Corporation tax is a business tax that applies to incorporated companies in the UK. It is based on self-assessment, which means the taxpayer is responsible for calculating their taxable profits and filing a return.
The corporate tax system in the United Kingdom may be difficult to navigate, with different allowances that you can claim. Here Venn Accounts explain what corporation tax is, who pays it, and how much you’ll have to pay if you’re liable.
What Is Corporation Tax and Who Pays It?
A corporate tax is a tax on the earnings of businesses. What is the definition of a corporate tax? A corporate tax is one that applies to limited companies based on their yearly profits. It’s like an income tax but it only applies to registered businesses at Companies House.
Sole traders and partnerships do not pay corporation tax. However, some other groups may need to pay it, even if they’re not incorporated.
These include:
- Organizations and groups are dedicated to a particular purpose.
- Associations for housing
- Associations of trade The term “associations of business” refers to organizations that are created by businesses in order to promote their interests collectively.
- Co-operatives are groups of people in business, such as co-ops.
If you believe you may be required to pay corporation tax, you should contact HMRC or your accountant. The company director is legally responsible for ensuring that his firm’s income tax return is submitted on time and for paying the outstanding amount of corporation tax due.
Even if the firm hires an external accountant to operate its books, it is still responsible for performing necessary controls.
If a company operates in the United Kingdom, it must pay corporation tax.
- It is incorporated in the UK, or
- Its central management and control are in the UK
Corporation tax is required to be paid if you are a non-resident firm with a branch in the United Kingdom that is a permanent UK establishment. In this situation, only the operations of the branch are considered for corporation tax payment.
Why is There Corporation Tax?
Businesses must pay corporation tax on their taxable profits. It’s levied on the income they get from business transactions in general. According to recent tax data, the British government collects around £800 billion each year in revenue. Corporation tax accounts for £53 billion of this total.
The corporation tax is a necessary component of government revenue. It’s the second-largest source of taxation income after income tax, national insurance payments (NIC) and VAT. Corporation taxes help the government to finance its activities besides personal income tax, and companies paying corporate tax make up a third of all firms in the country.
Because company earnings fluctuate considerably depending on the economy’s stages, revenue from the corporate tax is volatile. Even though corporation tax rates are generally declining over 50 years, corporate taxation has stayed at about two to three per cent of GDP. Because the corporate tax base has expanded faster than GDP, most corporation tax revenue comes from a small number of corporations
Companies making £1 million or more in tax payments paid 55 per cent of all UK corporation tax during the year, according to TaxLab.
What is the UK’s Corporation Tax Rate?
For example, the basic rate of corporation tax in the United Kingdom is currently 19%.
The rate for banks and businesses in the North Sea oil and gas industry is higher. For-profits linked to patented technologies, however, there is a 10% decrease. Banks have been subject to an eight per cent surcharge on their taxable income since 2016. This exemption does not apply to their first £25 million.
North Sea oil and gas production has overall higher corporation tax rates but also attracts more generous capital allowances.
The current rate of corporation tax is significantly lower than it was in the 1970s. Companies were then expected to pay a 52 per cent tax rate. In April 2023, the corporate tax rate will be increased to 25%.
However, not all companies will need to pay this increased rate:
- Companies with profits under £50,000 will be taxed at a rate of 19 per cent.
- In order to fund their operations, most businesses establish reserves. These can be used to pay employees, suppliers and other expenses until the firm runs out of cash. The government has built a system that allows firms with profits between £50,000 and £250,000 to receive a marginal tax reduction every year for up to seven years.
From 2023, companies earning more than £250,000 will pay the whole 25 per cent corporation tax rate. This is likely to complicate the corporate tax system even further.
Do All Companies Pay Corporation Tax?
Corporation tax is a tax that all limited companies in the United Kingdom are required to pay. Membership organizations, housing associations, co-operatives, clubs and societies may also be subject to this charge. Corporation tax liability does not apply to sole traders and partnerships.
Limited companies must pay corporation tax on:
- Trading profits
- Investments
- Sale of assets
Every company’s earnings are taxable. They can, however, deduct certain expenditures while there are limitations on how much tax they may owe.
How Do You Avoid Corporation Tax?
You can’t avoid corporation tax if your firm is responsible for it. However, you may decrease your tax burden. They are as follows:
- R&D tax credits
- Capital allowances
- Super deduction
- Relief for losses
R&D Tax Credits
Tax credits available under the R&D tax credit system encourage qualified research and development efforts by subsidizing them. A variety of projects and activities may be claimed for. The value of your R&D claim is determined by the amount you spent on these qualifying activities.
R&D tax relief is available to both SMEs and larger enterprises through two separate mechanisms: Smaller businesses can claim R&D tax relief under the Enterprise Investment Scheme (EIS), whereas firms of all sizes may benefit from the NEW Enterprise Allowance. Tax Relief for Entrepreneurs The Entrepreneurs’ Relief, commonly known as the Eisners
- An SME can receive R&D tax relief from the government of England, as well as a valuable discount on its SMP.
- The RDEC is a credit worth roughly £3,000 per year (2005 figures) that applies to research and development expenditure. It allows larger firms to claim 13% of their R&D spending.
Businesses must ensure that their R&D tax credit claims are valid. A project must be part of research or technology development to qualify.
A qualifying project must:
- Concentrate on a scientific or technological breakthrough.
- Overcome uncertainty or attempt to do so.
- Be complicated enough that no professional in the field would be able to succinctly explain it.
If a project qualifies, you can claim for various fees including wages, subcontractors, consumables, prototypes, and software licenses. You should apply for R&D tax relief at the end of your accounting period. The work you claim may encompass any work that occurred up to two years before the date shown on your application form.
You can continue to claim relief on your corporate tax for long-term R&D projects if they run for several years.
Capital Allowances
The number of capital allowances that a firm can claim to offset its corporate tax liability depends on the sort of assets it has acquired. The annual investment allowance (AIA) allows you to deduct the entire value of anything you buy from your pre-tax earnings. Most plant and machinery are eligible for this deduction, which is the most significant category of investment
Cars are not eligible for the AIA. HMRC treats them differently. They do not qualify for AIA tax relief, but you may receive money back depending on the car’s CO2 emissions. For electric cars with low carbon outputs, it is a 100% deduction. Deductions of 18 or 6 per cent are available for other vehicles. Int
There are no capital gains taxes on shares or other financial assets.
Super Deduction
The Chancellor announced a super deduction of 130% in his March 2021 budget. This will run until March 2023. Under this, firms can deduct 130 per cent of their taxable profits for plant and machinery investment. There are no restrictions on what kinds of investments qualify for a super deduction.
Relief for Losses
If you’ve made a loss in trading in a year, you may use it to reduce your taxable income from the prior year.
Normally, you can only deduct trading losses back a year. Exceptions are losses incurred in the first four years of business or at the end of a trading career. In these situations, you may subtract your trade loss from next year’s profit to lower your corporate tax obligation. This is possible as long as you remain in the same line of work.
There is, however, a cap on the profits you may offset against your losses carried forward. The maximum amount that can be offset in a year is £5 million of taxable income, as well as 50% of the remaining profits after this maximum limit has been reached.
Only capital losses can be offset against capital gains. As a result, if you suffer a loss on the sale of an asset, you cannot recover this through your pre-tax income. However, you may use a capital gain to reduce a trading loss.
How Much is Corporation Tax for a Limited Company?
A limited company is required to pay corporation tax at a rate of 19%. The tax you must pay is calculated on your firm’s earnings and applies to all income derived from commercial activities. As we’ve said above, there are several methods to reduce this tax burden, including R& D tax relief and capital allowance claims.
The system might appear daunting, with the risk that you won’t be able to take advantage of any benefits you’re entitled to. This is when professional accounting help can make a significant difference.
Invest in Corporation Tax Services for your Business
Venn Accounts specializes in cloud accounting for small and medium-sized businesses. They can help you understand your company’s tax issues, ensuring that you claim any eligible tax credits from your pre-tax earnings. They’ll prepare your corporate taxes and submit them on your behalf, making the whole process stress-free.
