Cash flow management is a crucial part of any business and having an awareness of when and how much tax you need to pay is an important part of that cash flow management. If you don’t pay your corporation tax on time, HM Revenue & Customs will charge interest from the day that it’s due until you pay it.
For small and medium companies (SMEs) your corporation tax payment is normally due by nine months and one day after the end of your accounting period. So if your company tax return covers your accounting period 1 April 2013 to 31 March 2014, then corporation tax must be paid no later than 1 January 2015.
Large companies (generally, where taxable profits are in excess of £1.5m, but see below regarding associated companies and accounting periods which are less than 12 months long) need to make their corporation tax payments by quarterly installments, commencing during the accounting period.
The current rates of corporation tax are shown in the table above. Please note that where there are two or more active associated companies for corporation tax purposes, then the amounts given in the corporation tax bands above are divided by the total number of associated companies.
As a practical example, if two companies are associated for corporation tax purposes then (for the year to 31 March 2014) each company will pay 20% on the first £150,000 of taxable profits (i.e. £300,000 divided by two), then pay 23.75% on the next £600,000 of taxable profits before paying 23% on taxable profits over £750,000.
Likewise, the tax bands above are pro-rated for accounting periods which are less than 12 months long.
Business owners need to be aware of tax planning opportunities perhaps by considering one or all of the following:
• Capital allowances – the timing of your capital investment (plant, machinery, office equipment etc) is vital to obtain maximum relief. The Annual Investment Allowance (AIA) is currently 100% for the first £250,000 of qualifying expenditure, meaning companies can write-off 100% of the cost of qualifying capital expenditure up to £250,000 per year, against taxable profits, in the year of purchase.
• Cars – choosing a fuel-efficient car can benefit both the business and the employee with low emission cars, CO2 emissions are no more than 95 g/ km, which encompasses more cars than you might think, attracting 100% tax relief on purchase (where unused and not second-hand). HM Revenue & Customs accept that this condition is met ‘even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car’.
• Going green – investment in approved environmentally-friendly or energy-saving equipment can also qualify for 100% first year capital allowances.
• Research & development – the rules offer generous tax opportunities for SMEs, with qualifying expenditure attracting a 225% deduction against taxable profits. Furthermore, if your business is not making a taxable profit, then there is a tax credit system in place which allows the relief as an ‘up-front’ cash sum in exchange for the corresponding trading losses. This can provide a vital cash flow boost for R&D companies, especially in the early stages of their business.
• Pensions – generally, contributions made by an employer to a registered pension scheme will attract tax relief for the employer. Contributions made by an employee will also attract tax relief for the employee subject to a maximum annual limit of £50,000 per person (£40,000 from 6 April 2014) in the total of the employer’s and employee’s contributions. From a planning perspective it is also worthwhile checking when your business must automatically enrol its employees into a pension scheme under the government’s ‘autoenrolment’ legislation. More information on this can be found here – http://www.thepensionsregulator.gov.uk/automatic-enrolment.aspx
• Salary versus dividend – this should be reviewed regularly to keep pace with changing legislation. Dividends do not incur National Insurance but are paid out of a company’s ‘after tax’profits, whereas salary is subject to National Insurance, but receives corporate tax relief as a company cost. Please contact us if you would like to discuss any of the above opportunities.