An SME’s Guide to Corporation Tax

If your business has recently incorporated, you may only have a very basic understanding of how corporation tax works, rather than being familiar with key details which might affect your tax obligations and opportunities. Today our goal is to take you through some of the most common confusions.

When Do You Start Paying Corporation Tax?

Corporation tax is mostly associated with limited companies, and it’s true that neither sole traders nor partnerships are liable. However, there are a couple of other groups affected. You are liable if you’re handling the financials for:

• A limited company
• The UK branch of an overseas company
• A club or co-operative

That third category is a surprise for many, but don’t worry; your unincorporated community group will only be liable for corporation tax if they profit from doing business. For the most part that won’t be an issue, though it’s something the treasurer should be aware of.

What Profits are Liable for Corporation Tax?

Taxable profits as defined for corporation tax includes:

• Trading profits from doing business
• Chargeable gains from selling assets at profit
• Return on any investments

You then pay salaries and other deductible business expenses to arrive at the total taxable profit. Importantly, this takes place before dividends are paid. Deductible business expenses include:

• Capital allowances for machinery, equipment, and business vehicles when bought
• Ongoing costs of running the business

Expenses incurred in entertaining clients are explicitly not claimable. In specific industries there are a number of other tax reliefs, including profit from patented inventions or for creative industries. These are specific enough applications that they exceed the scope of this blog; if you believe you may be eligible for one or more, we would recommend discussing these opportunities with your accountant directly. The final form of relief is marginal relief, which is most relevant to smaller businesses.

What’s the Registration Process for Corporation Tax?

Any limited company is already registered for corporation tax. However, to manage corporation tax online your business tax account will need the relevant services adding. Your business accountant can probably handle this for you, but if you’re taking care of it yourself the government provides a guide on this here.

Calculating Marginal Relief

It’s best to think of marginal relief as a slight relaxation of the corporation tax burden for smaller businesses to help those businesses grow more effectively. If your annual profit exceeds £250,000, you will pay corporation tax at 25%. If your annual profit is below £50,000, you will pay corporation tax at 19% (the “small profits rate”). And if your profit is between the two values, you will be taxed according to a sliding scale between the two points. There is an official government marginal relief calculator to help with this. If your business is part of a set of associated companies, these calculations will be different. This has its roots in preventing a single business from dividing into sections that would each qualify for marginal relief.

Should I Pay Corporation Tax Early?

There can be a measurable benefit to paying your corporation tax early. HMRC pays interest on early corporation tax payments, called credit interest. Credit interest is set at 1% lower than the Bank of England’s base rate. You can pay no earlier than 6 months and 13 days after the beginning of your accounting period. Credit interest then pays out between the date you pay and the payment deadline. Interest is allocated on the payment deadline day, and is considered taxable income. There is no interest on overpaying your taxes; instead, small sums will typically be carried forward to be offset against future tax liabilities. There are circumstances in which paying your corporation tax early can be a benefit, always assuming your cashflow remains strong. However, calculating the value of potential credit interest against the value of being able to use that money between when you would pay and the deadline is a complex question that must be handled case-by-case rather than as a rule of thumb. We would be happy to discuss these strategies with customers.