Corporation Tax

If you have a limited company then you will be paying Corporation Tax on your profits.

WHAT ARE TAXABLE PROFITS?

The profit that your business makes is not the same as the profit that will you will be taxed on (because nothing is every simple!) and there will be adjustments to your company profits for items such as:

• depreciation

• capital allowances

• entertainment

• non-allowable expenditure

WHAT ARE THE RATES OF CORPORATION TAX?

The rate of corporation tax will depend on the level of these profits:

• Small companies rate (taxable profits under £50k) – 19%

• Main rate (taxable profits over £250k) – 25%

But what about those profits between £50k and £250k? These are taxed at 25% and then marginal relief is given at 3/200 on the “gap” between the business profits and £250k – let’s look at an example:

If taxable profits are £120k then the corporation tax is calculated as:

• Corporation tax at main rate = £120,000 x 25% = £30,000

• Marginal relief = (£250,000 - £120,000) x 3 / 200 = £1,950

• Corporation tax = £30,000 - £1,950 = £28,050.

The effective tax rate is the tax dividend by the profits:

• Effective tax rate = £28,050 / £120,000 = 23.38%

I appreciate that this is a bit of a convoluted calculation and not the easiest to remember (!) so the easier way to calculate this (rather than the official way) is:

• First £50,000 of profits at 19%

• Profits above £50,000 and below £250,000 at 26.5%

• And then add these together

(remember that if profits are over £250k in the first place then the whole lot is taxed at 25%).

So using the same taxable profits figure of £120k and the easier calculation:

• First £50,000 at 19% = £9,500

• £120,000 profits less £50,000 = £70,000 at 26.5% = £18,550

• Corporation Tax = £28,050.

ASSOCIATED COMPANY RULES

But what about if you have more than one business? If you do then the “Associated Company” rules need to be taken into consideration:

A company is an associated company of another company if:

• One company has control of the other

• Both are under the control of the same person or persons.

Note: dormant companies are not included within these calculations.

And if there are associated companies then the limits are divided by the number of associated companies (ie 2 companies means the limits become £25k and £125k etc).

This is complicated and messy and definitely makes my brain hurt! So definitely worth speaking to an accountant but here are some examples:

If ABC Limited is owned by Mr A, Mr B and Mr C in equal shares and are not associated individuals then ABC Limited can be controlled by:

• AB

• AC

• BC

If DEF Limited is owed by Mr A, Mr B, Mr C and Mr D in equal shares (again, not associated individuals) the DEF Limited can be controlled by:

• ABC

• ABD

• ACD

• BCD

Then there are no controlling groups in common between ABC Limited and DEF Limited and they are not associated companies.

But what if this changes slightly?

If ABC Limited is owned by Mr A, Mrs B and Mr C in equal shares, and this time Mr A and Mrs B are married but Mr C is not an associated individual, then ABC Limited can be controlled by:

• AB

• AC

• BC

But AC and BC are considered to be “the same” because of Mr A and Mrs B being married and so this effectively gives:

• AB

• AC = BC

If DEF Limited is owed by Mr A, Mrs B, Mr C and Mr D in equal shares (and this time Mr A and Mrs B are married but Mr C is not an associated individual) the DEF Limited can be controlled by:

• ABC = AC = BC

• ABD = AD

• ACD = BCD

And now there is common control between the two companies and they are considered to be associated. This means that the tax limits are divided by 2 (because there are two associated companies).

If there are more companies then this gets bigger, messier and the limits get smaller.

And finally... Yep, tax isn’t straight forward and it isn’t easy.. that’s why working with an accountant or tax advisor to ensure that you get it right is always a good idea.

Rachael