In this article, our tax specialists will decipher the term “Corporation Tax” for you and let you know how it’s calculated. But before doing that, you should first have a quick peep into the types of taxes companies pay.
Types of Taxes Paid by Companies
If your company identifies itself as a “UK Resident Company”, it will be subject to CT on total profits (worldwide income, capital gains, and profits). However, a UK-resident company will not pay Capital Gains Tax or Income Tax.
Note* However, there are a few exceptions when it comes to Capital Gains Tax realised before 6th April 2019. For details, please go through Section 15.6.
Likewise, a UK resident company may be subject to income tax deduction at source. Again, this income tax can be charged from its Capital Gains tax liability against the same period.
Stamp Duty and Stamp Duty Land Tax
UK resident companies are subject to Stamp Duty and Stamp Duty Land Tax at rates paid by an individual. But there are exceptions if the 1st purchase of residential property exceeds £500,000
UK resident companies are only subject to Inheritance Tax in very rare and outstanding circumstances. The cherry on top? Even in these rare and outstanding circumstances, the only IT liability arises because of external factors that involve shareholders. Inheritance Tax basically arises when an individual dies, and their inheritance is passed to a spouse, children, or relatives. As companies are not living entities, they are just wound up.
Unlike companies, shareholders die. And when it is so, HM Revenue & Customs take into account the value of the shareholder’s property company shares as part of their state for Inheritance Tax purposes.
Value Added Tax
A company—just like an individual—is liable to Value Added Tax.
If you hire someone to help you with corporate property business, then the company – in its capacity as an employer) is responsible by law for secondary Class 1 National Insurance (NI) at the rate of 13.8%. Also, the company is legally responsible for Class 1A NI on those benefits provided to the employees and Class 1b NI on any voluntary settlements negotiated with HMRC.
Like other employers, a property company will deduct primary Class 1 NI from the employees’ salary and account for this via the Pay-as-you-earn system. Besides the NIs mentioned above (Class 1, 1A, and 1B), a property company is not liable for other types of National Insurance
Annual Tax on Enveloped Dwellings (ATED)
If the value of UK residential properties your company owns surpasses £500,00, only then will your company pay ATED or Annual Tax on Enveloped Dwellings (ATED).
These are the most common types of taxes that property companies pay in the UK. Now, let’s dive deep into the details and discuss corporation tax at length.
When calculating Corporation Tax in the United Kingdom, both capital gains and income for an accounting period are treated as a single sum. Both are added, and then CT is charged on it.
Company’s statutory accounts for the relevant period are taken into consideration when calculating taxable profits. If the company has more than one source of income, then HMRC may ask for more details of accounts to calculate CT. It is pertinent here to mention that trading profits, rental profits, and capital gains within a company are all calculated similarly to individuals. However, the main difference occurs in the method of taxing gains and income tax, the exemptions and relief available, and the method of relieving finance and interest costs.
For taxation purposes, the Corporation Tax is calculated against a period called “Financial Year”. Just for clarification purposes, it is stated that a “financial year” is different from a tax year, which applies to income received by individuals.
Financial Year expires on 31st March of a calendar year. But it is officially described by the calendar year in which it began. For instance, the 2021 financial year is the year beginning 1st April 2021 and ending March 2022. Therefore, it is always important to use the aforesaid period when calculating CT for a certain financial year.
Periods Spanning Two Financial Years
If the accounting period of your company does not end on 31st March, then it is going to span for 2 financial years. When this happens, you will split profits on a pro-rata basis across 2 Financial years.
Corporation Tax Rates
As of 2015, HMRC has introduced changes to CT taxes for companies of all profit levels and sizes (however, changes don’t apply to companies doing operations in the gas and oil sectors). Below are the CT rates:
- 1st April 2015 to 31st March 2017: 20%
- 1st April 2017 to 31st March 2022: 19%
For beyond March 2022 and afterwards, the position for CT rates is still unknown; therefore, we’ll assume it to remain at 19% for the foreseeable future and will base our calculations on the same.
For companies operating in Northern Ireland, different CT rates apply. At present, the CT rate in Northern Ireland stands at 12.5%. However, like all other things, these rates are expected to change soon. Therefore, taxpayers investing in the property sector of Northern Ireland can save an additional 12.5% through property companies.
Paying Corporation Tax
Companies pay Corporation Tax in a single lump sum payment within 9 months and 1 day after the end of the accounting period. For instance, the corporation tax for the tax year ending 3rd December 2021 will be due by 1st Oct 2022. As far as payments method are concerned, you will pay all CT taxes online. If payments are late, then HMRC will charge tax on them. It is pertinent here to mention that you can deduct interest on overdue CT as a deductible expense.
If your property company identifies as a large company and its profit surpass £1.5 million, it will pay corporate tax in quarterly instalments. Likewise, if the profits of your company exceed £20 million, then it has to make payments even more earlier than quarterly payments and have to clear all tax liability in a year.
Cashflow Benefits of Using Property Company
While individuals and partnerships always have to clear tax liability against certain dates [else, they face penalties], it’s not the case with companies, as they pay tax at the end of their accounting periods. There’s a big cash flow benefit for profitable and stable property businesses.
If your company has large profits and falls in the category of large companies, then it has to make tax payments under quarterly installment systems. If this is the case, your average corporate tax payment will come a month earlier before the end of the accounting period. When this occurs, the company is at a cash flow disadvantage. However, other considerations become more important when your company reaches the level of large companies.
Company Tax Returns
The self-assessments submitted by companies are called Corporation Tax Self-Assessment or CTSA simply. HMRC requires a company to submit CTSA within 12 months of its accounting date.
HMRC labels CTSA return the document as form CT600. When filing CTSA, HMRC requires companies also to submit accounts— a calculation of gains and profits made during a financial year. Likewise, a company is also required to calculate the amount of CT due. For companies, HMRC has made it mandatory to submit CTSA online. You will submit all documents in iXBRL format.
If you need any help with your corporation tax, look no further, as we have got your back. We have helped hundreds of businesses to save hundreds of thousands of pounds in taxes legally, and we can do the same for you. We will help you with CT computation and CT self-assessment.
At IBISS & CO, you can find leading CGT advisors, tax accountants, and inheritance tax specialists in London. Reach out to us for a 15-minute free call. Yes, you read it right. The initial 15-minute consultation is absolutely free!