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Corporation tax and other business taxes

The structure and profits of your business will determine whether or not you need to pay corporation tax and VAT.

What taxes do I pay on my business profits?

If you are a sole trader or part of a business partnership, then you do not need to pay corporation tax on your company’s profits – you must pay income tax and national insurance on your earnings from the business, however.

If your business is a limited company, a limited liability partnership, or an unincorporated association, you will need to pay corporation tax on any profits that are made.

Corporation tax

Corporation tax is the tax levied on the taxable profits (what is left after you have subtracted all expenses from gross income) made by limited companies in the UK.

These profits include trading profits and investment profits as well as capital gains (known as ‘chargeable gains’ in the context of Corporation Tax).

It is the responsibility of the business to inform HM Revenue & Customs (HMRC) that it is liable for Corporation Tax, pay the right amount of tax on time, and file a Company Tax Return and supporting documents.

The deadline for paying Corporation Tax is 9 months after the end of your company or organisation’s financial year. So for example, if your financial year runs from 1 April 2013 to 31 March 2014 you must pay by 1 January 2015. Be careful not to confuse this with the deadline for your Corporation Tax Return, which is filed 12 months after the end of an accounting period.

If your profits exceed an annual rate of £1.5m then your Corporation Tax will normally be paid in installments, with the full balance being paid before your Corporation Tax Return deadline.

There are two thresholds for Corporate Tax: the Small Profits Rate (previously known as Small Companies’ Rate) which stands at 20% and applies to businesses whose profits do not exceed £300,000, and the Main Rate which stands at 21% and applies to businesses whose profits exceed £1.5m.

Marginal Relief

Firms that fall in between the two thresholds are eligible for Marginal Relief (previously known as Marginal Small Companies’ Relief). This is effectively a sliding scale where the business is charged the main rate but the amount they pay is calculated and adjusted to an amount appropriate to their actual profits.

You can deal with HMRC directly but it is advisable to use an accountant or tax adviser – known to HM Revenue & Customs (HMRC) as an agent – who can act on behalf of your company or organisation to tell HMRC it’s liable for Corporation Tax and file your Company Tax Return. Your agent can also deal with HMRC on other Corporation Tax matters.

If you authorise an agent to act on your behalf to deal with your company or organisation’s Corporation Tax, you must inform HMRC.

Corporation Tax rates for financial years starting April 1

2011/12 2012/13 2013/14 2014/15
Small Profits rate (Profits of £300,000 or less) 20% 20% 20% 20%
Marginal Relief rate (Profits from £300,001 to £1.5m) 27.5% 25% 23.75% 21.25%
Standard fraction 3/200 1/100 3/400 1/400
Main rate (Profits of £1.5m or more) 26% 24% 23% 21%
Special rate for unit trusts and open-ended investment companies 20% 20% 20% 20%

Valued Added Tax (VAT)

VAT is payable on what is known as “taxable supplies”. Taxable supplies can account for a range of different things, including product and/or services sold by your business, commission, sold business assets, and any business goods that have been used for personal reasons.

The standard tax rate for VAT is 20%, although some goods and services are charged at a reduced rate (5%) or zero rate (0%). For example, most food is payable at the zero rate, with certain exceptions (including chocolate, sweets, and hot takeaway food and drinks). You can find a complete breakdown of what different taxable supplies are liable for what tax on GOV.UK.

Registering for VAT

You can register for VAT online by signing up for Government Gateway account on HMRC’s website. Alternatively, you can register by filling out form VAT 1 and posting it to:

VAT Registration Service
Crown House
Birch Street

You only need to charge and pay VAT if your business is registered for VAT. Registering for VAT is voluntary unless the business’s VAT taxable turnover is over £81,000 during any 12-month period. For example, if your company sells £90,000 worth of chocolate during a 12-month period, you must register for VAT. On the other hand, if half of that turnover was from selling a zero rate VAT product instead (milk, for example), you would not be required to register.

Bear in mind that this 12-month period does not need to be during the financial year – it can be any 12-month period.

You can apply to HMRC for an exception if your business’s VAT taxable turnover has crossed the £81,000 threshold, but you believe it will not stay above £79,000 for very long. You will need to provide evidence for to this HMRC, and they may make an exception for you.

It is possible to register for VAT on a voluntary basis even if your VAT taxable turnover does not reach £81.000. This may be beneficial to your business, as VAT registered businesses can claim back VAT paid on items they have bought from other businesses (for example, if your supplier has charged you VAT for products that your business sells to customers). This can save your business money, as you can deduct the VAT that you have already paid from the amount you will need to pay to HMRC.

Registering for VAT can also give your business extra prestige, as it can make customers and suppliers think that your business has annual turnover above £81,000.

Deregistering from VAT

You can deregister from paying VAT if your business’s VAT taxable turnover drops below £79,000. To do this, you should contact HMRC. You can do this using HMRC online services, or by filling out form VAT 7 and posting it to them.

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