What is Corporation Tax?
Here’s a detailed look at how corporation tax works, including the different rates, what counts as profits, and how companies can reduce their tax liability through various reliefs and deductions.
Corporation tax is levied on the profits of companies operating in the UK. This tax applies to incorporated businesses, while unincorporated businesses, such as sole traders and partnerships, are subject to income tax instead.
Scope and Rates
General Scope:
Corporation tax is charged on the profits of companies based on UK assets and production activities.
Companies operating in multiple countries are taxed on profits deemed to have arisen from their UK operations.
Special Rates:
Different rates of corporation tax have been applied at various times to specific sectors, including:
Banking
North Sea oil and gas production
Small profit companies
Profits earned from patented technologies
Calculation of Profits
Definition of Profit:
In broad terms, profit is revenue minus costs.
Types of Income Subject to Corporation Tax:
Trading Income: Profits from the sale of goods and services.
Investment Income: Income from investments.
Capital Gains: Profit from selling an asset for more than it cost.
Deductions from Revenue:
Current Expenditure: Includes day-to-day expenses such as wages, raw materials, and interest payments on borrowing.
Allowances for Investment Costs: These include various deductions and reliefs available to reduce taxable profit.
Losses
Loss Relief:
If a company makes a loss (costs exceed revenue), it can set this loss against profits from other years, subject to certain restrictions. This helps reduce the overall tax burden by offsetting profitable years with loss-making ones.
Tax Reliefs and Allowances
Research and Development (R&D) Tax Reliefs:
Companies can deduct more than 100% of qualifying current expenditure on R&D from their taxable profits.
R&D tax reliefs are more generous for small and medium-sized enterprises (SMEs) compared to large companies. This incentive is designed to encourage innovation and investment in R&D.
Investment Allowances:
Companies can claim allowances on investments made in certain assets, which reduces their taxable profit. This can include capital allowances on machinery, buildings, and other significant investments.
Summary
Corporation tax in the UK is charged on the profits of incorporated businesses based on their UK operations. The tax is calculated on trading income, investment income, and capital gains, with deductions available for various expenditures and allowances. Companies can benefit from R&D tax reliefs, especially if they are SMEs, to reduce their taxable profits and overall tax liability. Understanding the nuances of corporation tax and the available reliefs is crucial for businesses to optimize their tax position and ensure compliance with UK tax laws.
Other Articles
How to Calculate Corporation Tax
Can You Pay Corporation Tax in Instalments?
Need to file your Corporation Tax Return?
Our team of tax specialists are here to help you every step of the way, whether that be registering you as a limited company or filing your end of year submissions. We offer fixed priced accountancy services and handle all of your annual filing responsibilities leaving you stress free and up to date.
Whether you already operate as a limited company or are thinking of incorporating a new company, give us a call today for a free non obligated consultation to see how we can assist you.
Strategic Support for Your Business
Explore our comprehensive accountancy packages tailored to your business.
Self Assessment Tax Returns
From £85 per annum
Whether you are in the early stages of trading or considering starting a business, we can provide you a stress free and fixed price service when it comes to self assessment tax returns.
CIS Tax Returns
From £50 per month
Whether you are operating as a contractor or the sub-contractor, our specialist team will take control of all your CIS affairs from start to finish, leaving you to concentrate on your business.
Corporation Tax Returns
From £625 per annum
Are your Management Accounts, Corporation tax return and confirmation statement now due? Let us handle your entire end of year requirements for a fixed, competitive annual fee.
PAYE
From £50 per month
Whether you are a one man band, new start-up or mid-sized business, we have the flexible payroll solution for your business that allows you to pay your employees right, and on time.
VAT Returns
From £90 per submission
Our qualified and experienced team will prepare & submit your all-year-round VAT reporting and returns on your behalf for a fixed price monthly fee, no hidden costs or surprises.
Bookkeeping
From £35 per month
Provide us with your receipts, bank statements and invoices and we will give you reports on a monthly/quarterly basis allowing you to make decisions that grow your business.