UK Corporation and company tax

What is a corporation tax?

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A corporation tax is government tax that every UK registered company is required to pay. Companies, just like people, are subject to government income taxes.

The corporation tax is calculated using the company’s profits. If you set up a limited company, your company will be asked to pay corporation tax on any profits that it makes. Income for companies is a little bit different than income for individuals, but similar to how sole traders pay taxes. That means that companies may deduct various expenses from their revenue to calculate the final profit number.

What is the UK’s corporation tax?

The UK corporation tax in 2020 is 19%. Corporation taxes tend to be lower than personal income taxes.

What are taxable profits?

Taxable profits are the profit (or loss) against which corporation taxes are payable. Taxable profits are determined based on specific HMRC rules that determine which expenses and costs can be deducted from the company’s revenue before income taxes are chargeable on the remainder. In general terms, the company will pay taxes on any capital gains it has realised or if it has sold off assets at a profit. We strongly recommend that you hire a professional accountant or accounting firm to ensure that your company completes relevant tax returns correctly.

What is a financial year?

A financial year is a 12-month period that HMRC uses to determine the company’s tax liabilities. Companies pay taxes based on a 12-month accounting period. The company may set its own start and end date for the financial year, but it has to be a 12-month period. Sometimes are you allowed to change these dates, but caution is required as this may impact the company’s other obligations (such as bank borrowing).

You must keep accurate corporation tax records. This is a legal requirement. These records show your company’s income and expenditure. The good news is that on-line banking and on-line accounting tools like Xero, make this record keeping much easier.

The company must file its corporation returns within 12 months of the financial year-end. You must pay any taxes due within 9 months after the financial year-end. If you are lucky enough to have a business with more than £1.5m in profits, then you may be able to pay taxes installments. We can’t stress enough that getting an accountant to look after your company’s taxes is a very good idea.

You can submit your corporation tax return on-line.

Are there tax benefits to being a company?

Yes. Companies enjoy specific tax reliefs and allowances that are not available to individuals (even to sole traders).

Some of the biggest relief & allowances are associated with investments and capital allowances. For example, a company may get an investment allowance into research & development and different capital allowance for purchasing tools that are needed for such work. Please check with your accountant what your company can claim.
Currently the annual investment allowance is set at £1 million.
For research and innovation companies, Research & Development credits are a fantastic relief that can help your company innovate. We, at MachFast.com have benefited from this allowance.
What are allowable expenses for companies?

As long as HMRC allows the expense, your company may deduct these expenses from taxable profits. Most business costs are allowable expenses- office rent, insurance, salaries, travel, etc.. You must be careful if you pay for something that has a personal and business value. In that case you must carefully split what is personal and what is business. The business can not deduct costs associated with client entertainment – there are very specific rules around this. HMRC has a good guide on the topic that you may find helpful.

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