If your business is a company, you need to submit corporation tax returns and pay corporation tax on your profits.
Although you are likely to use accountants to prepare your returns and calculate your tax liability, you cannot afford to ignore corporation tax until the year end. The way you finance and manage your business can have a significant impact on the final bill.
1. Calculating taxable profits
Tax is levied on all the profits made during an accounting period.
Profits can arise from several sources
- Trading profits: income from your company’s trading activities, less allowable expenses such as labour and raw material costs etc.
- Capital gains: the profits made from selling certain company assets. For example, if you make a profit from selling a factory, it will be taxable unless you reinvest the money. Note: capital gains on the sale of shares in a trading subsidiary may be exempt.
- Income from letting out land or buildings.
- Interest on any money held on deposit. Unlike individuals, companies generally receive interest without tax having been deducted.
- Most other forms of income or capital gain. For example, share of partnership income; any profits made on currency movements.
- Profits from different sources have to be calculated separately, because different rules apply to income and expenditure on each.
- The rules are complex. Ask your accountant, tax adviser or auditor for advice.
Tax allowances and expenses
Taxable profits can be reduced by deducting various corporation tax reliefs and allowances, for example:
- For business assets such as plant and machinery, capital allowances are deducted from taxable profits rather than depreciation.
- Most business expenses are tax allowable but there are exceptions such as entertaining expenses.
Companies are taxed on the profits made in an accounting period
- The accounting period normally runs to their financial year.
- The end of an accounting period can also be triggered by the company going into liquidation or ceasing to trade.
- Tax rates are set for the tax year, which (for corporation tax purposes) runs from 1 April to 31 March.
- Where the company’s accounting period and the tax year do not coincide, the profits must be time-apportioned to decide which rate should apply.
Tax on overseas activities depends on where the company is resident for tax purposes
- Companies resident in the UK pay corporation tax on their worldwide profits.
- Companies resident elsewhere normally pay corporation tax only on their profits from a UK branch or agency. Non-UK profits are generally taxed (often at higher rates) elsewhere.
- Check your situation with your accountant or tax adviser.