Corporation Tax...

One of my friends is coming to the end of his financial year, and his company has actually managed to do quite well despite the tough trading conditions and the lack of support from government and banks for small businesses.

He has been advised anecdotally not to declare a profit so as to avoid corporation tax but rather pay the potential profit out in wages to himself and then for the company to break even (he is a one man band).

Is this a good idea or not? Personally I can't see the difference as if he takes it in salary there is lots of tax to pay, and if he leaves it in the company there is the corporation tax... is one set of tax less/more overall and therefore a preferable route?

Re : Corporation Tax

Hi Lianne

I don't know anything about what would be the best thing to do financially, however I think if someone has said never to declare a profit then that is just rubbish and someone trying to show a bit of bravado.

Lots of companies declare a profit don't they - just look at the banks with their multi-billion pound profits.

I think either way there is considerable tax to pay so unless he takes it all as dividend I don't see any particular reason why he shouldn't declare a profit and be proud to do so, particularly if he doesn't need the money right now then I don't see clearly why he should take it out as salary to avoid a profit being declared.

Re : Corporation Tax

Depends on what the scale of wage is. He may find that the PAYE and National Insurance that he pays on the wage is greater than the Corporation Tax liability he would pay.

I suggest that he contacts an accountant.
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For efficient accounting services go to www.truemanbrown.co.uk

Re : Corporation Tax

What is the actual current rate of corporation tax for a small business, has it changed since the Coalition government came in?

Re : Corporation Tax

It's 21 per cent for 2010/11, and yes, for the year to 31/3/2012 the rate has been reduced by the coalition govt to 20 per cent.
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Re : Corporation Tax

You may find this blog helpful!!!

http://www.truemanbrown.co.uk/index.php?option=com_content&view=article&id=135%3Abonus-or-dividend&catid=46%3Ablog&Itemid=185
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For efficient accounting services go to www.truemanbrown.co.uk

Re : Corporation Tax

I think the smart thing would be to do a bit more research on this topic, then sit down with an accountant for 1/2 an hour with some pointed questions written down in front of you, for reference.
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Re : Corporation Tax

I agree about sitting with an accountant.

For simple businesses there is relatively little you can do to reduce tax so that is perhaps the wrong question.

Unless he is mega-rich and has off-shore companies etc, you can't avoid paying the personal tax/ NI the moment that you take it out; an accountant can help minimize this by various means (pension scheme, dividends) but you will pay one way or another.

The important thing is that this is not really an either/or. If you paid the corporation tax this year, remember than when you do take it as salary (say next year), this will end up as a commensurate reduction in profit for that next year so you don't necessarily pay any less or extra tax by doing that.

You could argue that fitting your yearly drawings/ dividends to tax thresholds is smart but in this business climate that sort of planning is for the confident business person.

So the right question might be "does my company need the money for reinvestment more than I need a new living room carpet/ Rolls Royce/ new TV?". If the company requires investment in something (say an office) that could be paid out straight away then that is your "tax free" way of using the money...
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Tony Johnston http://delivermyhr.com Deliver My HR

Re : Corporation Tax

Excellent post by Tony two-up, very sensible!