A Beginner's Guide to Corporation Tax

Your business has to pay Corporation Tax on its taxable profits if it is an incorporated business, in other words a business which has registered as a company with Companies House. These taxable profits include money that a company makes from doing business, known as ‘trading profits’, rental income from property, investment gains and other chargeable gains.

Your company will be UK resident if it was incorporated in the UK and /or it is centrally managed and controlled in the UK. If your company is resident in the UK, it will be liable to pay tax on worldwide profits earned there.

The rate of Corporation Tax is decided in advance and announced in the Chancellor’s Budget. The rate of Corporation Tax is currently 19% but is set to fall to 17% from 1 April 2020. This is true for England, Wales and Scotland but in Northern Ireland, the rate fell to 12.5% on 1 April 2018.If you have not registered your business as a company with Companies House, you will not be liable to pay Corporation Tax.

Instead, you will be required to pay Income Tax on the profits for your business.

Registering for UK Corporation Tax

HMRC requires a company to register for Corporation Tax within three months of starting to trade – i.e. when business transactions begin or your company starts to receive income. If you don’t register within this three month period, your company may be liable to penalties.

What you’ll need to tell HMRC:

• The date you began to do business (this will be used as the start date of your company’s first accounting period)

• Your company name and registered number (provided to you by Companies House when you incorporated your company)

• The main address you do business from

• That kind of business you do

• The date you’ll make your annual accounts up to (see Accounting Periods)

• The name and home address of the company directors.

HMRC will use this information to work out when your company must pay Corporation Tax.Your company will not be required to register for Corporation Tax if it is dormant – i.e. not trading. For specific guidance from HMRC as to whether your company is considered to be trading, please click here.

Paying Corporation Tax

It is your company’s responsibility to calculate how much Corporation Tax it owes HMRC and disclose this in a company tax return. For Corporation Tax purposes, your accounting period is the period covered by your company’s tax return and cannot last longer than 12 months.

It is important to remember that your Corporation Tax accounting period will not always be the same as your financial period – i.e. the period that your company creates financial statements for.

For example, if you have a period in excess of 12 months for financial statement purposes, you will need to submit two tax returns for the period as they cannot exceed 12 months.Your company’s Corporation Tax liability will be calculated in what is known as a Corporation Tax computation.

This will be submitted to HMRC along with your company’s tax return as evidence that you have calculated your tax liability accurately.

Working out your company’s Corporation Tax liability involves calculating a number of different items which will be explained in the section below:

• Tax-adjusted trading profits

• Disallowable expenditures

• Capital allowances

• Non trading loan relationships (e.g. bank interest income)

• Property income

• Chargeable gains

 It is important to remember that HMRC can make enquiries about any company tax return, no matter the size of a business. Therefore you should retain your financial and company records and we suggest using cloud accounting software, such as QuickBooks, to ensure efficient and accurate record keeping, all on the cloud.

Calculating Tax-Adjusted Trading Profits

Your Corporation Tax is calculated as a percentage of your taxable profits. Your trading profits which you publish in your accounts (revenue minus expenditure) are not your taxable profits. You must calculate your tax-adjusted trading profits in order to pay your Corporation Tax.

Disallowable Expenditure

Expenditure is a complicated topic within tax. HMRC does not allow you to deduct certain expenditure from your revenue (known as disallowable expenses). You must add 100% of the value of these expenditures to your profits, increasing the amount you’re required to pay Corporation Tax on.Some common expenditure which HMRC disallows include:

• Depreciation of assets

• Entertaining clients and suppliers

• Movements in general provisions

• Remuneration not paid within 9 months of the period end

Capital Allowances

As we’ve already seen, depreciation of fixed assets is not allowable (can’t be deducted from profits) for Corporation Tax purposes. This is because depreciation can only ever be an estimate of the reduction in value of your assets and can be subjective. However, capital allowances may be available to take account of the cost of plant and machinery used in the business.

Annual Investment Allowance

Firstly the annual investment allowance (AIA) allows you to deduct 100% of the value of certain qualifying assets from your taxable profits, up to a value of £200,000. The amount of qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020 will go up from £200,000 to £1m.Capital purchases such as machinery, fixtures, fittings and computers qualify for AIA. It is worth noting that land, buildings and cars do not qualify for AIA. Until April 2020 some types of energy-saving equipment also qualify for a 100% first year allowance.

Writing Down Allowance (WDA)

Those assets which don’t qualify for AIA, or where you have purchased assets in excess of the AIA limits, may still qualify for capital allowances if they fall into one of the following ‘pools’:

• Main pool (18% WDA)

• All plant and machinery assets are added to the main pool unless they specifically qualify for a separate pool such as the special rate pool.

• Special rate pool (6% WDA)

• A new 2% non-residential structures and buildings allowance (SBA) is available where contracts for physical construction works are entered into on or after 29 October 2018.

• Assets qualifying as ‘integral features’ to a building, high emission cars or assets with an expected useful life in excess of twenty five years.

Please note that there are special rules relating to cars used in the business.The writing down allowance (WDA) is the percentage of the value of the asset which is deducted from trading profits each year.After you have deducted the WDA from the original value of the asset, this residual value (known as the tax written down value) is carried forward into the next year. The tax written down value (rather than the original value) is then used as the basis for calculating capital allowances for that particular asset for the next year.Further detail on capital allowances can be found here.

Chargeable Gains

You have made a chargeable gain when you sell a chargeable asset for more than it cost. This is a profit which you pay Corporation Tax on.

HMRC does allow you to deduct any costs associated with the initial acquisition of the asset from your chargeable gain, as well as costs incurred in selling the asset. These can include items such as legal fees and auction fees. Indexation allowance is also available, which reduces the gain according to the expected increase in value of the asset over time.Chargeable gains can be a very complex area of corporation tax, particularly in relation to the disposal of plant and machinery, shares and intangible assets. We suggest you speak to a tax specialist, like Mirandus Accountants, to help you through the process.Further detail on chargeable gains can be found here.

Corporation Tax Losses

If your company makes a loss during an accounting period, this loss can be rolled forward and offset against profits made in future accounting periods. This is particularly important for new businesses, which are more likely to be loss-making during their first few years of trading.Corporation Tax losses can accumulate for more than one year. The following example helps illustrate how losses can be used:

Company A has recently started trading.

Year 1 £35,000 loss Year 2 £15,000 loss Year 3 £2,500 loss

After the first three years of trading, Company A therefore has accumulated Corporation Tax losses of £52,500.

Year 4 £45,000 profit

Company A can choose to offset its accumulated losses in order to reduce its Year 4 profits.£45,000 profit minus £45,000 of losses = £0 taxable profit. This means that Company A’s corporation tax liability will be nil for its fourth year. It also means that the Company will have £7,500 of tax losses left over to continue to roll forward into future accounting periods.

Relief in the form of offsetting losses from earlier years is claimed by including the claim amount in your company tax return – box 4 in the ‘Company Tax Calculation’.It is also worth noting that for accounting periods, the way trading losses are set off will depend on when they arise.

For further detail on how your company can offset its Corporation Tax losses, please click here.

Research and Development (R&D) Relief

You can claim R&D Corporation Tax relief on expenditure which aims to achieve an advance in science or technology through the resolution of a scientific or technological uncertainty.

R&D relief is only available to incorporated businesses as it is a Corporation Tax relief. There are two schemes – one for large companies and one for Small and Medium Sized Businesses (SMEs). If you qualify for the SME scheme, then from 1 April 2015, the tax relief on allowable R&D costs is 230% - that is, for each £100 of qualifying costs incurred, you may deduct £230 from your trading income.

In addition, if your company is loss making then you can choose to surrender the enhanced loss for tax credits. The rate of credit is 14.5% on the R&D relief amount from 1 April 2015 and this is paid to you in cash, which can be very valuable to new businesses.Qualifying R&D expenditure includes revenue expenditure on:

• Staff directly or indirectly engaged in R&D

• Consumable or transformable materials

• Computer software

• Power, water and fuel.

For further detail on R&D tax credits, please click here.

Creative Sector Relief

Creative industry tax reliefs are a group of eight corporation tax reliefs that allow qualifying companies to claim a larger deduction or, in certain circumstances, claim a payable tax credit when calculating their taxable profits.This is applicable to companies operating in the following areas:

• Film

• Animation

• ‘High-end’ television

• Video-gaming

• Theatre.

If your company functions in one of these industries, please click here for further guidance from gov.uk.