How to Calculate and Pay Corporation Tax

A small business guide to working out what corporation tax you owe, offsetting profits with losses and minimising costs…

How to Calculate and Pay Corporation Tax

How should businesses pay corporation tax?

Business owners must calculate their own liability for corporation tax and pay the required amount on time. Failure to do so can result in prosecution.

Small and medium businesses (profits of less than £1,500,000) pay tax within nine months and one day from the end of their accounting period. Payments received after this date have interest charged on them.

Large companies, on the other hand, pay tax in quarterly instalments. The first is due six months and 14 days after the end of the accounting period, the second and third within three months and 14 days later.

Every business must make all their payments electronically, this includes the tax, plus any penalties and interest payments, and all must submit an online corporation tax return.

The online corporation tax return must be submitted within one year of the end of the accounting period. Any disputes registered by the HMRC may result in an enquiry – disputes may be registered up to a year after the tax return has been submitted.

How can businesses reduce their tax bill?

Businesses can use losses to reduce their tax bill, though there are restrictions and rules in place to prevent evasion.

Trading losses can be offset against all forms of profit. They can be carried back against those made in the preceding accounting period, or forward against future profit. However, if there is a major change in the business, or a change of ownership, they cannot be carried forward. Capital losses can also be offset against capital gains and it’s important to record all losses as they can be carried forward indefinitely – however they cannot be offset against trading income.

Finally companies within a group can use losses accrued by another company in the group, but the parent company must own 75% of the shares in the other company to qualify.

How can business owners minimise their tax bill?

There are several steps entrepreneurs can take to limit the amount of unnecessary tax payments they have to make.

Firstly, use loans for financing and not shares as interest on loans is an allowable expense against profits. Dividends on shares, however, are not. Another is to pay directors or shareholders in dividends, rather than salary – with corporation tax rates falling and National Insurance rising dividends represent a better value for money. However, since dividends don’t count as earning, doing this can limit your rights to state benefit and affect your contributions to approved pension schemes.

Business owners can also limit tax expenses by using benefits in kind to funnel away money, rather than added salary as employees do not have to pay National Insurance on most benefits. And finally attribute relevant profits to your attributed intellectual property (IP) if possible. The Patent Box scheme allows you a reduced rate of 10% on all profits associated with your IP – these profit must from sales of patented products, IP infringement income, the sale of patent rights, or any damages/compensation related to your patent right.

You must make an election on your tax return within two years of the end of the accounting period in question.

Useful corporation tax resources

Accountancy firms
Research different options – levels of skill and fees vary wildly. Any accountant you employ should be a member of either he Association of Chartered Certified Accountants, the Chartered Institute of Management Accountants, or the Institute of Chartered Accountants.

Chartered Tax Advisers
They can calculate your liability and advise you on your affairs, check out the The Chartered Institute of Taxation website for more information.

Solicitors
Consult them for advice on the legal aspects of corporation tax.

HMRC
When you register your company, they will send you all appropriate forms and can be consulted advice, take a look at the GOV.UK’s HMRC website for more details,

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