What You Need to Know about Corporation Tax Planning and How it can Benefit You

Corporation tax has long been levied in the United Kingdom, as far back as anyone can remember. Any company – big or small – which earns an income in the United Kingdom will have to pay taxes, and this is often computed in a standard way. If you are operating a small or medium-sized enterprise in the UK, you know very well that corporation tax is part of your responsibilities – but, with the right corporation tax planning strategy, you can still be a responsible citizen whilst making sure that your profits are not completely devoured by tax.

The history of corporation tax

The thing is, before the year 1965, any company in the UK was obligated to pay an income tax on whatever profits they earned – but this was levied at an equal rate as those for individuals. At the time, a system of imputation was used, where the company’s income tax was offset alongside a shareholder’s liability for income tax, if the shareholder was given dividends from said company. So, to give you a clearer picture: in 1949, a company’s income tax rate would have come to 50%. So if this company was able to make a profit of one thousand pounds, then it would have to pay a total of £500 in income tax.

Soon afterward, however, the government came up with the 1965 Finance Act, which replaced the income tax (and profits tax) system at the time with a single system: the Corporation Tax. Since then, the Corporation Tax created by the government has undergone various changes and adaptations, and the corporation tax rate today is governed by the financial year, and this is from the 1^st of April to the 31^st of March of the succeeding year.

What you should know about HMRC and self-assessment    

Until the year 1999, a company was not obligated to pay corporation tax until HMRC (HM Revenue & Customs) assessed that specific company. However, companies were obliged to report some details to HM Revenue & Customs so HMRC would be able to assess the right amount. This all changed in 1999, which was the year that self-assessment was established. With self-assessment, companies became responsible for doing an assessment of themselves, as well as taking complete responsibility for it. If a company’s self-assessment was incorrect (either due to recklessness, negligence, or both), then the company would be charged with a penalty. A company’s tax return for self-assessment needed to be submitted to HM Revenue & Customs twelve months after the accounting period. If, for any reason, a company was not able to submit their tax return for self-assessment during this time, it could also be charged with penalties.

Also, since the year 2004, companies have been required to inform HMRC of their company formation – their process of incorporation – in the UK, even though HM Revenue & Customs also receives a notification of companies that have newly-registered with Companies House. Companies are then sent a CT603, which is an annual notice, about one to two months after the end of the financial period for that company. This notice is simply to remind the company that it needs to complete and submit its annual return.

The importance of corporation tax planning

It goes without saying that as a company, it is in your best interest to pay particular attention to an effective corporate tax planning strategy. This is so that you can benefit from a completely legal way of reducing your company (and personal) tax liabilities following the HMRC legislation’s principles and framework. What you should also know is that the UK government actually offers a plethora of good tax incentives as well as packages for tax relief which can help your business run well and continue on its path to success. With effective corporation tax planning, you can move your business forward with ease.

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