Posted: 2. November 2019 by: Rupert Tennant

What is Corporation Tax?

Corporation tax is one of the expenses that a business owner or an investor in one should be aware of since it’s one of the biggest expenses they will have. It’s not a tax that’s paid by every business, and it depends on how the company is set up.

Small businesses are either corporations or sole traders, and when you set up your company as the former, you’ll need to pay the tax for it. There are also benefits from this set up take into consideration.

What kind of companies

There are a few types of companies that fall under these tax rules if they are based in the UK. If they are, however, based abroad, the companies need to pay corporation taxation regardless of how they are set up. That means that even the sole trader companies based abroad need to pay it when the company moves the money into the country.

For the companies based within the country pay this tax if they are:

There’s no bill for it; however, it’s paid via a return.

What kinds of profits?

The corporation tax is paid on the income that the company itself makes.  That’s sometimes difficult to figure out since a company has income and expenses coming in and out at all times and HMRC provides the guidelines as to on which you need to pay the corporation tax.

The profits that are made from these actions are being taxed with this tax:

  • Doing business from day to day to tasks. This is known as trading profits
  • Investments made by the company
  • Selling assets that are owned by the company

How to do it?

There are four steps that you need to take if you want to start paying this tax.

  • The first is to register for the corporation tax when you first set up a new business venture or when you reactivate a dormant one.
  • Keep the records of your income and the money going in and out the business as well as making a report on it.
  • You’ll need to pay the tax 9 months and one day after you’ve sent the tax return for the year. There are penalties if you don’t.
  • The return also needs to be sent on time, or there are fees.

Restarting a business

The company becomes dormant if it’s no longer trading and creating profits, and then there are no returns that you need to send. When the company is restarted again, the process is somewhat similar to starting a business in the first place, at least from the point of view of HMRC.

You’ll need to let HMRC know that you’re in business again and send company accounts to the Company House in 9 months of the year’s end. Within 12 months you’ll be in the normal tax return process again.

Rates and allowances

This isn’t a progressive tax, meaning that the rates for it don’t get higher as you earn more. What’s important is to have in mind that there is no allowance for this tax as there are for many others. The company starts paying this tax as soon as it starts earning income regardless of how much of it there is.

The rate set for this tax is 19 percent, and that doesn’t change regardless of how much you earn. That’s perfect for small companies since it allows you to plan your expenses and know what you’ll pay each month.

An accountant

The question then remains, do you need an accountant at all for this tax. It’s possible to pay and report this tax without an accountant due to the simplicity of the tax code. However, it’s best to still have one for overall advice on tax matters or to help you with different accounting tasks.

For most companies, the biggest accounting task won’t be about corporation tax but about income tax on the salary of their employees. This is paid via PAYE, and this is where you’ll need an accountant even when you don’t need one for the corporate tax.

Conclusion

Corporation tax is one of the taxes paid in the UK. It’s paid by the companies that are set up as such, which means it’s not paid by the sole trader businesses. The tax has a flat rate which makes it easy to plan for and send the records for, but there’s no allowance for it.

The tax is paid via a self-assessment tax return, and that’s done once a year with a fee if you’re late with both the return and with the payment itself. The rate is set at 19 percent.

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