What is corporation tax?
Corporation tax is payable by UK limited companies on profits generated.
Corporation tax applies to the profits generated by a company from:
- Sale of goods and services
- Sale of business assets (‘chargeable gains’)
Corporation tax on chargeable gains
If a company sells or disposes of a business asset at a profit, this profit will be subject to corporation tax.
Business assets are those owned by the company, which could include shares, property and land as well as items such as equipment and machinery.
Gains on intangible assets such as IP and business reputation acquired or created by the company after 31 March 2002 should be included in the company’s trading profits and are also subject to corporation tax.
To calculate the tax liability, you will need to determine the value of the gain resulting from the disposal, less any reliefs or allowances, and then apply the current corporation tax rate.
Chargeable gains are to be reported to HMRC with your annual company tax return.
The equivalent tax for the self-employed is capital gains tax.
What is the UK corporation tax rate?
The main rate for UK corporation tax in 2020/2021 is 19%. This has been at the same level since 2015. The corporation tax year starts 1st April.
Corporation tax is set at a single, standardised rate applicable to all UK limited companies, with the limited exception of ‘ring fence’ companies. These are companies that make profits from oil extraction or oil rights in the UK or UK continental shelf.
Non-UK companies active in the UK are liable to corporation tax the profits they make from trading activity in the UK.
What corporation tax allowances & reliefs are available?
Companies looking at ways to reduce their tax liability should assess if they are making full use of corporation tax allowances and reliefs.
R&D tax relief
The research and development tax relief scheme is a government incentive to encourage businesses to invest in innovative projects that will
Don’t be put off by the name – research and development in this context is extremely broad and can the scheme is open to businesses in all sectors, not just science and tech or those traditionally associated with R&D.
The scheme varies depending on the size of your business, for most SMEs, you will be able to deduct the full cost of qualifying R&D projects from your trading income, as well as claiming an additional 130% against taxable profits as corporation tax relief.
Patent Box scheme
This is an intellectual property scheme for companies with a qualifying patent that they either own or have an exclusive licence to sell.
Under Patent Box, income from the qualifying patent will be subject to a reduced corporation tax rate of 10% is applied. INcome from the patent could include sales and compensation resulting from any IP infringement awards.
Corporation tax relief allows loss-making companies to set their loss against other income, against past profits or against future profits.
Group companies are permitted to offset losses against the profits of other companies within the group under the group relief loss.
Where annual capital expenditure on such items is below the Annual Investment Allowance (AIA) threshold, companies can usually claim back the full investment amount under the capital allowances scheme.
The AIA is set at £1 million until the end of 2020, when it is due to change back down to £200,000.
Where capital expenditure is over the AIA, may be , companies may be able to claim back a percentage of the spend as a writing down allowance.
The writing down allowance rate is currently 18% for spend on most types of plant and machinery each year, or 6% where special rates apply.
Allowable business expenses
When calculating your profits, ensure you are deducting all allowable business expenses.
Under the rules, ordinary expenses can be set against business profits provided the spend is necessary and exclusively for business purposes. This includes expenses relating to business travel, subsistence and salary.
Key exceptions, however, apply, such as dividends and entertainment. Taking professional advice can ensure you are making full and correct use of the business expense rules.
Note that the purchase of assets such as equipment would not come under business expenses, but instead should be dealt with under the capital allowances scheme.
Under the mileage allowance scheme, Approved mileage allowance payments (AMAP) allow for business mileage to be claimed as an expense. Set rates apply and applied as follows:
|First 10,000 miles||Over 10,000 miles|
|Car / van||£0.45||£0.25|
How to pay corporation tax
The company’s annual tax return (CT600) must be submitted 12 months after the relevant accounting reference date.
Companies that file the return or pay corporation tax late can be fined.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal, tax or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.