A company is liable to UK corporation tax on all its profits and chargeable gains, whether made in the UK or elsewhere.

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1 launchpad January 2014 crprate tax It may be sme years befre a start-up cmpany begins t make a prfit, but unfrtunately that des nt mean it can ignre tax issues. Even if tax is nt an issue n day ne f the new business, it is imprtant that the entrepreneur understands the cmpany s future bligatins and establishes the cmpany t minimise future tax liabilities. The main UK taxes payable by cmpanies are crpratin tax, value added tax, incme tax and natinal insurance cntributins. Crpratin tax A cmpany is liable t UK crpratin tax n all its prfits and chargeable gains, whether made in the UK r elsewhere. 1 Rates f tax 1.1 Large cmpanies: The main rate f crpratin tax payable by all cmpanies with annual taxable prfits abve 1,500,000 is 23 per cent fr the financial year running frm 1 April 2013 t 31 March This rate f the tax als applies t small cmpanies which are clse investment hlding cmpanies. 1.2 Small cmpanies: Small trading cmpanies will pay tax fr the year cmmencing 1 April 2013 at the fllwing rates: Prfit band Tax rate 0-300,000 20% 300, m 23.75% Hwever, if tw r mre cmpanies are assciated by reasn f cmmn cntrl, the threshlds at which the small cmpanies rates cease t apply and the rdinary 23 per cent rate f crpratin tax begins t apply, are reduced crrespndingly fr each cmpany. The rdinary rate f crpratin tax is set t fall t 21 per cent frm 1 April 2014 and 20% frm 1 April Taxable prfits and deductins In cmputing the cmpany s taxable prfits n its trading activities, certain deductins frm receipts and accrued incme are permitted. Revenue expenditure incurred by the cmpany whlly and exclusively fr the purpses f the trade (althugh certain items, such as business entertaining, are specifically disallwable). Capital expenditure incurred by the cmpany n certain assets (eg, industrial buildings r plant and machinery) acquired fr the purpses f the cmpany s trade may give rise t capital allwances. Such allwances, when available, are nrmally allcated ver several years. The rates at which such allwances are available depend n the precise nature f the asset. An annual investment allwance treats capital

2 expenditure n plant and machinery as deductible in full (up t 250,000 pa in the tw years cmmencing 1 January 2013 but falling t 25,000 pa frm 1 January 2015). A small r medium sized enterprise which incurs qualifying R&D expenditure in excess f 10,000 annually may be entitled t tax relief equivalent t 225 per cent f the expenditure incurred. This relief can be set against current prfits r carried frward against future prfits. Alternatively, in the case f a cmpany which is perating at a lss in a financial perid, the tax relief may be given up in return fr claiming a tax credit payable in cash and wrth a prprtin f the tax relief available. Interest csts can nrmally be deducted frm the cmpany s ttal prfits. A statutry deductin may be available in respect f shares prvided t emplyees r directrs wh pay less than market value t buy thse shares. Special rules apply t expenditure incurred while a cmpany is preparing t trade but has nt yet begun its trading activities and tax relief fr such expenditure, while ften available, shuld nt be assumed. 2 Chargeable gains Crpratin tax n chargeable gains may be payable n the dispsal f a capital asset if the cnsideratin received (r treated as received) fr the dispsal exceeds the acquisitin cst and any ther deductible expenses r reliefs available. In sme circumstances, trading cmpanies can defer tax n chargeable gains by way f rllver relief n the replacement f assets used in the business. 3 Lsses Trading lsses can be ffset against ther prfits, including capital gains, made in the same accunting perid as the trading lss. Thereafter, lsses may be carried back against prfits f the previus year. Any surplus lsses nt used up by carry-back, may be carried frward and used against prfits arising frm the same trade in future accunting perids. 4 Clse cmpany rules If the cmpany is cntrlled by five r fewer persns, then it will be classified as a clse cmpany. Clse cmpany status can have tax implicatins in a number f situatins. In particular, if the cmpany lends mney r advances credit t any individual sharehlder, ptin hlder, lan creditr r any assciate f such a persn, a charge t tax is incurred at the rate f 25 per cent f the amunt f the lan r advance. If and when the lan r advance is repaid, this tax can be reclaimed frm the HM Revenue & Custms. 5 Transfer pricing Transactins between assciated persns n nn-arm s length terms, which wuld give either party a tax benefit, may be subject t transfer pricing rules. These rules are typically an issue where ne persn is in the UK and ne utside the UK. If s, the transactins are taxed as thugh arm s length terms had been agreed. Interest payments, management charges and imprt/exprt prices n nnarm s length terms can be cunteracted under these prvisins. In many cases small and medium sized enterprises are exempt frm the transfer pricing rules. 6 Payment and prcedures Fr small cmpanies crpratin tax is nt due until nine mnths after the end f each accunting perid. Under the Crpratin Tax Self-Assessment rules the cmpany is under an bligatin t file a tax return t the HM Revenue & Custms 12 mnths after the end f each accunting perid in which all f the cmpany s tax liabilities are disclsed t HM Revenue & Custms and penalties can be impsed fr failure t d s. The cmpany will require qualified staff and, in all prbability, advice frm external accuntants t discharge these cmpliance bligatins.

3 Value added tax (VAT) 7 VAT registratin A cmpany making taxable supplies f gds and/r services fr which the value exceeds (in the tax year ) 79,000 per annum, must register fr VAT with HM Revenue & Custms. The cmpany will be under a duty t accunt fr VAT (utput tax) n all its taxable supplies. Certain supplies are, hwever, exempt frm VAT (eg, supplies f land, such as renting ut premises, unless an ptin t tax has been made). VAT is added t the cst f the supply charged t the custmer t whm the supply is made. 8 Payments and returns The cmpany must pay n t HM Revenue & Custms any VAT due at the end f each accunting perid (usually quarterly but mnthly in certain cases). The VAT due is VAT n its taxable supplies less sme r all f the VAT the cmpany pays n supplies made t the cmpany (input tax). Input tax is recverable if it relates t taxable supplies the cmpany makes r intends t make. Where a business makes exempt supplies, this may restrict the amunt f input tax which the trader is permitted t recver r set-ff against his utput tax. Fr lw turnver businesses, VAT cmpliance can be undertaken thrugh the annual accunting scheme (taxable turnver less than 1,350,000) r a flat-rate scheme (taxable turnver less than 150,000). Special rules apply t crss-brder transactins, whether invlving gds r services, and the rules differ depending n whether a transactin is an intra-ec transactin r invlves ne r mre nn-ec persns. PAYE and natinal insurance 9 Emplyees incme tax Incme and benefits frm emplyment r frm serving as a directr f a cmpany are charged t UK incme tax as emplyment incme under the tax cde. Incme tax is charged n benefits in kind frm emplyment r serving as a directr (including many frms f share-based incentives) as well as mnetary payments. 10 PAYE 10.1 What is it? The Pay-As-Yu-Earn (PAYE) methd f deducting incme tax frm salaries and wages applies t all incme frm emplyment and directrships. PAYE des nt generally apply t benefits in kind but there are exceptins t this rule. It is the emplying cmpany s duty t deduct incme tax frm the pay f its emplyees/directrs. If an emplyer fails t d s, the emplyer will be required t pay t the HM Revenue & Custms the tax which he shuld have deducted and, in additin, penalties may be impsed Cmpliance The emplyer must cmplete tax returns in respect f incme and benefits prvided t emplyees and supply these t the HM Revenue & Custms in respect f each tax year within strict statutry time limits. In additin, the emplyer must prvide infrmatin t emplyees abut their taxable incme t enable emplyees t cmplete a tax return under the self-assessment rules Share incentives Particular care shuld be taken if shares r ptins are made available t emplyees. In sme cases, such shares r ptins can give rise t PAYE liabilities. A cmpany needs t cnsider whether emplyee sharehldings can be structured s that nly capital gains tax applies and nt incme tax. If this is impssible, a cmpany must ensure it has a suitable indemnity frm the emplyee sharehlder/ptinhlder t cver any PAYE liabilities and, t the extent apprpriate, NICs.

4 Natinal insurance cntributins (NICs) An emplyer is required t accunt fr NICs n his emplyees behalf t the HM Revenue & Custms, and the emplyer must pay additinal emplyers cntributins. Cntributins are earnings-related, althugh abve an upper earnings threshld, emplyee s cntributins apply at nly 2 per cent. Emplyer s NICs will be a liability f the cmpany and, nrmally, it is unlawful t attempt t pass this cst n t emplyees. Hwever, special arrangements can be made t transfer the cst f emplyer s NICs t emplyees in relatin t share ptins and, in sme cases, emplyee held shares. In nrmal circumstances, emplyer s NICs will represent an expense f the cmpany which is deductible fr crpratin tax purpses. Emplyer s NICs can be a tax cst assciated with the prvisin f share-based incentives t emplyees if, n the facts, NICs are fund t apply. Sme steps t take Register fr VAT. Set up yur payrll systems. Find a gd accuntant t help with crpratin tax returns. Ensure that tax planning is part f yur verall business planning. This sectin f LaunchPAD has been prepared n the basis f this law n 10 January Cntact If yu wuld like t discuss yur business venture with a member f ur LaunchPAD team please cntact: Manchester Debrah Clark Head f Private Tax & Trusts T +44(0) E debrah.clark@mills-reeve.cm Cambridge and Nrwich Christpher Twnsend Partner T +44(0) E christpher.twnsend@mills-reeve.cm Cntact details fr each specialist member f the LaunchPAD team can be fund at the end f the respective chapters. LaunchPAD is als available nline at Mills & Reeve LLP is a limited liability partnership authrised and regulated by the Slicitrs Regulatin Authrity and registered in England and Wales with registered number OC Its registered ffice is at Funtain Huse, 130 Fenchurch Street, Lndn, EC3M 5DJ, which is the Lndn ffice f Mills & Reeve LLP. A list f members may be inspected at any f the LLP's ffices. The term "partner" is used t refer t a member f Mills & Reeve LLP. The cntents f this dcument are cpyright Mills & Reeve LLP. All rights reserved. This dcument cntains general advice and cmments nly and therefre specific legal advice shuld be taken befre reliance is placed upn it in any particular circumstances. Where hyperlinks are prvided t third party websites, Mills & Reeve LLP is nt respnsible fr the cntent f such sites.

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