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What Is Corporation Tax Payment on Account?

corporation tax payment on account

Businesses have the option of settling corporate tax payments in instalments instead of one full payment. This staggered form of payment allows corporations to distribute taxation expenses in multiple manageable payments. Business taxation can prove challenging and complex and it is of utmost importance to fully grasp taxation laws and processes to avoid irreparable errors or costly fines.

Read on as we discuss what you must know regarding paying corporate taxes on instalments in the UK. From determining who the liable parties are, methods and terms of payment (including deadlines and penalties) to tax rates according to business type, this article covers it all.

What is Corporation Tax?

All businesses operating in the UK are liable for tax and this includes limited liability partnerships or LLPs. Businesses, whether large or small, are taxed in a way that is fair to the economy as a whole. Taxation naturally charges higher interest rates to businesses that have higher profits within a business year.

How is Corporation Tax Calculated?

A corporate tax bill is calculated based on company profits during the financial year. By profits, we mean total earnings from all income-generating sources. Not all expenses and deductions apply, but whatever is allowable will be subtracted from the total income. The Corporation Tax rate is currently at 19%, subject to rate adjustments. This can go higher or lower, and companies must stay aware of the updates.

Don’t be remiss in consulting with an accountant or directly contacting HMRC when needed, especially if you are not certain of your tax obligations. Seek guidance to ensure you are fulfilling your tax liabilities to avoid unfortunate legal consequences.

What are Corporation Tax Instalments?

If calculations result in a tax liability, you can elect to pay corporation tax in two instalments. The first payment is typically required within the first quarter of the financial year, while the second payment is required some time in the third quarter.

What is Corporation Tax Payment on Account?

Tax bills exceeding £1,000 can be settled in two payments within the same financial year. Payments fall in April and September. Remember that the amount of tax owed is calculated from your profits gained from the previous year.

Tax bills below £1,000 cannot be settled in instalment payments. The same goes for new corporations established only in the past financial year. This means the full amount of corporation tax liability must be paid within the end of the current financial year.

Making a Corporation Tax Payment on Account

As for payment methods, there are four options you may choose from. The first option is to pay online directly on the government website payment page. A direct debit payment can also be arranged, where tax payments are deducted automatically. Cheque payments are also accepted, as well as payments via telephone banking systems.

For sole traders or self-employed taxpayers, tax payments can go through the HMRC system. This entails a self-assessment of tax liabilities.

How to Calculate How Much Corporation Tax You Owe

When calculating the taxable income of your business, begin by filling out a corporation tax return. Tax return forms can be requested by post. Alternatively, you can access and download a form from the official government website. With the form, you can systematically and procedurally calculate the total income of your business for the financial year. Thereafter, you will deduct eligible expenses.

After calculating the taxable amount, multiply the figure by the corresponding tax rate. For instance, a company that reports a taxable profit of £100,000 for the 2020-21 financial year will have to pay corporation tax in the amount of £21,000. The amount is computed from a prevailing rate of 21%.

Bear in mind that should you make the same profit in a different year, let’s say, for the 2022/23 financial year, your corporation tax due would only amount to £19,000. This is because the tax rate has been reduced to 19% only for the said financial year.

Hence, it is crucial to stay aware of prevailing tax rates to ensure your company doesn’t pay more than what is due. However, if you do make an overpayment, refunds can be lodged from HMRC. This tends to be a tedious process, so you’d be better off making the exact corporate tax payment at all times.

What Expenses are Deductible for Corporation Tax?

Most of your company’s expenses will be eligible for tax deductions. Generally, business-related expenditures are essential to business operations. Furthermore, these tax-deductible expenses allow businesses to put money into the growth or advancement of their business.

Provided that the amount is expensed exclusively for business purposes, corporations can declare such to get tax relief. Eligible expenses vary, including the following:

  • Rental costs for rented premises and mortgage interests for loaned properties
  • Insurance costs
  • Wages and fees incurred in the operation of a business
  • Staff development
  • Cost of promotion or advertising
  • Business-related travel expenses
  • Equipment required for business operations

What Happens if You Underpay Corporation Tax?

If you don’t pay your corporation tax bill in full, interest will accrue on the unsettled balance. Interests are computed based on the amount owed and the time it has remained outstanding. HMRC may further impose penalties against businesses who notoriously and intentionally underpay in taxes.

Should your company fall on hard times and struggle to pay its taxes, get in touch with HMRC to organise a payment plan and tax assistance.

Penalties for Corporation Tax Evasion

Penalties apply to tax evaders who understate their taxes due. Your corporation may incur a:

  • Fine based on the gravity of the offence and the financial position of your business 
  • Imprisonment of up to 7 years for heavy offences.
  • Removal from your position as company director, effective for up to fifteen years.

On top of that, interest charges may be applied to the tax amounts remaining. And the HMRC can demand full payment in addition to applicable penalties.

Corporations suspected of committing tax evasion will be investigated by the HMRC, with the following action steps:

  • HMRC will require you to disclose and present company documents and information.
  • HMRC will subject your business premises to inspections
  • HMRC will interview you and your staff

In the event of any investigations, you are best to secure the services of a tax lawyer as they can provide expert guidance and representation during court hearings and meetings. Tax lawyers can skilfully negotiate on your behalf and represent you well at any meetings summoned by HMRC. Thus, it allows your business to continue without disruption.

Can a Business be Shut Down for Evading UK Corporation Tax?

Tax evaders are in danger of being closed down by HMRC. This government department has the prerogative to wind up companies at its discretion.

Shutting down businesses is reserved for serious cases, so the HMRC goes down this route only when tax evaders can no longer pay their tax bills. HMRC may also wind up a company they find to be deliberately evading their tax liabilities.

What is a Corporation?

In the UK, the corporation and its owners are viewed as separate legal entities. Businesses may use their business names when purchasing properties, suing, or facing lawsuits. In this regard, choosing a corporation for a business structure proves more advantageous for the following reasons:

  • You avoid incurring personal liabilities
  • Businesses are easier to attract investments
  • Businesses can sell company shares

Disadvantages also apply when incorporating your business. Following are some of the reasons why:

  • Business structures are more complex.
  • Costs multiply for business corporations.
  • Company law applies, thus limiting flexibility.
  • Your business will now be answerable to shareholders.
  • You will have to share control or power with other parties.

There are several kinds of corporations. The common kind is called PLC, which is a Private Limited Company. Before deciding to incorporate, you must have a full understanding of the advantages and disadvantages of each kind. That way, you can decide what will be the best structure for your business. Keep in mind that as your business expands, the structure may change. However, it is wise to have a solid setup in the beginning.

How to Set Up a Corporation

There are several steps to take when setting up your corporation. These are:

  • Determine the best company structure, whether it will be an unlimited company, public limited company or private limited company.
  • Officially register with Companies House. Lodge your business name, business address, and provide your shareholder and director list with relevant information.
  • Open a company bank account. You may be able to do this online. Otherwise, come into the bank to open the account.
  • Secure the required licences and permits. Some businesses require additional licences and permits so make sure your company complies with all business requirements.
  • Apply for a tax account with HMRC. In this step, you will provide your business name, business address, and your tax reference number.
  • Lodge all annual tax returns for your corporation. These are due within 9 months after the financial year ends.

Should you choose to establish a corporation, professional consultation is necessary to ascertain that you are not making any mistakes. While we have provided you with an overview that can guide you throughout the process, consulting with experts is a good investment of your time and money.

Other Taxes You May Need to Pay

Taxes not only involve corporation tax. Additional taxes apply depending on your business. Here are some of them:

  • VAT or Value-added Tax, which applies to all goods and services. For 2022, the rate was 20% chargeable at every stage of production.
  • PAYE or Pay as You Earn, which you as the employer will deduct from your staff wages
  • NICs or National Insurance Contributions, which both employers and employees contribute towards NHS, pensions, and other state benefits.
  • CGT or Capital Gains Tax, which you incur as you sell property, shares, and other assets. CGT rates depend on the amount of profit. For 2022, CGT is charged at a lower rate of 18% or a higher rate of 28%.
  • SDLT or Stamp Duty Land Tax, which is due on every property or land purchase. SDLT rates apply based on the value of land or property being purchased. Remember to check the applicable rate at the time of your purchase.

How to Reduce Your Company’s Tax Bill

Some measures will reduce the tax you need to pay if you follow them. Consider the following:

  • Take out tax-efficient investment products. These include Venture Capital Trusts or VCTs, Enterprise Investment Schemes or EIS, and more.
  • Plant equipment and machinery are entitled to capital allowance deductions. Make the proper claim where applicable.
  • Contribute towards staff pensions.
    • Offset losses against company profits.
  • Check where tax reliefs and allowances apply and make the appropriate claim.
  • Choose the most tax-efficient structure for your business. A company limited by guarantee is one example of this.

If tax liability is a concern for your business, consult a professional for expert advice. Tax specialists can make sure that you take full advantage of applicable tax allowances and reliefs for your company. Through professional advice, you can greatly reduce the amount of tax reflected on your tax bill. This means you’d incur a lower corporate tax bill during tax time.

Final Thoughts

Businesses can make two instalment payments for corporation tax bills instead of having to pay out a big lump sum amount. The tax bill is calculated based on company business income accumulated during the previous financial year, with instalment payments scheduled in advance.

Not all businesses will be liable for corporation taxes. That is why you should pay careful attention to the type of business structure you will choose for your company. Always check if a tax payment is due and settle all tax liabilities within the right time frame. Do this to avoid additional fees, penalties, and even imprisonment. Confirm the amount of tax payable by consulting with a tax accountant. You may also directly seek guidance from HMRC since they are the best advisers to get information and direction from.

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