In this chapter we turn our attention to guidelines for businesses with an examination of:
- The history of business rates
- Who pays business rates and why
- How business rates are calculated
- Changes in business rates from April 2017
- How to challenge your business rates bill
- Eligibility for small business rate Relief
- Other assistance with paying business rates
- Paying your business rates and missed payments
- Who pays corporation tax
- Filing corporation tax returns
- Corporation tax and capital allowances
- Paying your corporation tax and penalties
An overview of business rates and corporation tax
The first part of this chapter deals with business rates including information about their history, who pays them and why and how they’re calculated. Bearing in mind the recent changes in business rates, we look at solutions if you feel your bill for business rates is too high and what financial assistance you might be eligible for from your local council – both in the form of relief or when you miss a payment.
The second part of this chapter is also about business-related taxes but in this case, we look at corporation tax. Who has to pay corporation tax in the UK? We then give useful information about filing a return for this tax and ways to reduce your tax liability by claiming capital allowances. Finally, we explain how the tax must be paid and what penalties there are for late filing and/or payment.
The history of business rates
Business rates, like council tax, have their roots in the Poor Law of 1601, which levied a parish-based tax to pay for poor relief. The General Rate Act of 1967 set up a framework for local taxes to be collected from both domestic and non-domestic properties according to their rental value.
The Local Government Finance Act of 1988 saw a separation between local taxes for homes (which came under the short-lived Community Charge or Poll Tax) and a different tax for commercial properties. Two years later, control of the revenue for business rates was transferred from local authorities to central government.
In 2013 the administration of business rates was changed once again so that local authorities were allowed to keep half of the revenue raised from business rates and the rest was sent to central government to be redistributed in the form of the Revenue Support Grant. This means that the net income of a local authority doesn’t always bear any relation to the amount it collects in business rates.
Who pays business rates and why?
Business rates are the nearest thing that the UK has to a Land Value Tax – with the major difference that they’re levied on specific kinds of property rather than on the land itself.
In fact they are paid by all non-residential properties such as shops, offices, warehouses and factories although certain buildings, such as agricultural buildings and places for the welfare of the disabled, are exempt. Empty buildings are usually exempt for the first 3 months of non-occupation and then the rates should be paid (with the exception of industrial properties which are exempt from business rates for 6 months).
The occupier of a commercial property is liable to pay the business rates although in cases when you rent a shop, it’s something to be discussed with the landlord before signing a lease. Some might continue to pay the business rates but would add a monthly increase to your rent to cover the cost.
Like council tax, the revenue raised from business rates is used to fund services provided by local government such as street lighting, policing and waste disposal.
How are business rates calculated?
Businesses pay a proportion of the annual officially-established rental value of the property (or rateable value) as decided in an evaluation by the VOA (Valuation Office Agency). This means that the higher your rent, the higher the amount you have to pay in business rates.
Apart from the rateable value decided by your rent, the proportion of rates you pay depends mainly on the size of your business and which part of the UK you live. Once the ‘rateable value’ of your property has been calculated, it is multiplied by the multiplier set by central government. This is now 47.9p as a standard rate and 46.6p for small businesses. You’re eligible for the small business rate if your rateable value is under £51,000 in England.
Visit the government site to find out how much business rates you’ll need to pay.
With their roots in the Poor Laws, business rates were separated from domestic rates in 1988.
The control of business rate revenue is now divided between central and local government in the UK.
Business rates are paid by owners of commercial properties and are used to fund local government services such as street lighting.
Business rates are calculated according to the annual rental value of a property multiplied by a ‘multiplier’ set by central government.
Changes in business rates from April 2017
Although the rateable value of property is supposed to be re-evaluated every 5 years to allow for changes in commercial districts, the last evaluation by the VOA was deferred from 2015 until 2017. This means that new business rates have come into effect from April 2017 with the new rates being based on the open market value of the property as calculated on 1st April 2015. Changes in the rateable value don’t mean an increase in the amount that this tax raises in total since the Office of Budget Responsibility has pointed out that the revenue stays stable at 1.5% of GDP.
Although the rateable value of property is supposed to be re-evaluated every 5 years to allow for changes in commercial districts, the last evaluation by the VOA was deferred from 2015 until 2017.
However, increases will affect some areas more than others. So, what should you do if you find that your business rates have risen sharply and you’re facing financial hardship?
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How to challenge your business rates bill
Before applying for business rate relief, you could check the rateable value of your property – this can be found on the front of your business rates bill. If you find the amount to be excessive, you could contact the VOA on 0300 0501 501 and ask for a re-evaluation of the rateable value.
For independent advice, you could contact the RICS (Royal Institute of Chartered Surveyors) on their enquiry line: 024 7686 8555. Their advice is free for the first 30 minutes. If you need to go through the appeals procedure, as well as the RICS you could contact the IRRV (Institute of Revenues, Rating and Valuation) or the Rating Surveyors Association for representation although you’d have to pay a consultation fee.
At this time, the appeals procedure challenging your business rates bill is completely free. However, discussion is underway to set a fee to discourage those who challenge their rates bill since they haven’t understood how it’s calculated. If you haven’t been successful in your appeal to the VOA to have the rateable value of your commercial property reduced, your next step should be to contact your local authority to see whether you’re entitled to any form of business rate relief.
Relief schemes for businesses are administered and run by local councils; some will be applied automatically if you’re eligible whilst for others you must apply.
Questions on corporation tax
The small business tax rate in the UK for the year 2019 is a flat 21% for a C-corporate. On average, the effective business tax rate is 19.8%. Businesses, however, generally pay different amounts in taxation based on their establishment and entities. Corporate tax rate is expected to be reformed at 18% starting 1 April 2020.
Corporation tax is similar to income tax for companies, however the major difference is that companies do not have a personal allowance. As soon as a business starts to make a profit from their operations, it needs to start paying corporation tax at the designated rate, unless it has previously made losses which are used to calculate a lower contribution.
Companies pay corporation tax on their profits before any dividends are paid out. Therefore, shareholders who receive these dividends are considered as having already paid tax on income made from dividends (also called a tax credit). Shareholders who are paying higher tax rates will have dividends added to their total income and have extra taxes to pay.
Eligibility for small business rate relief
If your rateable value is calculated as under £12,000 and you only use one property, then you’re exempt from paying business rates. For rateable values of £12,001 to £15,000, you’re entitled to a sliding scale reduction in the amount of business rates which you’ll have to pay. For businesses with a rateable value of £15,000 to under £51,000, your multiplier is the small business multiplier of 46.6p rather than the standard multiplier of 47.9p.
In all these cases, you should check your business rates bill to make sure that these reductions have been included in your bill. If they haven’t, you should contact your local council so the bill can be reduced.
For businesses which are no longer entitled to business relief because of changes in the 2017 evaluations, you should be entitled to transitional relief. This means that your increases are phased in gradually; in 2017-18, you shouldn’t face an increase of more than £50 a month in your rates bill.
New business rates have come into effect from April 2017 according to VOA evaluations of April 2015.
If you feel the rateable value of your commercial property is too high, you can ask VOA for it to be re-evaluated.
There are a number of business rates relief schemes run by local councils.
Small business rate relief offers exemptions or reductions in the amount of business rates you pay according to your rateable value.
How much revenue is collected in the UK in business rates?
According to the IFS estimates, business rates raised £28.4 billion in 2016-17, which is 4% of all government receipts.
How many businesses pay business rates?
It’s estimated that 1.8 million properties in the UK pay business rates.
How many people appeal their rateable value and business rates bill?
During 2010-15 approximately 1 in 3 businesses appealed their rates bill.
What is the collection rate for business rates?
Along with council tax, business rates have one of the highest collection rates – 98.1% (2014-15).
Other assistance with paying business rates
Since the 2011 Localism Act, local authorities in England and Wales have been given powers to grant discretionary rate relief ‘for any purpose’. There are a number of schemes that may be available in your area but you need to contact your local council to see if you’re eligible.
Since the 2011 Localism Act, local authorities in England and Wales have been able to grant discretionary rate relief ‘for any purpose’.
If you have a shop with a rateable value of up to £8,500 and the population of your village is under 3,000, you may be entitled to rural rate relief. Hardship relief is also possible if your business is in the interests of local people but you’re facing financial difficulties.
If you’re starting a business up or relocating to an enterprise zone, you may be eligible for business rates relief as part of incentives to boost the local economy. Finally, if your business premises are affected by a severe local disruption such as floods, you may be able to claim a temporary reduction in business rates from your local authority.
Paying your business rates and missed payments
Business rates bills are sent in February or March every year for the following tax year. Apart from the amount to be paid, there will also be details of the instalments and the deadlines when they should be paid by.
If you miss an instalment, you’ll receive a reminder from your local council and if this remains unpaid, you could lose the chance to pay the rates in instalments becoming liable for the full yearly amount. After a final notice, local authorities can apply to the magistrates’ court for a liability order, which could give them the power to take the money from you, such as by seizing assets.
If you face difficulties in meeting a payment because of a struggling business, you should contact your local council to make arrangements before matters reach court. Most local authorities make provisions for deferred payments but they have to be notified beforehand. You could also be eligible for discretionary relief in some circumstances.
Who pays corporation tax?
Corporation tax is paid by limited companies as a percentage rate of their annual profits; for companies which aren’t based in the UK, corporation tax is paid only on their UK profits. Self-employed people aren’t liable for this tax since they complete a self-assessment tax return and pay their income tax in this way. Apart from limited companies, certain associations, clubs, societies and co-operatives also are liable for corporation tax.
Currently, the rate for corporation tax is 20% although there are plans to reduce this in order to encourage economic growth. It’s due to fall to 19% in 2017-18 reaching 17% in 2021.
Filing corporation tax returns
Corporation tax returns are submitted online to HMRC by completing the CT600 form through the use of an online account or a Government Gateway Account. The return must include the company name, its registration number, its registered office and its tax reference number. Like other tax returns, current expenditure (such as wages, raw materials, etc.) is deducted from taxable profits.
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Because of the complexity of tax laws regarding corporation tax, many limited companies appoint an accountant to act on their behalf. This can be of great help but it must be emphasised that the company directors are still liable for any errors in the return (and not the accountant). HMRC has a help-line (0300 200 3410) for any queries you may have about corporation tax and deductible expenses. Before phoning, you should have your 10-digit Unique Tax Reference number.
Although arrangements can be made for shorter periods if you wish, corporation tax is usually calculated on a 12-month accounting period. No proof of expenses has to be provided with the return but by law, all corporation tax records (such as receipts and invoices) must be kept for at least 6 years.
Because of the complexity of tax laws regarding corporation tax, many limited companies appoint an accountant to act on their behalf.
Apart from small business rate relief, there are a certain number of other schemes you may be eligible for to reduce your business rates.
Business rates are sent once a year with details of payments and deadlines for instalments.
If you have financial difficulties, you should contact your local authority to prevent them starting legal procedures and if possible, apply for discretionary relief.
Corporation tax is currently 20% and is paid mainly by limited companies, which must file an annual tax return detailing their profits and their tax-deductible expenses.
Corporation tax and capital allowances
Offsetting past losses against future profits can reduce the amount you pay for corporation tax but there are also a number of allowances which can cut your tax bill considerably.
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One of the key ones is the Annual Investment Allowance (AIA), which offers tax relief if you’ve spent money on both plant and machinery as well as integral features of the building (such as lifts) and some building fixtures, like bathrooms. This allowance can’t be used for anything which is used outside your business although a proportion can be claimed if it’s used both professionally and personally.
As of January 2016, the limit for the AIA for business-related equipment is up to £200,000 (although other rates apply for claiming for other tax years). If capital expenditure exceeds the limit of £200,000, then it comes under the Writing Down Allowance (WDA), which allows limited companies to offset a percentage of the expenditure over successive tax years. Depending on the type of equipment, there are two rates: the main rate (18%) and the special rate (8%).
Paying your corporation tax and penalties
Corporation tax must usually be paid 9 months and 1 day after the end of your company’s accounting year. For companies with profits exceeding £1.5 million, the tax is paid in instalments.
There are a number of payment methods but whichever you use you must ensure that it reaches HMRC on time. Online/phone banking or CHAPS are the quickest, arriving the same or next day while you might prefer to use other methods such as Direct Debit, online by credit/debit card or alternatively through a bank/building society account or the Post Office. Special payslips need to be ordered from HMRC so you should allow time for this.
Like any other money owed to HMRC, there are penalties not only for being late in filing the corporation tax return but also for being late in paying the tax. For late filing the penalty starts at £100 for the first day while interest is charged on late payments.
Do I have to pay business rates if I work from home?
You don’t have to pay business rates if you only use one room of your home for your business or if you sell goods by post. However, if you employ people to work in your home; have converted a part of the building to accommodate your business or if clients regularly visit your home on business, then you should contact your local authority as you may have to pay business rates.
How many limited companies are there in the UK?
According to the latest government figures (2016), there are 1.8 million registered limited companies in the UK, which is an increase of 38% since 2012.
What are the benefits of being a limited company compared to being a sole trader?
Many businesses choose to become a limited company since there’s a separation between business and personal debts and their liability. There’s also the question of tax efficiency. As a sole trader, as soon as your profits become higher you may go into a higher bracket for income tax and end up paying more than the 20% rate for corporation tax.
How much revenue does corporation tax raise?
According to IFS estimates for 2016-17, corporation tax raised £42.7 billion, which is 6% of all government receipts.
Do I have to be the owner of a building to claim for AIA for integral features or building fixtures?
No. To claim relief for such expenditure on buildings, the most important is who paid for it so it doesn’t matter if you rent the building.