Corporation Tax is a business tax payable once a year by limited companies on their annual profits. It is one of a number of taxes levied on businesses by HMRC. The type of tax you pay depends on your business structure and location.
It is one of a number of taxes levied on businesses by HMRC. The type of tax you pay depends on your business structure and location.
Corporation Tax is payable by all limited businesses trading in the UK and registered with Companies House, even if some of their income comes from trading abroad.
As well as registered companies, self-employed people trading as limited companies must pay the tax. However, new rules under HMRC’s IR35 apply from April 2021, so it’s important to check your employment and taxation status if you fall into this category.
The tax also applies if your company isn’t based in the UK but has branches or offices in the UK. In that case, your business only pays tax on taxable profits arising from your UK operations.
Corporation Tax is payable on trading profits - in its simplest form, the income of the business after all allowable expenses have been deducted. The calculations for the final taxable profit figure are more complicated than that and it pays to take professional advice so that you can minimise your Corporation Tax liability.
If your business structure means you are liable for Corporation Tax, you must register with HMRC within three months of the date you started trading or if you have an accountant they will make sure you are registered and compliant. You may get a penalty if you register late.
According to HMRC, most companies register for Corporation Tax at the same time as they register their business with Companies House online. However, you’ll need to register for Corporation Tax separately if you registered your company:
using an agent
using third-party software
You can register for Corporation Tax on the government’s website. You’ll need your company’s Government Gateway user ID and password to log in. If you do not have a user ID, you can create one when you log in. You’ll also need your company’s 10-digit Unique Taxpayer Reference (UTR). HMRC post this to your company address within 14 days of the company being registered with Companies House.
When registering, you’ll need to tell HMRC:
your company’s registration number
the date you started to do business
the date your annual accounts are made up to.
HMRC will then tell you the deadline for paying Corporation Tax.
The tax year, also known as the fiscal year, runs from 1st April to 31st March. This is the period for which Corporation Tax is payable.
The fiscal year is different from your accounting year – the period that your annual accounts cover. Your accounting year might run from 1st January to 31st December, for example.
If the two periods are different and your accounts cover two fiscal years, you will have to apportion your profits between the two fiscal years.
For example, your profits in your accounting period might total £10,000, made up of £6,000 and £4,000 in each of the two fiscal years.
At the end of your accounting period, you must pay any Corporation Tax due. This is usually 9 months and 1 day after the end of your accounting period, but HMRC should have provided a due date after you registered for Corporation Tax. You may have to pay quarterly if your profits are high.
If you have nothing to pay by your deadline, you must also report this to HMRC.
Separately, you must file your Company Tax Return online, together with any supporting documents, by a different deadline. This is usually 12 months after the end of your accounting period.
Remember, the two deadlines are different. You must always pay the due amount before submitting your return.
Corporation Tax is due on trading profits – excess of income over allowable business expenditure – plus any gains on sale of assets such as property, land, equipment and machinery and company shares.
Allowance business expenditure covers the cost of doing business, together with any capital allowances for purchasing equipment, machinery or vehicles.
There are also a number of Corporation Tax reliefs that you may be able to use to reduce your tax liability.
Corporation Tax reliefs include:
Research & Development (R&D) relief: This is available if your company works on innovative projects in science and technology. You can read more about this in our article on Research and Development accounting.
The Patent Box: You pay a lower rate of Corporation Tax (10 percent) on profits earned from patented inventions and certain other innovations.
Creative industry tax reliefs: You can make a larger deduction of expenditure if your business is in creative industries such as film, television or video games.
Disincorporation Relief: This is available if you’re closing your company and becoming a sole trader, ordinary business partnership or limited partnership.
Terminal, capital and property income losses, and trading losses: If you make a loss from trading, the sale or disposal of a capital asset or on property income, you can use the loss to reduce your Corporation Tax liability.
Marginal Relief: This may be available if your company had profits between £300,000 and £1.5 million that were from before 1 April 2015.
Relief on goodwill and relevant assets: The rules changed after April 2019, so you may be able to get relief on some purchases of goodwill and relevant assets.
The Corporation Tax rate is currently 19 percent on taxable profits.
The figure has been unchanged for the past 4 fiscal years, falling from 20 percent in the 2016-2017 fiscal year.
However, the Chancellor announced the following changes in the 2021 Budget:
Corporation tax on company profits to rise from 19 percent to 25 percent in April 2023
Rate to remain at 19 percent for about 1.5 million smaller companies with profits of less than £50,000
You must pay any Corporation Tax bill 9 months and 1 day after the end of your accounting period, though you may have to pay quarterly if your profits are high. If you do not pay on time, you may face penalties and interest charges.
HMRC offers a number of ways to pay your bill, with different clearance times:
online or telephone banking (Faster Payments)
through your online bank account
Direct Debit (if you’ve set one up before)
online by debit or corporate credit card
at your bank or building society
Direct Debit (if you have not set one up before)
You cannot pay Corporation Tax by post.
This is a brief outline of the process of paying Corporation Tax. If you would like professional advice on any aspect of Corporation Tax, or would like confirmation that you are paying the correct amount of tax, our team of experienced tax accountants will be glad to help.
Read More: Tax and NIC thresholds for 2021/22
Read More: A guide to UK dividend tax rates in 2020/21