corporation tax

It’s a hot political topic, but what really is corporation tax? Let’s find out.

What is Corporation Tax?

The clue is in the title here. If you run a private limited company, you must pay a specific tax called corporation tax on the profits that your company makes. Unlike PAYE (pay-as-you-earn) and income tax, the responsibility for paying corporation tax is with the director of the company. Simply, if you don’t pay, your business will be in hot water (the UK government can close down your business, for example).

How To Pay?

Accountants and bookkeepers work closely to make sure finance reportings are accurate. It’s essential that a company keeps a clear, accurate record of their finances, otherwise, the company may end up paying more corporation tax than they need to (bad), or end up not paying enough (worse). Once a company is sure they’ve calculated correctly, they pay the government directly. See the full list of ways to pay here.  

What Is A Profit?

As well as the profits made from “doing business” (the purpose of the company), a company also must pay corporation tax on profits from investments and selling company assets if they sell for more than they originally cost.

Who Doesn’t Have to Pay Corporation Tax?

If the company is registered here in the UK, they will have to pay UK corporation tax on all their profits (national and overseas). If, however, they have an office in the UK, but the company is registered in another country, they only pay corporation tax on the UK profits.

The argument for who does and doesn’t have to pay tax doesn’t finish there, though. Amazon and Starbucks are two of the flexible multinational companies that make sizable profits whilst avoiding the full 19% corporation tax rate from doing business in the UK. But how? A BBC report in 2015 highlighted how companies like Amazon’s use of the internet makes calculating how much profit was gained directly from the business’ functions in the UK quite difficult. Likewise, Starbucks has been accused of creating a “labyrinthine network designed to cut taxes”

What’s Next for Corporation Tax?  

The UK government’s aim is to cut corporation tax to 17% by 2020. By comparison, Germany currently has a corporation tax rate of 29% and France 33% (incidentally, both have higher GPDs).

The policing of companies avoiding paying the full 19% in UK corporation tax is incrementally addressed in parliament, however, few answers have been given in response to this difficult challenge.

Interested in making sure companies pay their fair share in corporation tax through investigations? Forensic accounting might be the perfect role for you. Find out how you can achieve your professional goals by contacting Aspiring Accountants today.  


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