Category Archives: Corporation Tax

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Changes in Corporation Tax

As part of the Budget, it has been announced that the Corporation Tax rates will change from 1 April 2011:

Main rate of Corporation Tax will fall to 27% (from 28%)

Small Companies Rate of Corporation Tax will fall to 20% (from 21%)

What is IR35

IR35 was first propsed in 1999 and was introduced into UK legislation in 2000. The primary aim has been to prevent the avoidance of tax and national insurance by trading through an intermediary (commonly a limited company) rather than being an employee.

Prior to IR35, individuals could form a limited company and invoice their “client”/”employer” and then have their own limited company pay them a minimum salary and take the remainder as dividends. This avoided national insurance and tax through PAYE on the dividend element.

Investment, Tax and Extraordinary Items

Investment Income
The various types of investment income can be broken down into three main headings:

  • Income from shares
  • Income from other fixed assets (for example, property)
  • Interest

If there are any losses or interest payable, these are then deducted (but they are shown separately on the face of the Profit and Loss Account as opposed to being hidden away in a note to the accounts)

The amount of tax due on ordinary activities (which are all the items so far listed in the Profit and Loss account but excluding extraordinary items).

Extraordinary Income and Charges
Extraordinary items in the accounts are quite rare.  The definition of an extraordinary item is that it is “…outside the ordinary activities of the company…”  But most things a company does, is related to it’s ordinary activities.  Even if you sell off a division of your company, this is not classed as an extraordinary item.

Exceptional Items
Exception income and expenditure relate to the ordinary activities of a company, but they are exceptional because the amounts of money involved are very large.

Disadvantages of a limited company

It’s more costly both in terms of time and money to trade as a limited company.

First up, you have to pay to form your limited company.  If you do it yourself, it can be as low as £20, but if you get someone to do it on your behalf, it can be as much more.

You have to keep proper accounting records (but of course, you would be doing that as a sole trader!), but with a limited company, you will have to provide a set of end of year accounts to Companies House.

Other people, including your competitors can see your accounts and other information that you are obligated to file at Companies House.

If you are over the audit threshold, you will also have to pay to have an audit.

If you are looking for finance, lenders may ask for personal guarantees, possibly with your house as collateral.  If that’s the case, how limited is your liability, anyway?

You will have to deal with Corporation Tax as well as your personal tax situation.