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Why Most Small Limited Companies Overpay Corporation Tax (And Don’t Realise It)
Why Corporation Tax Looks “Simple” – But Rarely Is
Corporation tax is often perceived as one of the most straightforward UK taxes: calculate profit, apply the rate, file the return. In reality, this simplicity is exactly why many small limited companies quietly overpay. The rules are technical, the margins are tight, and HMRC does not alert directors when they’ve paid more than necessary.
At Rothstone Accountants, we regularly review corporation tax computations prepared elsewhere and find legitimate savings that were simply missed.
Common Reasons Companies Overpay Corporation Tax
1) Incorrect Expense Treatment
Not all business costs are treated equally for tax purposes, and conservative or incorrect categorisation often inflates taxable profit.
| Common Issue | Typical Outcome |
|---|---|
| Capital items expensed incorrectly | Relief delayed or denied |
| Personal/business split handled poorly | Underclaimed deductions |
| Timing errors on accruals | Profit overstated |
2) Missed Capital Allowances
Capital allowances are one of the most underused reliefs for small companies.
| Asset Type | Often Missed Relief |
|---|---|
| Office equipment | Annual Investment Allowance |
| IT & software | Full expensing (where applicable) |
| Fixtures in property | Embedded allowances ignored |
Many companies expense assets through the P&L but fail to claim the correct tax relief in the CT600.
3) No Salary / Dividend Optimisation
Corporation tax does not operate in isolation.
| Strategy Missed | Impact |
|---|---|
| Inefficient director salary | Higher CT and NIC |
| Dividend timing ignored | Lost personal tax savings |
| Profit extraction not planned | Cash trapped in company |
A mechanically prepared CT return rarely considers the director’s wider tax position.
4) Group Relief Ignored
Even small groups frequently miss group relief opportunities.
| Scenario | Missed Opportunity |
|---|---|
| Loss-making subsidiary | Losses not surrendered |
| Shared ownership structures | Relief incorrectly assumed unavailable |
HMRC Risk Areas Directors Assume Are “Safe”
Overpaying tax does not mean low risk. HMRC often focuses on:
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Expense classifications
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Capital vs revenue distinctions
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Director-related transactions
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Connected party payments
Conservative errors still attract scrutiny.
What’s Changed Recently in Corporation Tax
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Main rate and marginal relief complexity remains
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Increased focus on capital allowance accuracy
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Higher HMRC scrutiny of owner-managed businesses
What Business Owners Should Do Now
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Review prior-year capital allowances
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Reassess director remuneration annually
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Ensure CT is aligned with personal tax planning
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Have computations reviewed, not just submitted
At Rothstone Accountants, we review corporation tax critically — not mechanically — ensuring reliefs are claimed correctly and defensibly.
Every company’s position is different. Tailored advice should always be taken before making tax decisions.
