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CORPORATION TAX

Corporation Tax (CT) is charged on profits made by 'companies' - but for these purposes a 'company' can include an unincorporated association such as a club or society.

Corporation Tax rates for the year commencing 1 April 2008 have been amended as follows:

Due to the operation of marginal rates on profits  between £300,000 and £1.5 million, there is an incentive to ensure that all possible deductions are obtained to minimise the liability between these levels of profit. The profit limits are reduced where a company is 'associated' with another company.

Self Assessment

A company has to estimate its own CT liability and pay this on or before the due date, which is normally 9 months and one day after the end of its accounting period. (earlier for 'large' companies - see our Quick Guide to Self Assessment for Companies). A Corporation Tax Return (Form CT600) must be filed with H M Revenue & Customs within 12 months of the year end.

Interest is charged on late paid Corporation Tax, and there are penalties for the late filing of a Corporation Tax Return. The initial penalty is £100, but if three Returns in a row are late, the penalty rises to £500.

Reducing the Charge

1. Expenses
Expenditure incurred prior to the company's year end may reduce the current year's tax liability rather than next year's. Bringing forward expenditure by even a few weeks can accelerate the tax relief by 12 months - for example building repairs, advertising, sales & marketing campaigns and any other items deductible from profits. It should be noted that the expenditure must be 'incurred' in the period and the relevant accounts must give a 'true and fair' view of the profits for that
period.

2. Plant and Equipment
Expenditure on plant and equipment by small businesses
usually qualifies for a first year allowance (FYA) of 50% from April 2006. From 1 April 2008 following various reforms to Capital Allowances FYA’s are replaced by an annual investment allowance of £50,000 a year. Expenditure in excess of this amount will qualify for an additional writing down allowance of 20%.

This can be a complex area and appropriate advice should be taken to ensure tax benefits are maximised.

3. Hire Purchase
Hire purchase (or lease purchase) may provide a useful way of financing an asset. Plant and equipment obtained in this way will qualify for writing down allowances on the full purchase price - even if only the deposit has been paid.

4. Provisions
Specific provisions against bad debts or stock are usually allowable for tax purposes. General provisions are not. There are stringent conditions attached to other specific provisions (e.g. for repairs) before they can be brought into an earlier year's accounts for tax purposes.

5. Bonuses to Directors & Staff
Provision may be made in the annual accounts for specific bonuses paid up to 9 months after the year end. There should, however, be an expectation at the balance sheet date that such a bonus will be paid. Care should also be taken to ensure that any bonuses are correctly subjected to PAYE as appropriate.

6. Pension Contributions
From 6 April 2006, under the new pensions tax regime,
employers' contributions to a registered pension scheme
are tax allowable in the year of payment provided the
contribution is made 'wholly and exclusively' for the
purposes of the trade. There is no limit to the annual
amount that may be paid but if the total contributions
exceed the employee's annual allowance (set at £235,000 for 2008/09) there will be a tax charge on the individual on the excess. Large irregular contributions may be subject to spreading provisions.

7. Company Cars
It may well be more beneficial to own a vehicle privately and claim for business usage. (See our Quick Guide to Company Cars)

Capital Gains

Capital Gains made by a company are taxed at the effective rate of Corporation Tax. Gains are calculated by deducting from sales proceeds the market value of the asset at March 1982 (or cost of acquisition, if later), costs of improvements made, an indexation (inflation) allowance and certain disposal costs. (Taper relief does not apply to companies).

Capital Gains may, in certain cases, be reduced by Rollover Relief, Negligible Value Claims, Crystallizing Capital Losses or by Deferment. All of these matters, however, require specialist advice.

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from this firm or other suitably qualified person or practice.