Corporation Tax Rates - Essay Example

?TAX ADVICE Taxation is one aspect of business which is a liability of a company to pay the government an amount based on the business turnover. Thisprovides them permission to run their business in the home country or elsewhere and get necessary support from the authorities. You can analyze certain aspects of taxation in respect of: 1. How does taxation affect a business after incorporation- its pros and cons. 2. Setting up of a company on equal shareholding basis and retaining Chloe as Company Secretary and finally, 3. Tax efficient profit withdrawal. Retaining GBP 30,000 per year in business Moving on to the first aspect, what are the major tax codes implied by the UK government. As with usual government practices across the globe, here too there is a (1) Corporation tax, (2) VAT, (3) PAYE (Pay As You Earn), (4) Self Assessment Tax, (5) Business rates tax, (6) Capital Gains Tax, (7) Stamp and Excise duties and (8) Industry specific tax. Before getting into these taxes, we need to understand the records to be maintained for an ongoing business concern or a proprietorship concern for that matter getting converted to a company format. These include: Business income records (record of sales) Business expenditure records (record of purchases and expenses) Financial and accounting records Employer records (payment to employees, benefits, IT , NIC) VAT records Formation of a company has major benefits in terms of liability of partners or shareholders as the business is treated as separate entity and hence there is no personal liability of any partner / shareholder towards creditors of the company. Corporate profits will be taxed at corporate tax rate of 28% and HM Revenue and Customs (HMRC) is responsible for Corporation Tax aspects. Upon intimation to Companies House, the same shall be provided to HMRC who in turn provides an introductory pack within six weeks containing CT 41G forms. Upon filling this form, the same has to be submitted to the CT Office and this information is used by HMRC to calculate CT and deadlines (Business Link, 2011). The corporation tax for small profit companies has been pegged at 20% as of 2011 (Business Link, 2011). VAT meaning Value Added Tax is charged by business houses on the goods and services provided. A VAT rate varies between 0-20percent in UK. The UK taxation laws provide options to reclaim VAT based on purchases made on goods and services, reclaiming VAT on Bad debts etc. (Business Link, 2011) a company/ partnership has to register for VAT if their taxable income is GBP ,64,000 a year . Some of the major benefits by incorporating a company will be : Company makes pension contributions promptly Claiming maximum possible expenses involved related to business as per UK legislation Capital allowances can be claimed if there is a capital expenditure incurred for the business. Ensuring benefits paid out in terms of medical and HRA if salary is less than GBP 26,000 per year. Surplus cash can be used as loan provided to business, on which interest can be earned and only needs to pay 10% tax on first GBP 10,000 taxable profits. If the same cash is maintained in personal account, then 40% tax on interest has to be paid. Hence, here there is a clear demarcation of 30% interest savings. There are options where no tax can be paid on certain income derived – expenses allocating to a particular income stream, eg: A Partner’s salary allocating to interest income, in such a way no tax need be required to be paid on the income generated. GBP 7500 capital gains tax free allowance. The firm need not pay National Insurance and is only liable to pay Corporation Tax at 10% on its profit slab upto GBP 10,000 and 20% on next slab level between GBP 50,000 – 300,000 after deducting all expenses including Director’s remuneration. By developing Company Pension Scheme and payment of dividend to its shareholders, the Corporation Tax can be reduced a great extent. (Form A Company, Worldwide Incorporations, 2011).at times, the management by taking a small pie as salary reap a major portion of their income by way of dividends as they are taxed only to the extent of 10% . Other aspects involves , using personal vehicle for business purposes instead of company vehicle as the company allows you for tax free fuel and the costs are tax deductible to the company. Similarly, operating the business from your home provides added advantage as one can claim for the cost involved in it, where for example for a single room business, cost can be calculated for that particular room in terms of electricity, water and other expenses which can be claimed back to the extent of amount derived from dividing the room’s expenses to the total number of rooms in the house. One of the major and prominent issues in taxation on forming a company is the double taxation process. Double taxation occurs when the company is taxed on the profits and again the taxation comes into effect on dividends paid to shareholders, or in cases where income is taxed in two states. Double taxation not only hampers, the company’s growth prospects by eating away the profits , but also reduces returns of shareholders of the company, and on a larger scale scales down international trade between economies thereby hampering the local growth of the economy. By and large, it is always advisable to form a corporate structure with all the above advantages provided there is enough manpower to support on taxation and filing and documentation work. 2. Setting up of a company on equal shareholding basis – a structure can be set up in the form of equal shareholding in the following ways – LLP, Partnership, and Corporation In case of partnership, the partners are equally liable for the profits and losses created on account of business and the most important demerit with this aspect is the concept of unlimited liability. Similarly, a Limited Liability Partnership is a partnership registered at Companies House and enables protection of partners’ personal assets. Here partners are taxed similar to self employed professionals.(Duport,2011) Meanwhile, while considering the Limited Company fashion, it is easier to register and lightly regulated as compared to other forms. Here, people of any nationality can be included, allowing dormant companies to file Nil returns year after year. The minimum quota for appointment is the requirement of one Director and one Shareholder and there is no legal requirement to have a company secretary. The biggest advantage is that, a British company can trade anywhere in EU , and this has created demand from overseas companies also to get registered in UK market, so as to get an entry in Europe. In terms of taxation, the company which has its activities and earnings in any one particular EU, then that would be the place where it is taxed (Duport.2011). A private limited company, limited by shares is registered according to Laws of England and Wales. Limited by shares clearly means, the liability of shareholders limited to the capital contributed in the company. The disclosure requirements of Private Limited Company is lighter and at the same time they cannot list their shares in any of the exchanges , ie, shares cannot be offered to general public. A private company can transfer its shares to another individual / firm as a “private placement” initiative. As per Laws of England and Wales, a company can be created with any number of shares with any value and currency. Retaining Chloe as Company Secretary would be considered apt for the business considering the fact that her by paying her salary, the remaining amount gets taxed but at the same time since she is Andrew’s wife, the same amount comes back home at the end of the day. Chloe can also use her personal vehicle for company purposes as the costs are tax deductible. On the other hand, if Andrew has to show higher profits, then the best option would be to outsource the work to a consultant Company Secretary who can work on hourly basis and save the amount paid to Chloe as monthly salary for him. Some of the major documents required for formation of a Private limited company are Form IN 01 Articles of Association Memorandum of Association. 3) Tax efficient profit withdrawal – taxes in your organization can be bought down or reduced by the following means: Above the line tax deductions Claim Business credits Itemized tax deductions Form of deferred tax Above the line tax deductions are referred to as adjustments to income which reduces the adjusted gross income .some of the options you can use includes – Stock losses, Interest paid on motor vehicle ( which might be used as personal vehicle),certain medical expenses, using suitable accounting methods for deduction through cost of goods sold , charitable contributions and so. Choosing the right accounting method helps you to cover your profits based on the timing of deduction. This includes accounting of depreciation, capitalizable cost of intangibles, choosing method for cost of goods sold ( FIFO and LIFO). Cost of systems which is likely to produce future benefits can be capitalized which includes, development of intangible assets (goodwill), plant and machinery, fees on acquisition of property. Capital allowances are also provided based on the type of business and assets involved. Similarly, business credits based on the nature and type of business can be claimed as per law. This includes, motor vehicle credit, employee social security credit, renewable energy credit, health insurance credits etc. other modes of deducting taxable income is by business use of homes and cars for which expenses can be deducted based on the quantum of expense incurred on the proportion of the property used for business purposes. Other business expenses can include- insurance, employee cost, retirement plans etc. Deferred tax – this is a complex issue, which involves tax that might be payable some time in future as a consequence of transactions that has already occurred but no certainty as to when the tax will be paid. The main objective of this method is to defer payment of tax for as long as possible. These taxes might arise due to many reasons but it depends on the tax authority as to accepting the same or not. In terms of recapitalization , where depreciation is charged on the P&L, the taxable profit reduces as compared to accounting profit thereby company can pay lower taxes (TUC,2010). Management of companies can reduce their tax liability by taking lower monthly salary and adding more perks into the kitty, by taking majority chunk through dividends ( charged after net profit) as a lower tax rate is charged compared to that of corporate tax. Retaining an amount of GBP 30,000 would be advisable as this can be either utilized for inorganic growth opportunities ( mergers, acquisitions), Andrew can utilize a portion of the amount for long term investment purposes(more than a year) in capital markets where no capital gains tax is charged, investments in Government denominated tax saving bonds also is advisable. The remaining amount has to be retained as cash and cash equivalents in the business to meet the working capital needs. It is always advisable for you to go ahead and register a company with equal shareholding agreement as this helps to reap benefits of an entity which is separate from the promoters and secondly, provides added advantage on taxation part as tax concessions are offered and can be claimed through proper advice. Reference: Business Link,2011, Corporation Tax rates for 2009-2012 retrieved on 13th July 2011 http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1082156440&r.l1=1073858808&r.l2=1083661495&r.l3=1082148483&r.s=sc&type=RESOURCES Business Link,2011, Introduction to VAT retrieved on 13th July 2011 http://www.businesslink.gov.uk/bdotg/action/layer?r.l1=1073858808&r.l2=1083126673&r.l3=1083127204&r.s=m&topicId=1081167361 Business Link,2011, Reclaiming VAT on your purchases , retrieved on 13th July 2011 FormA Company Worldwide Incorporations , Advantages of a Limited Company retrieved on 13th July http://www.formacompany.com/en/uk/benefits-of-limited-company HM Revenue and Customs, 2011, Double Taxation Agreements, Tax Information Exchange Agreements and Social Security Treaties, retrieved on 14th July 2011 http://www.hmrc.gov.uk/international/treaties1.htm Duport 2011, Why Form an LLP, retrieved on 14th July 2011 http://www.duport.co.uk/guides/company-structure/why-form-llp.php Trade Union Congress, 2010, The Corporate Tax Gap,London,TUC Publication pg-15 Duport 2011,Limited Fashion,retrieved on 14th July 2011 http://www.duport.co.uk/guides/company-structure/limited-fashion.php Wikipedia 2007, Private Company Limited by Shares, retirieved on 14th July 2011 http://en.wikipedia.org/wiki/Private_company_limited_by_shares Horngren, Charles T. ,2005, Cost Accounting , Prentice Hall Publication, New York IRS,2011, Business Credits ,retirieved on 15th July 2011 http://www.irs.gov/publications/p334/ch04.html#en_US_2010_publink100025155 Read More