Corporation Tax
Corporation Tax (CT) is charged on profits made by "companies" - but for these purposes a "company" can include an unincorporated association such as a club or society.
Corporation Tax rates are unchanged for the year commencing 1 April 2005:
| Taxable profits | Year commencing 1 April 2004 |
Year commencing 1 April 2005 |
| First £10,000 | 0% | 0% |
| Next £40,000 | 23.75% | 23.75% |
| Next £250,000 | 19% | 19% |
| Next £1,200,000 | 32.75% | 32.75% |
| Over £1,500,000 | 30% | 30% |
Due to the operation of marginal rates on profits of between £10,000 and £50,000 and between £300,000 and £1.5 million, there is an incentive to ensure that all possible deductions are obtained to minimise the liability between these levels of profit. The profit limits are reduced where a company is 'associated' with another company.
Tax on Distributed Profits
In addition to the general Corporation Tax charge as above, the 2004 Budget introduced an additional requirement that profits which are distributed (dividends) after 1 April 2004 must have suffered Corporation Tax at 19%. This means that if a company's overall tax rate as calculated via the table above is less than 19%, this charge must be "topped up" to an overall 19% charge in respect of any dividends paid out.
The Corporation Tax charge on profits which are left in the company and not distributed is unaffected.
Companies with profits in excess of £50,000 are unaffected as they are already charged to tax at a minimum of 19% (and thus the charge does nor require "topping up").
Self Assessment
A company has to estimate its own CT liability and pay this on or before the due date, which is normally 9 months and one day after the end of its accounting period (earlier for 'large' companies). A Corporation Tax Return (Form CT600) must be filed with the Inland Revenue within 12 months of the year end.
Interest is charged on late paid Corporation Tax and there are penalties for the late filing of a Corporation Tax Return. The initial penalty is £100, but if three Returns in a row are late, the penalty rises to £500.
Reducing the Charge
1. Expenses
Expenditure incurred prior to the company's year end may reduce the current year's liability rather than the next year's. Bringing forward expenditure by even a few weeks can accelerate the tax relief by 12 months - for example: building repairs, advertising, sales & marketing campaigns and any other items deductible from profits. It should be noted that the expenditure must be 'incurred' in the period and the relevant accounts must give a "true and fair" view of the profits for that period.
2. Plant and Equipment
Expenditure on plant and equipment by small businesses usually qualifies for a first year allowance (FYA) of 50% from April 2004. The rate of FYAs for a medium sized business remains unchanged at 40%. Where appropriate, capital expenditure should be brought forward to take advantage of capital allowances.
3. Hire Purchase
Hire purchase (or lease purchase) may provide a useful way of financing an asset. Plant and equipment obtained in this way will qualify for writing down allowances on the full purchase price - even if only the deposit has been paid.
4. Industrial Buildings
Expenditure on new industrial buildings qualifies for a writing down allowance of 4% on cost. Used industrial buildings may also qualify for an allowance, dependent upon allowances granted to previous owners.
5. Provisions
Specific provisions against bad debts or stock are usually allowable for tax purposes. General provisions are not. There are stringent conditions attached to other specific provisions (e.g. for repairs) before they can be brought into an earlier year's accounts for tax purposes.
6. Bonuses to Directors & Staff
Provision may be made in the annual accounts for specific bonuses paid up to 9 months after the year end. There should, however, be an expectation at the balance sheet date that such a bonus will be paid. Care should also be taken to ensure that any bonuses are correctly subjected to PAYE as appropriate.
7. Pension Contributions
Contributions to approved pension schemes are fully tax-allowable in the year of payment. Special payments can be made to 'top up' the scheme and these are also allowable - provided they do not exceed normal annual contributions. Executive pension schemes now a maximum employer's contribution based on a constant percentage of a director's earnings. Individual directors may also make additional voluntary contributions.
8. Company Cars
It may well be more beneficial to own a vehicle privately and claim for business usage. (See our Quick Guide to Company Cars)
Capital Gains
Capital Gains made by a company are taxed at the effective rate of Corporation Tax. Gains are calculated by deducting from sales proceeds the market value of the asset at March 1982 (or cost of acquisition, if later), costs of improvements made, an indexation (inflation) allowance and certain disposal costs. (Taper relief does not apply to companies).
Capital Gains may, in certain cases, be reduced by Rollover Relief, Negligible Value Claims, Crystallizing Capital Losses or by Deferment. All of these matters, however, require specialist advice.
Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from Just Tax or other suitably qualified person or practice.
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