Corporation tax plays a significant role in the UK economy, as it provides a substantial source of revenue for the government. In the 2019/2020 tax year, corporation tax contributed £57.7 billion to the UK’s public finances.

For UK-limited companies, paying corporation tax is a legal obligation and a responsibility to contribute to the country’s economy. Businesses can help fund public services and infrastructure projects by paying their fair share of corporation tax, ultimately benefiting the wider community.

Understand the Corporation Tax System

The UK tax system can be complex and overwhelming for businesses to navigate. Corporation tax, a tax on the profits made by companies, is a significant source of revenue for the UK government. Businesses must understand how corporation tax fits into the UK tax system and their obligations. The rate of corporation tax that a business pays depends on its profits and legal structure. The current corporation tax rate is 19%, one of the lowest rates in the G20. However, there are different rates for different types of businesses.

• Small profits rate: If a company has profits of £50,000 or less, it is eligible for the small profits rate of corporation tax. This rate is currently set at 19%.
• Main rate: The main corporation tax rate is 19% for companies with profits over £50,000.
• Marginal relief: If a company’s profits fall between £300,000 and £1.5 million, it may be eligible for marginal relief. This means that the company will pay a reduced rate of corporation tax.

Corporation Tax Return Filling and Penalties 

The first tax year for Limited Companies runs from the date of incorporation to the last day of the month next year and, subsequently, the 12 months period, which is different from the tax year for individuals, which runs from 6 April to 5 April the following year. Businesses must understand their corporation’s tax year as it determines when they need to file their tax returns and pay any tax owed.

The deadline for filing corporation tax returns is 12 months after the end of the accounting period. For instance, if a company’s accounting period ends on 31 December, the deadline for filing its tax return is 31 December the following year. Businesses must meet this deadline as there are penalties for late filing.

The penalties for late filing are as follows:

• One day late: £100
• Three months late: £100 plus 1% of the tax due
• Six months late: £100 plus 1.5% of the tax due
• 12 months late: £100 plus 2% of the tax due

In addition to these penalties, interest will also be charged on any tax owed that is paid late.

Claiming Allowable Expenses to Reduce Corporation Tax

Allowable expenses are the expenses that can be deducted from your taxable income. Therefore, these expenses are considered necessary for conducting business and are eligible for tax deductions. By claiming allowable expenses, you can significantly reduce your tax liability and keep more of your hard-earned money.

There are several types of allowable expenses that you can claim on your tax return. These include:

• Travel expenses: This includes expenses incurred while travelling for business purposes, such as airfare, hotel accommodations, and meals.
• Office expenses: This includes expenses related to maintaining an office, such as rent, utilities, and office supplies.
• Equipment expenses: This includes purchasing and maintaining equipment, such as computers, printers, and software.
• Professional fees: This includes expenses related to hiring professional services, such as legal and accounting fees.
• Marketing and advertising expenses: This includes expenses related to promoting your business, such as website development, advertising, and marketing materials.

To determine which expenses are allowable, you must ensure they are necessary for conducting business. The expenses must also be reasonable and directly related to your business activities. For example, if you are a freelance writer, you can claim expenses related to purchasing a computer and software, but you cannot claim expenses related to purchasing a new wardrobe.

Keep Track of Allowable Expenses

Keeping track of allowable expenses is crucial for maximising your tax deductions. Here are some tips for keeping track of your expenses:

• Keep all receipts and invoices: This includes receipts for meals, travel expenses, and office supplies.
• Use accounting software: Accounting software can help you keep track of your expenses and generate reports for tax purposes.
• Separate business and personal expenses: It is essential to keep your business and personal expenses separate to avoid confusion and ensure that you only claim allowable expenses.

Strategies to Maximise Allowable Expenses

Maximising your allowable expenses can significantly reduce your tax liability. Here are some strategies for maximising your allowable expenses:

• Plan your travel wisely: When travelling for business, combine multiple trips to reduce travel expenses.
• Take advantage of all available tax deductions: Make sure you are aware of all the tax deductions available to you and take advantage of them.
• Invest in equipment: Investing in equipment can help you claim more allowable expenses. For example, purchasing a new computer can be considered an allowable expense.
• Hire professional services: Hiring professional services such as legal and accounting services can also be considered allowable expenses.

Claim Capital Allowances to reduce Corporation tax 

Claiming capital allowances can significantly reduce your tax bill, which means more money in your pocket to reinvest in your business. For example, if you spent £100,000 on qualifying assets and claimed a 20% capital allowance, you could reduce your taxable profits by £20,000, resulting in a tax saving of £4,000 (assuming a 20% corporation tax rate).

There are several types of capital allowances that businesses can claim, including:

• Annual Investment Allowance (AIA): This allowance allows businesses to claim 100% of the cost of qualifying assets up to a certain limit (£1 million until 31 December 2021).
• First-Year Allowance (FYA): This allowance allows businesses to claim 100% of the cost of qualifying assets in the year of purchase.
• Writing Down Allowance (WDA): This allowance allows businesses to claim a percentage of the cost of qualifying assets each year (18% for most assets and 6% for certain buildings).
• Enhanced Capital Allowance (ECA): This allowance is available for energy-efficient technologies and allows businesses to claim 100% of the cost of qualifying assets.

Maximise Capital Allowances

To determine which capital allowances you can claim, you need to identify the assets that qualify for each type of allowance. For example, the AIA applies to most types of plant and machinery, while the ECA applies to specific energy-efficient technologies. It is essential to keep accurate records of your capital expenditure to ensure you claim all the allowances you are entitled to. To maximise your capital allowances, consider the following strategies:

• Plan your capital expenditure: By planning your capital expenditure, you can take advantage of the AIA and FYA allowances, which allow you to claim 100% of the cost of qualifying assets in the year of purchase.
• Consider energy-efficient technologies: The ECA allows you to claim 100% of the cost of qualifying energy-efficient technologies, which can help you reduce your energy bills and carbon footprint.
• Review your assets regularly: It is essential to review your assets regularly to ensure that you are claiming all the allowances you are entitled to. For example, if you dispose of an asset, you can claim a balancing allowance or charge.

If you are need help with your tax planning or corporation tax return, reach out to our tax advisors for a consultation to determine the most suitable tax planning for your specific needs.