Companies pay corporation tax on the money they make from (amongst other things):
Trading profits are calculated by looking at a company’s income minus allowable (‘deductible’) expenses. Examples of deductible expenses include the cost of travel, staff, finance, office equipment and business premises. To be deductible, expenses must be incurred wholly, and exclusively, for business purposes.
Depending on their individual circumstances, companies may also be able to use other allowances and reliefs to reduce their corporation tax liability. For example, companies may be able to reduce the corporation tax payable on business profits by claiming capital allowances relief in respect of the purchase of certain kinds of business assets. Capital allowances are described in more detail here. Further information about corporation tax allowances and reliefs is available here.
Dividend income received by companies benefits, in most cases, from an exemption from corporation tax, whereas other types of investment income (such as interest and royalties) are typically subject to corporation tax. In many circumstances, tax will be payable on the investment income received, with only limited deductions (if any) being allowed for costs expended in earning that income.
Companies do not pay CGT in the same way as individuals. Instead, any ‘chargeable gains’ the company makes (which will be calculated in roughly the same way) are subject to corporation tax.
The VAT position, described in the Different Types of Tax section, applies to companies.
If a company has employees, the position in respect of employee’s NICs, employer’s NICs and PAYE, described in the Different Types of Tax section, may apply to the company.
Where an individual sets up a company to do business, tax consequences will normally arise for the individual when dividends are paid by the company to the individual; generally, the shareholder will be required to report the dividend income to HMRC on his/her own tax return, and may be required to pay income tax on it (see the Different Types of Tax section **for a discussion of allowances which may apply). A shareholder owner may also receive employment income from the company (on which see the position in respect of employee’s NICs, employer’s NICs and PAYE described in the section entitled “Different Types of Tax” above).