Reply to: School boy question on CT

[northernladuk]

hence why I pay a lump sum into my pension as I approach year end and stare in horror at the CT bill.

Jeez, don't give the OP that option. He'll bust a blood vessel trying to work that one out.

[Lance]

Another bit of general advice for the OP which is a common misconception (just in case you are unaware); dividends are not included as expenses i.e. if you declare a dividend, it doesn't reduce your CT. Dividends are paid out of profit AFTER corporation tax.

Turnover/Sales : A
Less Expenses : B
Profit/(Loss) : C = A - B
CT @ 19% on profit : D = C x 19%
Profit after corporation tax : E = C - D

hence why I pay a lump sum into my pension as I approach year end and stare in horror at the CT bill.

[Craig@Clarity]

Another bit of general advice for the OP which is a common misconception (just in case you are unaware); dividends are not included as expenses i.e. if you declare a dividend, it doesn't reduce your CT. Dividends are paid out of profit AFTER corporation tax.

Turnover/Sales : A
Less Expenses : B
Profit/(Loss) : C = A - B
CT @ 19% on profit : D = C x 19%
Profit after corporation tax : E = C - D

[SimonMac]

MODS, can we stickie this thread so we can point people to it when ever they ask "do you really need an accountant?"

[lecyclist]

You know how Einstein was like um, really bad at football? That's me.

Some stuff is just not interesting (I have the same problem thinking about pensions). Like eating a plate of kale.

But sometimes an important subject (like exchanging the never to be replaced days of your life for money, and understanding basic accounting terminology) requires you to focus and overcome that mental inertia.

[northernladuk]

You know how Einstein was like um, really bad at football? That's me.

Einstein wasn't a footballer though...

[ApeShape]

You know how Einstein was like um, really bad at football? That's me.

[jamesbrown]

Agree with vwdan, it's a surprisingly common misconception among n00bs that it reduces actual CT by £1 for every £1 spent (rather than profits that suffer CT).

[northernladuk]

Easy to mock, but a shockingly common belief. I had somebody tell me that Starbucks asking for charity donations was a scam because it let them pay less corporation tax...

Man that's just ridiculous.. I mean, anyone thinking that Starbucks pay any CT at all. Unbelievable.

[vwdan]

Easy to mock, but a shockingly common belief. I had somebody tell me that Starbucks asking for charity donations was a scam because it let them pay less corporation tax...

[northernladuk]

neither can I. I had to blink and re-read as I assumed I'd missed an important piece of information.

@OP - what does your accountant say? He probably needs a chuckle as well

He doens't even need to do that. There are GCSE bitesize revision articles that cover this, and if this is his level of knowledge, a whole host of other stuff he clearly won't know. To come on a prof contractor forum and ask this is... well...

[Lance]

I can't believe what I am reading.

neither can I. I had to blink and re-read as I assumed I'd missed an important piece of information.

@OP - what does your accountant say? He probably needs a chuckle as well

[northernladuk]

It still doesn't make sense to my thick head....Ugh. I understand expenses 'reduce' CT liability. So rather than reduce my profits I'm reducing my CT liability, up until a point? 19% the profit but only up until 19% that 19% profit?

Some napkin maths -

I make 100k in profits.
My liability is 19k in Corp tax.
I end up with 81k once the CT balance is cleared.

Or, I stay in the Ritz for two nights costing the business 9k
My liability is now 9k less due to my amazing taste in hotels
I end up with only having to pay 10k in CT

So I end up with 90k left in the company, rather than 81k?

I'm a maths prodigy.

I can't believe what I am reading.

[jamesbrown]

It still doesn't make sense to my thick head....Ugh. I understand expenses 'reduce' CT liability. So rather than reduce my profits I'm reducing my CT liability, up until a point? 19% the profit but only up until 19% that 19% profit?

Some napkin maths -

I make 100k in profits.
My liability is 19k in Corp tax.
I end up with 81k once the CT balance is cleared.

Or, I stay in the Ritz for two nights costing the business 9k
My liability is now 9k less due to my amazing taste in hotels
I end up with only having to pay 10k in CT

So I end up with 90k left in the company, rather than 81k?

I'm a maths prodigy.

Your liability isn't reduced by £9k. It is reduced by 0.19 * £9k = £1,710. So your liability remains £19k - £1,710 = £17,290 or (£100k - £9k) * 0.19 = £17,290.

It is really simple. If you have a legitimate business expense for CT purposes, you will save 19% of that expense, which would otherwise have been paid in CT, not 100% of that expense.

[hobnob]

Your profit is calculated as income minus expenses. In your Ritz example, your company profits would now be £91,000 so you would pay £17,290 in corporation tax. I.e. you'd pay £9000 to the hotel instead of £1710 to HMRC, which probably isn't worthwhile