How is my Corporation Tax Bill Calculated?

If you own or manage a business in the United Kingdom, no matter how big, small, successful or unsuccessful your sales and profits may be, you must have a detailed understanding of corporation tax. Why do you have to file corporation tax? What is corporation tax? When is my corporation tax due? And what are the penalties for not abiding by it? These are all important questions you should know the answer to.

However, one question that is still asked a significant amount is how corporation tax is calculated. Whether you file your own company tax return online or have a professional do it for you, as a business owner, knowing how your bill is calculated will ensure you go on to make informed decisions throughout the financial year that comply with the regulations put in place by HMRC (HM Revenue & Customs).

Let’s look at the intricacies of filing your corporation tax, starting from the basics and delving into the key factors influencing your final bill.

Corporation Tax – The Basics

When a limited company or other corporate organisation generates profits of any size, they need to follow the HMRC regulations of filing corporation tax. Something people often fail to understand is that this will be calculated by your business’s taxable profits, not your total revenue. To explain, a taxable profit will equate to the overall income your business has attained after deducting any reliefs or allowable expenses. When it comes down to calculating your own corporation tax, you should have a clear understanding of your business’s taxable profits.

Your Taxable Profits

When you start to determine your taxable profits, you will need to subtract any allowable expenses from the total revenue your business has achieved. If you have costs directly related to your business operations, from salaries and office rent to travel and utilities, these are your allowable expenses. When you make these payments, it’s essential you keep a record of these safe. Having access to accurate accounts each time you’ve made a business purchase or payment ensures you are able to claim them back effectively from your taxable profits.

Losses & Reliefs

As well as deducting your business expenses, you can use your losses and reliefs to reduce your corporation tax liability. It’s also important to note that your businesses experienced losses in previous accounting periods, as these may well be able to be carried forward and offset against future profits. There are multiple reliefs, such as research and development, that offer businesses the chance to lower their tax bills while encouraging and promoting growth and innovation.

Capital Allowances

Capital allowances are another important element to consider when calculating your taxable profits. This can be done if you want to deduct the cost of equipment and machinery or company vehicles. Before venturing into this, you should have a clear understanding of the types of capital allowances as well as their applicable rates – this ensures you optimise cash flow and maximise your tax efficiency.

The Thresholds & Rates

You may know that the corporation tax process in the United Kingdom is managed on a tiered structure. This includes multiple tax rates and thresholds depending on the business’s profits. In summary, the smaller the profits, the lower the tax rate. As a business owner, understanding your profits and the threshold and rates for the current financial year will ensure you remain compliant with HMRC’s regulations – it also allows you to plan accurately for your tax liabilities.

The Importance Of Staying Compliant

Following the strict rules and regulations expected by HMRC while fulfilling your reporting obligations is incredibly significant. This process is paramount for businesses if you want to avoid reputational damage and penalties and maintain healthy company finances. Submitting accurate corporation tax on time, within the specific deadline you are provided, as well as ensuring these reportings are detailed and secure records and evidence, should always be a priority. If filing your corporation tax seems unmanageable or overwhelming, many software and professionals are available to offer step-by-step guidance and advice.

To conclude, it’s no secret that filing corporation tax is a dreaded and somewhat complicated tax for businesses. However, understanding the basics, remaining up to date with regulation changes, ensuring you file within your deadline and keeping a secure record of your outgoings and expenses will set you up for filing success.