How Your Corporation Tax is Calculated
The Tax – Collection and Administration
Following the end of your business's financial year you submit your accounts to HMRC (Her Majesty’s Revenue and Customs) who assess them for calculating your corporation tax liability. This starts but does not end with your published net profit.
Note that when you are entering your figures for a report, Figurewizard performs all of these calculations for you automatically.
The Fiscal Year
The fiscal or tax year on which HMRC bases its calculations runs from the 1st April to 31st March. This is an important point if your own financial year does not end on the 31st March.
Where this is the case the first part of your tax liability will be calculated using the current rates and allowances that apply up to the 31st March and the second part using those that apply from 1st April onwards. The example below demonstrates this:
Example:
1). Your financial year runs from 1st August 2011 to 30th June 2012.
2). This means that the first 243 days of your year are assessed as in fiscal year 2010/2011
3). And the last 122 days are assessed as in fiscal year 2011/2012
4). Therefore 243 days of your profits (i.e. 66.6%) are taxed by the rules of 2010/2011
5). And 122 days (i.e. 33.4%) are taxed by the rules of 2011/2012
VAT
With the sole exception of company cars, where VAT is not recoverable you never include VAT when entering your figures into Figurewizard: Our system calculates all VAT values and transactions for you automatically.
Equally this means that VAT is never taken into consideration by HMRC when calculating the values of your tax liabilities and / or any tax reliefs you may be entitled to.
The Rules
There are four steps HMRC take to work out how much tax you must pay. These are:
1). Establish your Taxable Profit by adding back the depreciation you have deducted in your accounts.
2). Calculate the value of Capital Allowances, which they use in place of depreciation.
3). Multiply the Taxable Profit thus created by the applicable % rate of tax.
4). Deduct what Marginal Relief (if any) should be allowed against the value of that tax.
The Taxable Profit
Your taxable profit is not necessarily the same as the pre-tax profit shown on your accounts. This is because HMRC does not accept your depreciation charges against fixed assets. Depreciation is added back to the published net profit and is replaced by Capital Allowances.
There are exceptions to this, principally goodwill and property which are treated as special cases. Generally your own estimates of depreciation will be accepted where these are concerned if they are considered to be reasonable. It is always advisable to seek the advice of your accountant when dealing with the treatment of goodwill and property.
Capital allowances can very often be more generous than your own depreciation charges, especially in the first year of ownership of assets.
Capital Allowances – Sundry Operating Assets (other than Company Cars)
With exception of company cars - plant; fixtures & fittings; commercial vehicles and computers etc. all fall into the same category for capital allowances. They are referred to here as sundry operating assets. Remember VAT is not part of the value of these assets when allowances are calculated. The allowances break down into AIA (annual investment allowance) FYA (first year allowance) and WDA (written down allowance) on assets Bfwd from previous years as demonstrated in the table below.
| In the first year of acquisition: maximum of £100,000 - Annual Investment Allowance (AIA) |
100% |
| In the first year of acquisition above £100,000 - First Year Allowance (FYA) |
20% |
| Thereafter on the reducing balance - Written Down Allowance (WDA) |
20% |
Note that in tax year starting April 1st 2011 the 100% AIA remains but FYA and WDA falls to 18%. From 2012 however AIA falls to £25,000.
Capital allowances are always calculated using the reducing balance method
Example:
1). You acquire operating assets in the year of £70,000 excl. VAT.
2). In year 1 an allowance (AIA) of 100% of this cost up to the maximum allowance of £50,000 is set against profits.
3). An allowance of 20% of the balance of £20,000 (FYA) of £4,000 is also set off against profits.
4). This balance of £20,000 less the allowance of £4,000 (i.e. £16,000) is c/fwd into the next year.
5). And a further 20% allowance (now WDA) of £3,200 is set off against profits in that year.
6). And so on ...............
Capital Allowances – Company Cars
Company cars are treated differently in your accounts and by HMRC in that they are the sole items that are entered including VAT. This is because VAT is not recoverable for cars. Note that this rule does not apply to vans or trucks.
There is no larger allowance for the first year of ownership of Company Cars; the rate is always set at 10% in 2011 and 8% thereafter.
For cars with emissions at or below 110 however 100% relief is allowable.
Marginal Relief
At this point HMRC has taken your pre-tax profit as reported in your accounts, added back the depreciation you have charged and substituted their capital allowances. There is one last step however before your corporation tax charge can be established and that is whether you qualify for what is known as marginal relief or not.
The following explains how to assess if you do qualify and if so, how much marginal relief you are entitled to. The secret here is to understand how the table is to be used. A working example at the end of this paragraph should make this clear.
| Taxable Profit band | Tax Rate 2010 | Tax Rate 2011 | Tax Rate 2012 | Marginal Divider | Marginal Multiplier 2007 | Marginal Multiplier 2008 | Marginal Multiplier 2009 |
| £0 - £300,000 | 21% | 20% | 20% | 0 | 0 | 0 | 0 |
| £300,001 - £1,500,000 | 28% | 27% | 26% | 400 | 10 | 7 | 7 |
| £1,500,000 + | 30% | 28% | 28% | 0 | 0 | 0 | 0 |
What HMRC then does is to check which taxable profit band you fall into once capital allowances have been taken into account. If this is in the band £0 - £50,000 or £1,500,000 + in fiscal year 2010 / 2011 there is no marginal relief available but if you are in band £3000,001 - £1,500,000 that same year you do get relief (i.e. divide by 400 & multiply by 7).
Assuming a taxable profit of £400,000 in a financial year beginning 1st. April 2008, marginal relief at 400/7 would apply.
First the tax before marginal relief is worked out. In the case of £400,000 this is £112,000, (i.e. £400,000 x Tax Rate of 28%).
What happens then is that the taxable profit is deducted from the upper limit of it's taxable profit range.This figure is then divided by 400 and multiplied by 7 and deducted from the tax charge.
Example:
1). Your Taxable Profit after Capital Allowances is £400,000
2). Tax before marginal relief is therefore £112,000 (i.e. £400,000 x 28%)
3). The upper limit of your Taxable Profit range is £1,500,000
4). Deduct the Taxable Profit from the upper limit (i.e. £1,500,000 - £400,000)
5). This leaves £1,100,000
6). Divide the £1,100,000 by 400 = £2,750
7). Multiply this by 7 = £19,250, which is your amount of marginal relief
Your corporation tax payable is therefore £92,750 (i.e. tax of £112,000 less marginal relief of £19,250).
Tax Losses
You only have to pay corporation tax if you have made a profit, but what if you have made losses in previous years?
This is taken into account when calculating your tax liabilities in successive years when you will have made profits. For example if last year, once depreciation had been written back and capital allowances had been substituted you showed a loss, that figure would be deducted from any profit that you made this year.
Example:
1). In your financial year ending 31st March 2009 you made a Taxable loss of £10,000.
2). In your financial year ending 31st March 2010 you made a Taxable Profit of £55,000.
3). The £10,000 loss is deducted from the £55,000 profit
4). And tax for year 2010 is calculated on the balance of £45,000 only.
If you had made a loss of £5,000 in 2010 instead of a profit then that would be added to the previous year's loss of £10,000 and a new total for tax losses of £15,000 would then be carried forward to be deducted from profits you would make in 2011.
Mitigating Your Tax Bill
This is not the end of the story where tax is concerned. Tax law affords a number of concessions beyond the simple matters of capital allowances and marginal relief. These can help to reduce your company’s or indeed your personal tax burden, especially if there is an element of research and development in your business.
The rules can be complex though and may involve changing the way your business is structured, how and when you acquire fixed assets or whether or not to pay yourself dividends instead of salary. This is where both figurewizard and your accountants come in.
No one is better qualified to advise you on these than your accountant but he or she needs tangible figures in front of them to be able to form a correct judgement. By producing a realistic and accurate set of forecasts with figurewizard (which is free for use), you can enable them to do so. If you wish you can produce and save two or more sets to be advised on your likely options on each. This is especially important if your business holds or is likely to hold property, goodwill or inteectual property rights.
One meeting early on covering tax planning can leave you better informed and the better informed you are the less tax your business could end up paying.
Article updated - 15th January 2011.
© Figurewizard.com ltd. This article may not be reproduced without our express permission
Your Comments
Comment by h
Comment by skillman
Comment by wendygee
I find no guidance to say whether corporation tax is an expense before getting profits for tax calculation or profit for tax should disregard corporation tax paid.
Comment by Eion MacDonald
Comment by Figurewizard
Comment by David
Comment by Figurewizard
Couple of questions :
1. We received a Inland Revenue Incentive Payment of £150 for online filing of our P35 / P14's 2007/08. Is this tax deductible or should we include it in our taxable profits?
2. How do you write off assets for Capital Allowances purposes? My previous accountant depreciated on a 20% reducing balance, i have written off some old IT (& other tangible) assets that are defunct. I have shown this in my fixed assets calcs for my company accounts, but do not really know what to do in terms of capital allowances.... Therefore my current calc is just 50% on additions, and 25% on the WDV b/f from last years accounts.... But this value obviously includes a proportion of the written off assets. Any help greatly appreciated.
Matt
Comment by Matt
Comment by Figurewizard
You say that we can deduct capital allowances at 100%, but was that true for financial year ending before 1st April 2008 (like mine)? I understood the rules prior to this were 50% in year 1 and then 25% on reducing balance... its it those accounts i am filing so i am not sure the 100% applys...?
Also what do we do with the existing WDV b/f from last year in this years accounts (i.e Year ending 31 Mar 2009)? Can we just claim the full amount of the brought foward WDV to leave a carried forward of zero, or do we have to continue to apply the 25% reducing balance rules as the assests were purchased prior to March 2008?
Thank you in anticipation
Comment by Matt
Comment by Figurewizard
Comment by Matt
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Comment by ed.parsons
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Comment by M. Gardiner
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Comment by Rockyhad
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Comment by alan D
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Comment by Gillian L
Comment by Figurewizard
Many thanks for your advice.
Comment by IDbulk
You purchase the asset; say a laptop for 1,000 pounds excl. VAT in April.
It is stolen four months later in July.
You replace it, again for 1,000 pounds excl. VAT
Your total purchases of fixed assets in the year does not exceed 50,000 pounds.
You depreciate this at the rate of 25% p.a.
This would mean that you would charge depreciation aaginst 1,000 pounds for the year plus you would qualify for 1,000 pounds capital allowance against profits before corporation tax is assessed.
If however you replace it for 800 pounds then you should charge 1,000/12x4 + 800/12x8, which amounts to 867 pounds times 25% depreciation. Depreciation in subsequent years will be @ 800 pounds less depreciation previously charged times 25%.
Capital allowance would effectively represent 100% of 1000/12x4 + 800/12x8 (total again 867 pounds) for that year only.
Comment by Figurewizard
Comment by Chris J
Thanks for your kind words Chris. There are new and important figurewizard calculators to come towrds the end of this year. Also the home page is being redesigned to make navigation easier on what will be a greatly expanded site.
Comment by Figurewizard
Comment by Amanda
This is not an easy one to answer. There are arrangements in place with HMRC for 'group payments' but there are many conditions. Further not all groups can participate.
On the other hand if a number of companies exist with identical members but which are not manifestly not related they could then be judged as individual identities for taxation purposes. As you may gather from this reply however you are best advised to put your exact query before an accountant experienced in these matters. There is no hard and fast rule that applies to all such situations as you describe.
Comment by Figurewizard
Comment by KAUSHIK PATEL
I own 2 small limited companies. I am a PAYE employee of one to use up my allowances & get NI credits but unfortunately due to the downturn in the property market this company is not making a profit and won't for some time. The other company has a very small residual income and makes a profit without my time (less than my £6k allowance). Should I also become an employee of the second company so that I can write-off all the profits as wages and avoid paying CT? How much time do I need to spend to justify a salary?
Can I charge my company a fee for doing the accounts & VAT returns as I save paying an accountant?
Many thanks.
Comment by Matt
Comment by Graham
Comment by Paul Smith, Warrington
Comment by Paul Smith, Warrington
Comment by Angie
If you sold your debt book as an exceptional 1 off P&L hit for below the balance sheet value would this be allowable for corporation tax purposes?
thanks!
Comment by Jo
How many years trading losses can be bought forward to offset against corporation tax?
great site, thank you for any advice you can give
Comment by Sharon
Comment by Leslie
Comment by roger
If directors & secretary take no salary to help with company cash flow do you have to make a provision for it even though nothing is taken. In my case if no salries are in then company makes profit- it they are put in then the company would make a loss ? Any advise ?
Comment by Mel
I have recieved a repayment of my last year corporation tax, infact the amount i paid to them they returned it and added on some tax as well.the letter they sent states that i overpaid my corp tax. So i am not too sure why they have done so.
Comment by Bilal Khan
Comment by jeff w
Could you advise please small business with 33000 taxable profit but with AIA of 43000 Can the profit be converted to aloss of 10000 or should only 33000 of the AIA be taken and the remainder treated ad written down amount for 20% allowance in future years
Comment by vatman
On the other hand LLP's statutory accounts has detailed Profit & Loss statement. i.e. Income, expenses (including depreciations, entertainments etc)and the net profit is £10k and this £10k is being awarded to Ltd (being a member). The net profit after profit share for LLP is effectively nil, therefore co tax liability for LLP is zero. Is this correct? Should we add back entertainment in Ltd's PBIT?
Many thanks.
Anthony C.
Comment by Anthony C.
ABC LLP and ABC Services Ltd are owned by same peoples and both companies are registered in England & Wales. ABC Services Ltd is a member of ABC LLP alongside the proprietors and any profit generated by ABC LLP is transfered to ABC Ltd as share of profit. If we calculate corporation tax liabilites for Ltd, should we adjust PBIT as per LLP PnL? or simply calculate tax @ 21% (small company tax rate)? (e.g. if the profit share is £100 the tax liability should be £21?) Usually we add any disallowed expenses (i.e. entertainment etc) and add into PBIT. Should we adjust Ltd PBIT prior to tax calculation (i.e. expenses like entertainment listed in LLP's profit & loss statement but not listed in Ltd's PnL statement)? Ltd does not generate any other revenue.
Note: Tax liability for LLP is zero as all profits are transfered to Ltd.
Thank you for advice.
Comment by T. Caro
Comment by Ben
Do I have to pay corporation tax if I made a loss. If not then how do I present the tax calculations. What figure do I need to put in taxable box ? and tax @21% ?
Thanks
Comment by Jason
"In year 1 an allowance (AIA) of 100% of this cost up to the maximum allowance of £50,000 is set against profits."
should read
"In year 1 an allowance (AIA) of 100% of this cost up to the maximum allowance of £100,000 is set against profits."
Comment by Steve from Raw Solar - www.rawsolar.co.uk
Comment by Jackie
Comment by Roberta
Comment by CEP
If I read it right is the following assumption correct.
If we buy a block for say 50000 then we can claim 10000 a year in amortisation costs against our profits and therefore 2000 a year in ct tax at the current rate of 20%
Comment by Chris
Your early reply is much appreciated.
Comment by ST
Comment by Figurewizard
Please use this area to contribute your opinion to this article whether its to add detail, critiscise or correct we really appreciate your input
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