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Business taxes - the basics

Corporation Tax

Basics

The rate of tax payable depends on the size of the profits. For the financial year from 1 April 2014, taxable profits of up to £300,000 are taxed at a rate of 20%, the next tranche at 21.25% and over £1.5 million at 21%. These thresholds are lower if there are associated companies, that is, companies under common ownership. Corporation tax self-assessment requires companies to work out their own tax liability as part of their return and account for the 'self-assessed' liability to corporation tax. This is part of the role we undertake as accountants.

Planning pointers

Taxable profits are typically reduced by employers making pension contributions. Self-invested personal pensions (SIPPs) are popular with many company owner-directors. Another popular tax reduction strategy is to bring qualifying capital expenditure forward to take advantage of the £500,000, 100% annual investment allowance. For a company in the marginal rate, that potentially reduces the cost of £500,000 capital expenditure to £393,750.

VAT: Registration threshold: £81,000

Basics

Value Added Tax (VAT) is chargeable where taxable turnover is in excess of £81,000 in the previous 12 months or you expect this threshold will be exceeded within the next 30 days. There is a range of special schemes which are intended to simplify VAT accounting. These include the cash accounting scheme, annual accounting scheme and the flat rate scheme.

Planning pointers

Would it be appropriate for you to use one of the special schemes? Are you claiming any VAT bad debt relief that you are entitled to? Are you accounting for VAT on the fuel used for private motoring using the appropriate scale charge? Make sure that you don't reclaim VAT on cars (unless you are a car dealer or taxi company, for example, or provide certain pool or leased cars for employees) or on entertaining UK customers.

Business deductions

Basics

Business owners are entitled to claim deductions from income for costs which are incurred wholly and exclusively in running the business. Determining how this rule applies in practice can be a challenge. A deduction may not be claimed in respect of depreciation, but deductions in the form of capital allowances are available for some expenditure on qualifying capital expenditure.

Planning pointers

We have already looked at pension contributions and capital expenditure. So, it is important to ensure that all costs incurred are recorded. Directors' bonuses can be claimed so long as they are paid within 9 months after the company year-end but pension contributions must be paid before the year-end to get tax relief in the accounting period. Salaries can be made to family members as long as they are justifiable and at commercial rates. Other ways of extracting profits include dividends and benefits in kind.

Entrepreneurs' relief - Relief on disposals: 10%

Basics

Entrepreneurs' relief provides relief for disposals by smaller business owners. It charges a reduced tax rate of 10% on disposals up to the lifetime limit of £10 million giving rise to a potential tax saving of up to £1.8 million. The relief is available on material disposals of business assets which covers businesses operated as a sole trader, partnership or through a limited company.

Planning pointers

The liability to capital gains tax is just one aspect of all the planning that goes into the wording of the final contract for sale. Maximising the sale value and looking carefully at the proposed sale structure helps to ensure the liability to capital taxes is not a penny more than absolutely necessary. There are a number of planning opportunities in this area but there are also pitfalls if some shareholders do not qualify for this relief.

Landlords energy saving allowance (LESA) - Saving per dwelling house: £1,500

Basics

Landlord's Energy Saving Allowance (LESA) is available until April 2015. Under the rules, qualifying expenditure of up to £1,500 per dwelling is tax deductible. Expenditure which qualifies for this deduction from rental income includes loft insulation, cavity wall insulation, solid wall insulation, draft proofing, hot water insulation and floor insulation.

Planning pointers

LESA is only available to landlords letting residential as opposed to holiday accommodation. Why not ensure that your let properties are all as energy efficient as possible before this extra relief is withdrawn?

Penalties

Basics

The tax system is replete with penalties to which you may become liable if you either fail to file or pay late. This penalty regime covers such taxes as income tax, corporation tax, VAT and inheritance tax. There are also penalties to cover the notification of starting a business and the filing of returns and accounts at Companies House. So, for the avoidance of doubt, you should ensure that you know all of your filing and payment requirements and the due date for payment.

Planning pointers

Miss the first income tax return filing deadline and the next day you are liable for a £100 fine. Leave for another 3 months and the maximum penalty rises by £10 a day up to a maximum of £900. After 6 months a further £300 or 5% of the tax due, whichever is the higher, is added. In some serious cases the penalty can be even higher than this.

HMRC charges late filing penalties for PAYE, VAT and Corporation tax while at Companies House penalty rates range from £150 for a private company filing the accounts not more than 1 month late up to £7,500 for a public company filing accounts more than 6 months late.