Corporation Tax and Tax Planning
Corporation tax must be paid on profits from doing business as:
- A limited company
- Any foreign company with a UK branch or office
- A club, co-operative or other unincorporated association
It is important to note that the company will not receive a bill for corporation tax and there are several obligations a company (and the directors of the company) must do to work out, pay and report the tax owed.
The process
Firstly, you must register for corporation tax. This obligation is on the business and not on HMRC. From here, the business is obligated to keep company accounts and prepare a company tax return to disclose how much corporation tax must be paid.
Usually after the company’s year end, the company will have 9 months and 1 day to pay the corporation tax. If nothing is owing, then the company must report this within the deadline. The company is then obligated to file the company tax return by the deadline which is usually 12 months after the end of the company’s accounting period.
Please note the company’s accounting period is normally the same 12-month period as the financial year covered by the company’s annual accounts.
What is taxable
Corporation tax is calculated on the taxable profits of the company / association. This is usually made from:
- Doing business (trading or revenue profits)
- Investments
- Selling assets for more than they cost (chargeable gains)
Note that if the company is based in the UK, it will pay corporation tax on all its profits from the UK and aboard. However, this is different if the company is not UK based. If the company only has a presence in the UK (e.g an office or branch) then it only pays corporation tax on profits from its UK activities.
Allowable company expenses
Allowable expenses are expenses that are purchased wholly, exclusively, and necessarily for the trade of the business. Some expenses to consider include:
- Phone Bill – As a director, you can claim for 1 phone bill through the business.
- Stationery
- Insurance such as public liability insurance
- Materials for the trade
- Equipment
- If you use your personal vehicle for business use, then you can claim mileage which is 0.45p/mile for the first 10,000 miles (per tax year), after of which is reduced to 0.25p/mile.
- Use of Home
- Marketing
Tax Planning
Tax planning is a tool used to analyse a financial situation and allow an individual/company to pay the lowest taxes possible, using all the available allowances and claiming all the allowable expenses which are necessary.
It is not to be confused with Tax Evasion or Tax Avoidance.
Tax Evasion is illegal and is where the company purposely understates their income or overstates their expenses to reduce their tax. This a deliberate attempt to not pay the tax that is due. The consequences of Tax Evasion could range from financial penalties to imprisonment.
Tax Avoidance is legal however seen as immoral. Tax avoidance is an act to minimise tax liability through methods such as loopholes in legislation. It is not advisable and could be questioned in court.
Tax Planning is following the legislation as it is written.
One example of tax planning for a director of a limited company is to use a dividend/payroll split for paying themselves. This is because dividends are taxed at a lower rate to payroll. Currently it is 8.75% for basic rate taxpayers, whereas PAYE would be taxed at 20% for the same taxpayer.
