Announced by the Chancellor of the Exchequer in the 2016 Spring Budget was some favourable news for corporations whereby from 1st April 2017 corporation tax (currently at 20%) is going to be cut by 1% in every tax year until 2020 whereby corporation tax will stand at 17%.

In order to fully understand the impact of these changes it is important to answer some basic questions about the mystery of corporation tax.

What is corporation tax and who pays it? Corporation tax is a tax levied by the government on businesses that are registered with Companies House, being a separate legal entity in their own right and trading in most cases as a “Limited” entity. Specifically corporation tax is a tax on a company’s profits achieved in a given twelve month financial period. In order to calculate a company’s taxable profit, this is derived in the main from the income statement contained within the company’s financial statements for that year.

What are the current corporation tax rates and do they change? Currently the corporation tax rate stands at 20% no matter what size of company you are or indeed how much profit the company makes. In essence it is a fixed tax rate, which differs from income tax whereby an individual’s tax rate will depend on earnings thresholds. From 1st April 2017 however the fixed rate of corporation tax will be cut by 1% and in every tax year after until 2020 when corporation tax will be just 17%.

What is a corporation tax return and are there any deadlines and penalties for non-compliance? A corporation tax return draw similarities to self-assessment tax returns in so much as it is the document that discloses the profit or loss attained in a given financial year, and in so doing calculates the amount of tax that may be payable based on those financial results. For most companies the tax owed per the tax return must be paid nine months and a day after the company’s financial year end. The corporation tax return however does not need to be filed with H M Revenue & Customs until twelve months after the company’s financial year end. Should a company fail to either pay its tax liability or file its tax return on time, H M Revenue & Customs impose interest charges and fixed penalties for late action.

What expertise do we have in this area to help businesses? The good news is that for existing companies the benefits of the cut in corporation tax will be received without having to do anything. The businesses that are not affected by corporation tax are sole traders and partnerships (of whom are subject to income tax on profits). For these businesses one option is to “incorporate”; in essence transferring a sole trader or partnership into a limited company. Following this process the business would then fall under the corporation tax rulings instead of the previous income tax legislation.

Should you have any further questions about the changes to corporation tax or how to incorporate our business please contact us now by calling 0121 706 8585.