Corporation Tax, VAT and Inheritance Tax
A company's tax bill is not a single number pulled from a profit-and-loss account; it is the output of a structured calculation, and the solicitor's job is to know where in that structure a client's transaction lands. A share buyback, a director's loan, an unregistered VAT trader crossing a turnover line, a family business passed down at death — each triggers a different regime, and SQE1 tests whether you can spot which one applies to a given set of facts and apply the mechanics correctly.
A UK-resident company is a taxpayer in its own right, separate from its shareholders. Corporation Tax is charged on the company's taxable total profits — trading income, investment income, and chargeable gains added together — for an accounting period. That period tracks the company's period of account (usually 12 months, matching its statutory accounts) but is subject to a hard rule: an accounting period for Corporation Tax purposes can never exceed 12 months. If a company draws up accounts for an 18-month period of account (common after incorporation or a change of accounting date), the tax system does not stretch to fit — it splits that period into two accounting periods, the first covering 12 months and the second covering the remaining 6, each assessed separately.
Rates and Marginal Relief
Since April 2023 the rate structure has had three tiers, and knowing which tier a client falls into is the first calculation in almost every corporate tax question.
The rates: A company with taxable profits of £50,000 or below pays the small profits rate of 19%. A company with taxable profits above £250,000 pays the main rate of 25%. A company in between pays the main rate reduced by marginal relief.
Marginal relief exists so that a company earning £250,001 isn't taxed at 25% on every pound while a company earning £249,999 is taxed at a blended rate far below that — it smooths the transition. The formula uses a standard fraction:
Marginal relief formula: 3/200 × (upper limit − augmented profits) × (taxable profits ÷ augmented profits)
"Augmented profits" adds back exempt dividends received from non-group companies to taxable profits — a base-broadening step that stops a company sheltering itself into a lower band purely via intra-group dividend flows. Think of the £50,000 and £250,000 figures not as fixed pegs but as full-strength thresholds for a lone company with a 12-month period; both are divided by the number of companies associated with the company in question. Two companies are associated if one controls the other, or both sit under the common control of the same person — a client running three companies through a single controlling shareholder does not get three separate £250,000 mains-rate thresholds; they share one, divided by three. This is why a competent adviser always asks about a client's other corporate holdings before quoting a Corporation Tax rate.
Payment and Filing
Corporation Tax is normally payable 9 months and 1 day after the end of the relevant accounting period — deliberately later than the filing deadline, so a company knows its final tax bill before it must pay. That filing deadline is separate: the company must submit its Company Tax Return (form CT600) within 12 months of the end of the accounting period. A large company breaks that simple payment pattern: one with augmented profits exceeding £1.5 million must pay its Corporation Tax in quarterly instalments during the accounting period itself, rather than in one lump sum afterwards — HMRC is not willing to wait nine months for tax on genuinely substantial profits. And exactly as with the rate thresholds, the £1.5 million instalment threshold is reduced proportionately by the number of associated companies, so a group cannot dodge instalment payments by fragmenting profits across shell entities that are all under one controlling mind.
What Reduces the Bill
Not every outflow from a company reduces its taxable profits, and the distinction between a distribution and a deductible expense is one of the most tested ideas in this area. Dividends paid by a company are distributions of already-taxed profit, not a cost of earning that profit — they are never deductible in calculating taxable profits. Symmetrically, dividends a UK company receives from another company are generally exempt from Corporation Tax, because the profit underlying them has already suffered corporate tax once in the paying company's hands; taxing it again on receipt would be double taxation with no policy justification. Interest, by contrast, genuinely is a cost of doing business: interest paid on a loan taken out wholly for trading purposes is generally deductible in calculating taxable trading profits, because borrowing to fund trade is treated the same as any other trading expense.
Capital expenditure needs its own mechanism because ordinary accounting depreciation is not tax-deductible — the tax system substitutes capital allowances, letting a company deduct qualifying expenditure on plant and machinery according to statutory rates rather than accounting judgement. The headline allowance here is the Annual Investment Allowance, which gives a 100% deduction for qualifying plant and machinery expenditure up to an annual cap — in effect, most ordinary equipment purchases by a trading company are fully deductible in the year of spend rather than trickling through over years.
Losses complete the picture. A trading loss is not wasted; it can be set against the company's total profits (trading, investment, and gains together) of the same accounting period, or carried forward and set against future profits of the same trade. A newly-incorporated client with a loss-making first year is not simply out of pocket for tax purposes — that loss is an asset to be deployed against other income now or profits later.
Close Companies and the Section 455 Trap
Many SQE1-relevant clients run small, owner-managed companies, and those companies are usually close companies: one controlled by five or fewer participators (broadly, shareholders), or controlled by any number of participators who are also directors. The close company label matters because it triggers anti-avoidance rules aimed at the classic temptation of an owner-director simply "borrowing" money from their company instead of taking a taxed salary or dividend.
If a close company makes a loan to a participator, section 455 of the Corporation Tax Act 2010 charges the company itself — not the participator — a tax charge on the outstanding balance. For loans made on or after 6 April 2022, that charge is 33.75% of the loan, matching the higher-rate dividend tax rate, because an unrepaid director's loan is economically equivalent to an untaxed dividend.
The charge is not permanent punishment: it is repaid to the company if the loan is repaid, released, or written off within specified time limits after the accounting period ends. Advising a client who has taken money out of their own close company therefore means checking two things in sequence — has a section 455 charge already arisen, and is there still time to repay the loan before the relief window closes.
Switch registers entirely for VAT: it doesn't care whether a business made a profit — it taxes the supply itself. VAT is charged on the taxable supply of goods or services made by a taxable person in the course or furtherance of business. The mechanics run on two mirrored concepts: output tax is the VAT a business charges its customers on its own taxable supplies, and input tax is the VAT it incurs on goods and services it buys in for the business. A VAT-registered business nets these off against each other — reclaiming its input tax against the output tax it owes — so VAT is designed to fall on the final consumer, with each registered business in the supply chain acting as an unpaid tax collector along the way.
Rates and Exemption
Not all supplies are taxed alike, and misclassifying a supply is one of the most common practical errors a solicitor drafting a commercial agreement can make.
| Category | Rate | Example supplies |
|---|---|---|
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Domestic fuel and power |
| Zero rate | 0% | Most food, children's clothing |
| Exempt | Outside scope | Specified supplies (e.g., certain financial and property transactions) |
A zero-rated supply and an exempt supply can look identical at the till — no VAT is added to the customer's bill either way — but they are legally worlds apart. A zero-rated supply is still a taxable supply, just charged at 0%, so the business making it can still recover its own input tax. An exempt supply falls entirely outside the scope of output VAT, and a business making only exempt supplies cannot recover the input tax related to those supplies at all. A business straddling both — making some taxable supplies and some exempt supplies — is partially exempt and must apportion its input tax recovery between the two, typically pro rata to taxable versus total supplies. This is precisely the trap for a client running, say, a mixed insurance-brokerage-and-consultancy business: some input tax is fully recoverable, some is fully blocked, and the rest needs apportionment.
Registration, Records, and Returns
A business must register for VAT once its taxable turnover exceeds £90,000 in any rolling 12-month period, and must notify HMRC of that liability within 30 days of the end of the month in which the threshold was exceeded.
The deregistration threshold sits slightly below registration — £88,000 of expected taxable turnover for the next 12 months — a deliberate gap that stops a business hovering near the line from having to flip registration status back and forth every quarter. A business is also free to register voluntarily even where its turnover sits below the compulsory threshold, which matters commercially: a start-up with heavy up-front input tax (fitting out premises, buying equipment) may want to register early purely to recover that input tax, even though it isn't legally required to.
Once registered, a business normally submits VAT returns to HMRC quarterly, and under Making Tax Digital for VAT it must keep digital records and file those returns using compatible software — paper ledgers and manual re-keying into HMRC's portal are no longer compliant routes. Records themselves must generally be retained for at least 6 years, reflecting HMRC's enquiry window into past periods. On individual transactions, a VAT invoice must generally be issued whenever a taxable supply is made to another VAT-registered person, since that invoice is the other party's evidence for reclaiming input tax — get it wrong, and you can break the input tax chain for your counterparty.
The Flat Rate Scheme
Small businesses can sidestep the input/output tax calculation altogether under the VAT Flat Rate Scheme, paying VAT as a fixed percentage of VAT-inclusive turnover instead. A business can join if its expected taxable turnover for the next 12 months is £150,000 or less, and it must normally leave the scheme once total income exceeds £230,000. The scheme trades precision for simplicity: a business with genuinely low input tax (little to reclaim) often does well out of it, while one with heavy input tax costs may find itself worse off than under standard VAT accounting — a point worth flagging to any small-business client considering it.
The final piece of this topic moves from ongoing corporate taxation to a one-off event — death — and the relief that protects a family business or trading company from being dismantled to pay the resulting Inheritance Tax bill. Business Property Relief (BPR) reduces the value transferred of "relevant business property" when IHT is calculated on a transfer, whether that transfer happens on death or, in some cases, during lifetime.
The Two Rates
BPR is available at either 100% or 50%, depending on the type of business property being transferred.
| Relief | Qualifying property |
|---|---|
| 100% | A sole trader's business, or an interest in a business (e.g., a partnership share) |
| 100% | Shares in an unquoted trading company, including shares traded on AIM |
| 50% | A controlling shareholding in a quoted trading company held by the transferor |
| 50% | Land, buildings, or machinery used by a company the transferor controls, or by a partnership the transferor is a member of, where the asset itself is personally owned rather than held by the business |
Notice the pattern: full relief goes to the business itself and to genuinely unquoted trading shares (illiquid, hard to realise without breaking up the business), while the 50% rate is reserved for controlling stakes in listed companies and for personally-owned assets merely used by a business rather than owned by it. To qualify at all, the transferor must generally have owned the relevant business property for at least 2 years before the transfer — a holding-period test aimed squarely at last-minute deathbed restructuring to dodge IHT.
What BPR Excludes
BPR is targeted at trading activity, not investment activity dressed up as a business, and two exclusions do the real work here. It does not apply to a business that consists wholly or mainly of dealing in securities, stocks, shares, land, or buildings, and it does not apply to a business that consists wholly or mainly of making or holding investments. A property investment company or a share-dealing operation is not what BPR was designed to protect, however genuinely commercial it is in a lay sense. A related trap sits inside otherwise-qualifying businesses: excepted assets — assets not used wholly or mainly for the purposes of the business in the two years before transfer — are stripped out of the value that qualifies for relief, even where the business itself clearly qualifies. A trading company sitting on a large cash pile or an unrelated investment property inside its balance sheet will find BPR available on the trading assets but not on that excess.
The 2026 Cap
A significant structural change lands on 6 April 2026: 100% relief under combined BPR and Agricultural Property Relief becomes capped at £2.5 million of qualifying value per estate. Above that combined cap, qualifying business and agricultural property receives only 50% relief rather than 100% — so a very large family business no longer escapes IHT entirely on its full value, only on the first £2.5 million. The cap is not lost if unused, however: any unused portion of the £2.5 million allowance can be transferred to a surviving spouse or civil partner, mirroring how the IHT nil-rate band itself already works between spouses.
The £2.5 million BPR/APR cap sits on top of, and separately from, the ordinary IHT nil-rate band of £325,000 per individual — the two allowances are cumulative, not competing.
For a client with, say, a £4 million unquoted trading company and no other significant assets, that means £325,000 is sheltered by the nil-rate band, the next £2.5 million of business value by full BPR, and only the remaining roughly £1.175 million falls to 50% relief rather than 100% — a materially better outcome than if the reliefs were mutually exclusive.
Finally, BPR is not automatic paperwork the deceased's estate simply enjoys — it must be actively claimed by the personal representatives or trustees on the Inheritance Tax account submitted to HMRC following the death. An adviser who spots qualifying business property but never actually claims the relief on the account has not protected the client's estate at all.