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CORPORATION TAX – A GUIDE FOR SMALL BUSINESS

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Nidhi is a Content crafter at 123Financials.

 

Do you run a small business or a limited company? If yes! Then you’ll need to know about corporation tax.

Corporation tax is the same as income tax for your company, where you, as an individual, pay income tax to HMRC on earning each year; your company will pay corporation tax instead.

Besides, if you submit your corporation tax return late or if it contains errors, then you could be penalised.

So, it’s essential to be aware of some basics and facts related to the Corporation tax.

Here’s the guide to help you understand Corporation Tax in more detail.

 

What is Corporation Tax?

Any organisation doing business in the UK is required to pay corporation tax on its profits.

If the company in the UK, pays corporation tax on all its profit from the UK, and if the company is not UK based but has a branch here, then it only pays this tax on profits related to UK activities.

Corporation tax also applies to clubs, co-operatives, and other unincorporated associations, like sports clubs and community groups.

You’ll not get a bill for this tax, but you required to calculate, pay, and report on it yourself, or with guidance from your tax advisor or accountant.

 

Nidhi

What is the Rate of Corporation Tax?

The current tax rate is 19% for company profits.

The taxable profit includes the money you make from business, investments, and selling assets for more than they cost (chargeable gains).

For a chargeable gain, you are required to work out your gain to calculate tax.

Companies involved in oil rights or extraction in the UK or UK continental shelf have different tax rates, known as ring fence profits.

 

Small business responsibilities

Small businesses have some responsibilities associated with the Corporation Tax.

The first responsibility is to register for Corporation Tax when you start your business.

The second one is you must keep your business’s accounting records, prepare tax returns, and file it by your deadline.

You must do this even if your company made a loss, and you owe no tax.

Finally, you must pay the Corporation Tax you owe by your deadline.

 

How to pay Corporation Tax?

Firstly, you are required to register for Corporation Tax within three months of starting your business.

However, when exactly you start to do your business is rather complex; here’s HMRC guidance on what counts as trading for tax purposes.

After working out how much corporation tax you need to pay, you’ll need to pay it.

There are varieties of ways to pay it, depending on how urgently you want to pay:

If you want the money to reach HMRC the same or the next day:

  • Use faster payment services (online or phone banking).
  • Use Clearing House Automated Payment System – CHAPS.

 

If you want the money to reach HMRC within 3 to 5 working days:

  • Use Banker’s Automated Clearing Service – BACS.
  • Use Direct Debit – if you’ve set one up before.
  • Pay online by corporate credit or debit card.
  • Pay at your bank or building society.

If you want the money to reach HMRC within five working days, then set up a new direct debit.

If your payment deadline is on a bank holiday or a weekend, in such case, the payment must reach by the last working day before your deadline to HMRC.

You can find full instructions for payment and HMRC account details here, Pay your Corporation tax bills.

 

Deadlines for Corporation Tax

A Corporation Tax deadline depends on the accounting period, which is generally the same 12 months as the financial year in your annual account.

Businesses with profit up to £1.5 million must have to pay their tax in 9 months & 1 day after the end of their accounting period.

As an instance, if your business’s accounting period ended on 31 March 2020, your payment deadline would be 1 January 2021, and the tax return deadline would be 31 March 2021.

Deadlines are affected by COVID-19.

Large companies with taxable profits above £1.5 million must pay corporation tax electronically in instalments with different deadlines.

 

Reliefs on Corporation Tax

You may get deductions on your corporation tax.

You can deduct capital allowance on assets such as equipment, plant and machinery, business vehicle, and business running costs from pre-tax profits.

You can also claim for,

  • R&D relief
  • The patient box – if your business makes a profit from patented inventions
  • Creative industry relief (CITR) – if your business makes a profit from the film, theatre, animation, etc.
  • Disincorporation relief – in case you close the company and become a sole trader.
  • Capital, terminal, property income and trading losses.

 

Penalties for late filing of Corporation Tax

If you don’t pay Corporation Tax by the deadline, then HMRC may charge you penalties and interest.

It ranges from £100 for being one day late to 20% of the unpaid tax if you are 12 months late for filling the Corporation Tax.

However, you can appeal against the penalty by writing to your corporation tax office, but for that, you must have a reasonable excuse.

 

Wrapping up

When it comes to deal with HMRC and Corporation Tax there’s one golden rule – it pays to be organised.

Always make sure that you don’t pay more than you need to by claiming any applicable reliefs.

Pay your Corporation Tax on time and with care to avoid penalties of late submissions.

And if you can’t get your head around any of it, you can always hire an accountant or tax advisor or an accountant to get professional advice.

 

Business

HOW TO CREATE A PROFORMA INCOME STATEMENT FOR YOUR STARTUP?

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There are two reasons why you are on this page right now. First, you are just starting with your business, and you want to learn about pro forma. Second, you are not sure if you are making your business proforma income statement correctly.

Before we discuss the process of creating a proforma income statement for your business, let’s start with the definition of proforma.

 

Pro forma: What is it and why I need one

Pro forma is the process of calculating financial results with the use of presumptions or projections. It is a Latin term that means “for the sake of the form” or “as a matter of form.” Businesses used this to describe a document needed to conform to a specific doctrine or norm.

A pro forma income statement is a component of the financial projections of any business. It should be included in the financials of a business plan. This income statement is just like a historical income statement. The only difference is that it projects the future instead of the past. It will help you make some operational changes right away if the projections predict a decrease in profitability.

Now that you know what a proforma is, the next part is about creating a proforma income statement for your startup business.

 

Uses of Proforma Income Statement

Pro forma income statement has several uses. Some of which are as follows:

Planning and Control

The income statement is used in estimating in-coming budgets and sales. It serves as a planning tool to set standards for future operations and business activities. The financial information is used to control and monitor the performance based on the set standards. It is achieved through the use of various tools like variance analysis and ratio analysis.

Reporting

Some businesses are required by the legislation to prepare a pro forma financial statement as part of their financial report.

Financial Modeling

It is also used in creating a summary of the expenses and incomes of your business. The financial models can help you in deciding, and it is based on the presumptions done by the company.

 

Steps on How to Create a Proforma Income Statement

Below are the steps in preparing the proforma income statement:

 

Step #1 Calculate Business Revenue Projections

When creating a proforma income statement, you should use realistic market assumptions. You can do some research or talk to the experts to determine the expected yearly revenue, asset accumulation, and cash flow.

Here are steps on how you calculate revenue projections of your business:

a.   Estimate How Much to Sell

Determine how much of your product you are going to sell within a specific period. Also, you should have a better understanding of the market.

b.   Calculate the Projected Income

To calculate your projected income, multiply your total estimated sales by the amount you charge for every item you sell. After estimating how much you will sell, determine the cost of each product.

c.    Calculate the Projected Expenses

Next, calculate the projected expenses of the company. It is a must to figure out how much the company is spending in producing your products or services.

d.   Subtract projected expenses from projected income

The final step in calculating business revenue projections is subtracting projected income from your projected income.

Step #2 Estimate Liabilities and Costs

Liabilities are the lines of credit and loans of the company. On the other hand, the costs are your lease, insurance, materials, licenses, employee pay, permits, etc. In creating the first part of your company pro forma, you will use the business revenue projections calculated from step one and the estimated costs and liabilities.

This step is your chance to evaluate if all your expenses are necessary and what you can do to reduce them.

 

Step #3 Estimate Cash Flows

Cash flow is calculated by making some adjustments to your net income by subtracting or adding differences in expenses, credit transactions, and revenue, leading from transactions that happened from one period to the next.

These adjustments are carried out due to non-cash items calculated in the income statement and total assets and liabilities. Since some transactions do not involve cash items, some are re-evaluated when computing the cash flow from operations.

Cash flow is calculated using these two methods:

Direct Cash Flow Method

The direct method adds the receipts and the different cash payments, including cash paid to suppliers, cash paid as salary, and cash receipts from customers. These numbers are computed using the starting and ending balances of the different business accounts and assessing the net increase or decrease in your account.

Indirect Cash Flow Method

With the indirect cash flow method, the operating activities are computed by getting the net income off the company’s income statement. Because it is set on an accrual basis, revenue is recognized if earned and not received.

This part of the proforma statement will project the company’s future net income, dividends, sale of assets, issuance of stocks, etc. The estimation of cash flow is considered as the second part of your pro forma financial statement.

 

Step #4 Creation of Chart of Accounts

The chart of accounts will complete your proforma income statement and includes data collected for a three to five-year period. The first year is detailed and broken into every month increments. The following years will be split into by quarter, and the fourth and fifth years are then broken into yearly.

 

Final Thoughts

Some business owners are surprised at how good a pro forma income statement is to their startup operations. But, if done correctly, you can consider it a strategic planning tool to direct your company in the right direction.

Follow the steps in this guide to make sure you get the correct estimations and numbers in completing a proforma income statement. Others think that the income statement will not benefit new businesses. But for others, it is a good start in foreseeing the future of the company. If you want to share your thoughts about the topic, or have questions, feel free to comment below.

 

Resources:
https://www.investopedia.com/investing/what-is-a-cash-flow-statement/
https://en.wikipedia.org/wiki/Pro_forma
https://getpoindexter.com/blog/pro-forma-income-statement-example
https://www.freshbooks.com/hub/accounting/calculate-liabilities
https://businesstown.com/articles/how-to-create-a-pro-forma-income-statement/
https://smallbusiness.chron.com/write-pro-forma-3064.html
https://www.investopedia.com/terms/p/proforma.asp

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WAYS TO KEEP YOUR HYBRID WORKPLACE SECURE FROM THE IRREVERSIBLE DAMAGE OF A CYBER ATTACK

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By Alex Bransome, CISO at Doherty Associates, specialists in managing and securing cloud services in the finance sector.

 

recent in-depth study into 3000 UK firms and 2000 employees commissioned by our team at Doherty Associates found that 42% of the financial and legal firms questioned including those in private equity, investment and asset management, said their firm was inadequately protected against the cyber risks of hybrid working.

At the same time, one in five of the firms admitted that a major cyber attack could significantly cost their business at least £10 million or more in irreversible damage such as through loss of sensitive information, corporate and confidential data, due to a GDPR breach or fine, and long-term reputational damage to the firm.

Yet hybrid working is here to stay for over half of the firms we spoke to, despite being more vulnerable than ever to a cyber breach. A recent BBC poll on 50 of the biggest employers in Britain, including investment firms JP Morgan, Rathbones and investment bank VSA Capital, said they had no immediate plans to bring staff back to the office full-time.

And you can see why flexible working is the preferred choice for both firm and employee, as over a third of the finance and legal professionals we spoke to said that they found it easier to win new business and close deals when working from home.

However, a more flexible, hybrid scenario is creating increasingly complex cyber security challenges as employees move between different set-ups, in different places, using different devices.

 

More than one front door

With employees working outside of the office, using a blend of personal and company devices, finance firms no longer have a single ‘front door’ to protect but a multitude of entry points to secure against cyber criminals.

While it remains the case that most information leaks out by accident, the chances of this happening increases with more employees working from home, as the ‘attack surface area’ extends out to every device being used, no matter who owns it. At the same time, cyber criminals are finding ever more sophisticated ways to target remote employees, with finance an increasingly attractive target due to the high value of transactions.  What’s more, it seems a high number of employees working remotely are experiencing cyber or data breaches unknown to the firm.

 

It’s the unknown you need to worry about

52% of the finance and legal firms we interviewed said their organisation has yet to experience a cyber attack or data breach since transitioning to remote working since the first UK Covid-19 lockdown back in March 2020. Yet, a quarter of employees said they had been the victim of a data breach or caused one themselves since working remotely, one in seven had experienced a phishing attack or similar, and 42% admitted to emailing confidential client information or unencrypted attachments.

The difference between how many firms are detecting breaches compared to the reality of them occurring suggests that employees are not reporting all of the mistakes they make. It also shows that firms are still in need of a well-rounded cyber security programme that incorporates protective, detective and responsive solutions, if they are to keep their information, people and workforce safe.

It’s not the tip of the iceberg you need to worry about. It’s the bit you can’t see underneath. Underestimating the risks and vulnerabilities that come with home and hybrid working could prove costly.

 

Reinforce your moats to protect your castles

Many firms appreciate that a single ‘castle and moat’ perimeter defence approach – where employees are protected within the boundaries of the office firewall – is no longer fit for purpose in a hybrid workplace. However, some are struggling to keep up with the fast-moving challenges that blended working brings, but there are steps your firm can put in place to safeguard a firm’s ‘borderless’ network.

  • Improve your cyber hygiene and widen your security perimeter to protect those working outside the office

Cloud-based technologies such as Data Loss Prevention and Information Protection can help protect against data leakage. Ensure that all internet facing systems have multi-factor authentication, so employees keep their identity secure while working remotely, and restrict the use of personal devices.

Use software that ringfences and encrypts all the corporate data on a mobile or ‘bring your own’ devices as this means the corporate data can be wiped if the device is lost or stolen without this affecting any personal data – such as family photos – if the device is then found or recovered.  Also using disk encryption to protect all data on company devices such as laptops, will mitigate the risk of it being lost or compromised if the device is stolen.

Ensuring though that no company information is shared via personal cloud storage platforms where documents can easily be forgotten, and just as easily hacked, is also advised.

  • Conduct a cyber risk assessment at least every six months to improve your security posture

This will identify and address any critical vulnerabilities, gaps or compliance issues. An assessment should involve identifying your most important/critical assets; identifying any weakness/vulnerabilities in those assets, or in how they are used or accessed, assessing the likelihood of a risk materialising; and finally identifying controls to help address the identified risks, to reduce risk to an acceptable level.

  • Carry out regular cyber awareness training

Over a third of the financial professionals in our poll say they’ve had no cyber training since working from home from the start of the pandemic despite the fact that they are now using different software and platforms to collaborate as well as a mix of personal and work devices.

Building in regular comprehensive cyber security awareness training for every employee is critical to safeguarding against any vulnerabilities, weak spots or compliance breaches.

It should most importantly clearly convey your organisation’s approved methods of working, communicating and sharing data. Beyond this, user awareness should cover the end user security best practices and how to spot common attacks such as phishing, plus phishing assessments to actively test and measure awareness levels across the organisation.

Empowering employees with the knowledge to identify threats in real-time can become a firm’s greatest security asset so making cyber security training a ‘must’ and not just a nice-to-have is critical in this new era of hybrid working.

Your firm is only as safe as your weakest link but cyber savvy employees, robust cyber security measures, and a strong cyber defence system will keep both firm and workforce safe and secure no matter where they are.

 

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