Corporation Tax explained
What Corporation Tax is, how it is calculated and when will your small business have to start paying it?
What is Corporation Tax? Basically, it’s the company equivalent of income tax but for registered companies.
Corporation Tax is based on the profits your business makes, and the rate depends on how much profit is generated.
The bad news is that you have to pay Corporation Tax early – but the good news is that the rate is preferable to income tax.
What is the Corporation Tax rate for a small business?
The Corporation Tax rate which is most likely to apply to you is the small profits rate of 20%; this applies to companies with annual profits of £300,000 or less.
The other principle rate applies to firms with profits of £1.5m or more; this is known as the main rate, and, as of April 1 2017, it currently stands at 19%.
If your profits fall between £300,000 and £1.5m, you’ll have to pay the main rate. However, you can apply for marginal relief, which means that your corporation tax bill is reduced by a certain amount, which depends on the precise amount of profit you make.
The formula for calculating marginal relief is extremely complicated, but thankfully HMRC provides a calculator on its website to help you work it out. Here’s the link.
When do I need to pay Corporation Tax?
This is the main problem with Corporation Tax – the payment deadline is different from other major taxes, such as income tax and VAT, and you have to pay corporation tax before you file your company tax return.
Invariably, you have to pay your corporation tax within nine months of the end of the accounting period for your previous financial year. So if, like many firms, your accounting period comes to an end on March 31, you must settle your corporation tax bill by January 1 the following year.
How do I pay Corporation Tax?
All corporation tax payments now have to be made electronically, so if you’re used to paying by post you’ll have to find a new way of settling your bill.
If you’re desperate to cling to the old way of doing things, and want to pay by cheque, you can still do so; but now you have to deposit the cheque with your bank or building society – HMRC classifies this as electronic payment.
Alternatively you can pay by direct debit – all you need to do is register with HMRC Online Services, then the website will take you through the direct debit process step-by-step. As long as you can wait five days for the payment to go through, you shouldn’t have any problems.
You can also make a payment via credit or debit card – but, to do so, you have go through BillPay, the service provided by Santander Corporate Banking.
A credit card payment will incur a transaction fee of 1.4%. It’s also worth noting that American Express and Diners Club cards are not accepted.
To pay through Billpay, you must have your credit or debit card number to hand, along with the corporation tax reference number. This method of payment is slightly quicker than direct debit; it usually takes only three days.
If you prefer to use your internet or telephone banking service, or BACS, to make the payment, that’s fine as well. All you’ll need are HMRC’s bank details, as well as your corporation tax reference number. Again, this’ll take around three working days to go through.
But if you’re really up against it, and you need to make your corporation tax payment asap, there’s only one method – CHAPS. This method may be expensive, but it’ll make sure the money reaches HMRC from your bank same-day.
Just remember that most banks only allow CHAPS payments within a certain time window – if you try and make a payment outside that window, you probably won’t have much joy.
Tax simplification for small businesses
A document published in 2012 titled ‘Making tax easier, quicker and simpler for small businesses’, outlines how the government and HMRC plan to make the tax system easier and simpler for small businesses to understand and deal with.
As part of the new plans, businesses will be able to work out their income tax on a cash basis, with simple and specific rules relating to small and mid-sized businesses (otherwise referred to as SMEs).
For more information click here