wealth of information – found on the website. Or, you could call the HMRC helpline directly to discuss your situation with a consultant.  

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