In this breakdown, we’ll cover all the important points to understand, so that you come away feeling more confident that you know what to expect. Let’s dive in.

What is Corporation Tax?

Quite simply, Corporation Tax is a kind of tax paid by some UK businesses and organisations on the profits they make. In this context profit is defined as the amount of income remaining after the business has paid all of its expenses. So, whatever’s left over.

Who needs to pay Corporation Tax?

As a general rule, it’s paid by all limited companies incorporated in the UK. This doesn’t tell the full story, though, as there are other organisations that might need to pay it (even if they’re not set up as limited companies). These other organisations include, but are not limited to:

• Members’ clubs, societies, and associations
• Trade associations
• Housing associations
• Groups of individuals who run businesses (e.g. as co-operatives)
• Foreign companies with UK branches or offices (also known as ‘overseas’ companies)

Sole traders and partnerships don’t pay Corporation Tax, but instead pay Income Tax on their profits, which they tell HMRC about via Self Assessment or MTD Income Tax returns (as opposed to company ones).

How does Corporation Tax work?

You’ll need to submit a Company Tax Return in order to pay Corporation Tax if you operate as a limited company, with HMRC using the information you provide to work out how much tax you owe.

Basically, it’s paid on the taxable profits your company makes, which can include the money your company or association makes from:

• Doing business (‘trading profits’)
• Investments
• Selling assets for more than they cost (‘chargeable gains’)

How do I pay my Corporation Tax?

The first thing to know is that most companies automatically register for Corporation Tax at the outset when they incorporate the business at Companies House, but you can defer this.

It is fine to register your company at a later date, as long as you do so within 3 months of you starting to trade. Trading doesn’t just mean making sales, though. It can actually refer to any sort of business activity (placing an advert, for example).

Once registered, HMRC will send your company’s Unique Taxpayer Reference, or UTR. It’s separate to any personal UTR you might have for your own taxes, so don’t mix them up!

To file your Company Tax Return and actually pay your Corporation Tax (when the time comes), you’ll need to fill out and submit a CT600 form, which features a list of strict criteria that must be met for compliance. These include:

• Income and turnover
• Profit and loss for the financial year
• Tax reconciliation
• Tax deductions
• Any tax relief you’re claiming

In terms of making the payment itself, you can do this online or over the phone. While you can also pay in person at a local branch of your bank, you’ll need a paying-in slip from HMRC.

Is there a way to reduce my Corporation Tax bill?

There are actually several ways to reduce your Corporation Tax bill, the main one being through Marginal Relief.

You can claim Marginal Relief if your company’s annual taxable profits are between £50,000 and £250,000, and the easiest way to work out how much is available to you is by making use of HMRC’s online calculator. This basically adjusts the rate of Corporation Tax you’ll pay on your profits if they’re between those two thresholds.

You can’t, however, claim Marginal Relief for a non-UK resident company, a close investment holding company, or a company whose profits are more than £250,000.

In addition to this, here are some other things to consider if you want to reduce your bill:

• Salaries are an allowable expense
• Pension payments your company makes on behalf of directors are also deductible
• Keeping good financial records is useful for making sure you record every expense
• If you buy assets for your business (e.g. machinery), you might be able to reduce your tax bill by claiming Capital Allowances, either in the year they’re purchased, or over their lifetime in the business

Limited companies can also sometimes claim tax relief against the cost of research and development, although the rules around this can be very confusing so get specialist advice!

Do I still pay Corporation Tax if my business makes no profit?

You’ll be relieved to learn that, no, you don’t, as Corporation Tax is only paid on a company’s taxable profits.

It’s essential you still submit your Company Tax Return, though – even if you don’t have any tax to pay. This is because HMRC won’t know what you owe (or don’t) unless you tell them.

Now, if the reason your company is making no profit is that it’s dormant, then you don’t even need to submit a tax return, but again, make sure you tell Companies House and HMRC that your company is dormant. They use different definitions though, so double check before updating the status!

Companies House considers a company dormant if it’s had no ‘significant’ transactions in the past financial year. These don’t include filing fees, penalties for late filing of accounts, or money paid for shares when the company was incorporated.

On the other hand, HMRC usually considers a company dormant for Corporation Tax purposes if it’s stopped trading and doesn’t have any other income, or if it’s a new company which never started trading at all. Unincorporated associations or clubs owing less than £100 Corporation Tax, and flat management companies also qualify.

A basic rule of thumb is that your company is considered dormant as long as it isn’t actively trading or liable for Corporation Tax.

 
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.

The post Understanding Corporation Tax appeared first on The Cheap Accountants.

Some business owners choose to undertake their tax return in-house by themselves or with an employee, whereas others will leave it in the capable hands of a qualified accountant. Whichever route you choose, it’s essential that your bookkeeping is accurate and up to date so that the tax return can be filed correctly.

Bad bookkeeping habits lead to errors and omissions which can, in turn, lead to penalties from HM Revenue & Customs (HMRC). The moral of the story here is to ensure that your bookkeeping is up to scratch so that you can submit your Company Tax Return on time with maximum precision and minimum stress.

In this article, we share the good bookkeeping habits you need to ensure your tax return runs smoothly each year, regardless of who is submitting on behalf of your business.

Keep a checklist of everything you need to cover

To file your Company Tax Return and pay your Corporation Tax, you’ll need to fill out and submit a CT600 form. The CT600 is notoriously complicated in parts and there’s a list of strict criteria that must be covered for compliance, including (but not exclusive to):

• Income and turnover
• Profit and loss for the financial year
• Tax reconciliation
• Tax deductions
• Any tax relief you’re claiming

Keeping a full checklist of everything you need to cover means you’ll be able to tick all the necessary boxes in your bookkeeping throughout the year. It goes a long way towards ensuring all the information you need is to hand when it comes to submitting your return. If you fail to comply, you could find yourself facing a penalty from HMRC.

Don’t worry, this isn’t something you’re expected to rattle off the top of your head each time the deadline looms. HMRC has actually put together a comprehensive guide to CT600 to support you through the process. It includes what you must do to comply, and how to carry out some of the more complex calculations. Or alternatively, you could pass the responsibility onto a qualified accountant – but more on that later.

Understand (and complete) your statutory accounts

Your statutory accounts are the accounts you produce at the end of the financial year. These must be sent to HMRC as part of your Company Tax Return, so you need to ensure that all of the relevant information is present and correct – this starts with good bookkeeping.

Guidance from HMRC stipulates that your statutory accounts must include:

• A balance sheet – this documents the value of “everything the company owns, owes and is owed” on the final day of the tax year.
• Profit and loss account – this records your sales, running costs and the profit or loss you have made over the financial year.
• Director’s report, unless you qualify as a ‘micro-entity’ (a company with a turnover of £632,000 or less, 10 employees or less, or £316,000 or less on its balance sheet).
• Any additional notes about your accounts that might be relevant.

Good bookkeeping habits throughout the year will make preparing your statutory accounts significantly easier than if you’re having to scrabble them together at the last minute.

Invest in cloud-based bookkeeping software

Bookkeeping is like anything else – you need to have the right tools, skills, and resource to hand if you’re going to do it well.

One of the most effective things you can do to bolster your bookkeeping and streamline the Company Tax Return process is to invest in good cloud-based bookkeeping software. This will allow you to take advantage of features and applications that simplify and automate so many of the processes where it’s easy to go wrong.

Here are just a few of the many benefits of using cloud-based bookkeeping software:

• Access your accounts at any time, from anywhere with an internet connection so you can do your bookkeeping on the move.
• Integrate with applications like PayPal, as well as your personal and business bank accounts.
• Take advantage of multi-user access so that more than one person can work on your accounts at any given time.
• You can automate processes (e.g., invoices and payroll) and set up automated reminders.
• Data will be stored on a secure cloud server and backed up regularly.

Enlist the expertise of a professional bookkeeper

Great bookkeeping is no mean feat, especially for business owners who are often spinning multiple plates at any one time. That’s why, if you can, we’d recommend enlisting the skills of an experienced bookkeeper who can save you valuable time. They’ll also have a good understanding of what the data should look like, helping to further reduce the risk of errors.

A professional bookkeeper has insight into the accounting industry and will also be able to support you with using your bookkeeping software. Working with a bookkeeper is another way to protect yourself against stress headaches and any trouble with HMRC.

Hire the skills of a good accountant

As we mentioned earlier, the Company Tax Return process can be pretty complex. For example, you’re required to make sure that all information in your CT600 is reported in Inline eXtensible Business Reporting Language (iXBRL).

Understanding and submitting your information can be super time-consuming and stressful, which is why we’d always recommend hiring an accountant to help you out. An accountant will also be able to help out in other areas. For instance, suggesting a budgeting strategy that ensures you’ve got a cash cushion to pay your Corporation Tax bill, and helping you claim for all your allowable expenses.

If you don’t want to hire two separate services for bookkeeping and accounting, look for an accountant that can take on both tasks. That way, you’ve got ultimate peace of mind when it comes to Company Tax Return time.

Need more help? Get an instant quote for accounting services, or get more information on comparing accountants.

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