Save thousands of pounds on corporate taxes and allot more money for business operations by reading our quick guide to the corporate tax system of the UK.
Financial and Yearly Accounts—UK Corporate Tax
The UK corporate tax system is complex and ever-changing; hence, knowing where to start preparing for your corporation’s financial and yearly accounts can be challenging, as corporate taxes affect these deliverables.
But we are here to help. In this comprehensive guide, we will take you through everything you need to know about corporate tax. With our easy-to-follow tips, you will learn how to navigate corporate tax computations easily. Keep reading to learn more!
Who falls within the UK corporation tax regime?
All limited companies and some organisations are subject to the corporation tax regime. This isn’t only limited to local companies but also includes foreign ones with a branch or office in the country.
However, certain entities such as charities, non-profit organisations, and unincorporated associations are exempt. On the other hand, sole traders and partnerships are not subject to corporation tax; instead, they pay income tax on their profits.
Calculation of Taxable Profit/Loss
Calculating your taxable profit or losses is crucial in determining your corporation tax liability. Here’s a breakdown of the key factors that are considered in the calculation:
- Revenue. Your business’s revenue is the total amount earned from sales of goods or services during the accounting period.
- Cost of goods sold. This refers to the cost of producing or acquiring the goods or services sold during the accounting period, including materials, labour, and other related expenses.
- Operating expenses. Expenses incurred in running your business during the accounting period, such as rent, utilities, salaries, and advertising costs.
- Capital allowances. Capital allowances are tax deductions that businesses can claim for the depreciation of assets such as equipment, machinery, and vehicles.
- Losses. If your business has incurred losses during the accounting period, these can be carried forward to offset against future profits for up to 12 months.
To calculate your taxable profits, you need to subtract the total cost of goods sold and operating expenses from your revenue. You can then subtract any capital allowances and add any other income or gains earned during the accounting period. The resulting figure is your taxable profit.
Financial and Yearly Accounts UK: Corporation Tax Calculation
To better digest how to calculate your corporation tax liability, follow these easy, comprehensive steps:
Determine your accounting period
The accounting period is the time frame for which you will calculate your corporation tax. It can be up to 12 months long and is usually the same as your financial year.
Calculate your taxable profits
As discussed in the earlier section, the amount you computed is relevant in this step. This figure is calculated on your company’s tax return form (CT600).
Apply the corporation tax rate
The corporation tax rate is applied to your taxable profits to calculate the amount of corporation tax due. The current corporation tax rate is 19% (as of March 2023).
However, this rate is set to increase to 25% in April 2023 for companies with profits over £250,000. For companies with profits below this threshold, the 19% rate will still apply.
Calculate any tax reliefs or deductions
Tax reliefs or deductions can help reduce your overall corporation tax liability. We have a separate section in this blog to discuss the items you can declare under tax relief or deductions.
Submit your corporation tax return
Once you have calculated your corporation tax liability (net of tax relief or deductions), you must submit your corporation tax return to HM Revenue and Customs (HMRC) and pay any tax that is due.
The deadline for submitting your tax return is usually 12 months after the end of your accounting period.
All these steps are just a backgrounder, and there are still tax concepts that might still need to be covered here. Therefore, it can still be challenging to calculate your tax dues and prepare the documents needed by HMRC and other regulatory bodies.
With that, in preparing your financial and yearly accounts, it is best to seek help from a tax professional or an accountant. They can provide assurance that you are compliant with the relevant tax regulations, as this is their line of expertise,
Tax Incentives and Deductions
Corporate tax incentives and deductions refer to the various tax breaks businesses can claim to reduce their corporation tax liability. Familiarise yourself with some of the most common corporate tax incentives and deductions available:
Research and Development (R&D) tax relief
Businesses that invest in R&D can claim tax relief of up to 230% of their qualifying R&D expenditure. This can be used against taxable profits, resulting in a lower corporation tax liability.
Patent box relief
This tax incentive provides a reduced corporation tax rate of 10% on profits earned from patented inventions. To qualify, businesses must hold qualifying patents and have carried out qualifying development work.
Creative Industry’s tax relief
Businesses operating in the creative industries, such as film, TV, and video games, can claim tax relief on their production costs. This relief can be up to 25% of the qualifying expenditure and can be used to offset taxable profits.
This tax incentive allows businesses to claim a reduction in their employer NICs liability, up to a certain amount, for each tax year.
Annual Investment Allowance (AIA)
The AIA allows businesses to claim a tax deduction on the first £1 million of qualifying capital expenditure incurred annually. This can be used t against taxable profits, reducing the amount of corporation tax owed.
Frequently Asked Questions
What is the deadline for filing a corporation tax return?
As discussed, the deadline for filing a corporation tax return is usually 12 months after the end of the accounting period.
For example, if a business’s accounting period ends on 31 December, the deadline for filing the corporation tax return would be 31 December of the following year.
Can businesses carry forward losses to future years?
Yes, as we mentioned in the blog, businesses can carry forward losses to future years and offset them against future profits for tax purposes.
The amount of loss that can be carried forward and the period for doing so depend on the type of loss and other factors.
How are foreign profits taxed?
Foreign profits are usually subject to corporation tax if a UK-resident company earns them. However, various rules and exemptions apply, depending on the circumstances.
You may visit the HMRC website for a more detailed discussion on foreign profits.
Understanding the tax implications of your business activities and taking advantage of available tax incentives and deductions can make a significant difference to your bottom line. If you need professional advice about your corporate tax compliance, consult Sterlinx Global.