What Is Corporation Tax?
Updated: Feb 7
Xtract Accounting, the small business Accountants for Directors and Limited Companies, explains what Corporation Tax is, how it is calculated, and what it means for small businesses.
What is Corporation Tax?
Corporation Tax is paid on the taxable profits made by a company during its accounting period. Think of it as the equivalent to Income Tax for individuals, but unlike individuals, companies don’t receive any tax free allowances and therefore, all profits are taxable.
What are taxable profits?
Taxable profits include your profits from trading activities but also profits from investments. Profits made on the sale of a property or investment, known as Capital Gains, are also included when calculating taxable profits.
Who pays Corporation Tax?
All UK-based Companies need to pay Corporation Tax on their taxable profits.
If you are a Sole Trader or Partnership, you will not pay corporation tax. Instead you will pay Income Tax on your profits via a Self Assessment Tax Return.
If you’re wondering what the differences are between Self-employment and trading as a Limited Company, have a read of our recent blog post, “Self-Employed V’s Limited Company – Which one should you choose?”.
How to register for Corporation Tax with HMRC?
Companies House, the registrar of companies in the UK, will often inform HMRC that a new company has been formed. However, this does not necessarily mean that HMRC are aware of the company actively trading.
The directors of a company must tell HMRC within three months of the company beginning to trade. This will need to be completed online through the HMRC Online Service using the company’s Unique Tax Reference number. You will need to following details to register:
The company name and registration number,
The company’s main address,
The type of business,
The date the business began trading,
The date you’ll make the annual accounts up to; and
The name and home address of the company directors.
Be aware however, a company that fails to register on time or at all, could be issued with penalties by HMRC.
If you are thinking of forming a new limited company, we strongly recommend that you consult with an accountant first. Speak to us here at Xtract Accounting and with our Company Formation service, we will ensure that your new limited company is set-up with a tax efficient structure tailored to your personal circumstances. So, take the stress and worry away, and Contact us today.
What is the rate of Corporation Tax?
In this current financial year (2020/21), the Corporation Tax rate is 19% on all taxable profits and has been at this rate since April 2016. Prior to this, the rate charged depended on the level of taxable profits.
However, it was previously set to be reduced to 17% this financial year, before PM Boris Johnson cancelled it in November 2019. In his statement, Boris said he would divert the £6bn savings to the NHS “because the NHS is the nation’s priority, and because we believe emphatically in fiscal prudence.” Little did we know at the time, that this was an extremely prudent decision.
Following the recent splurge in public spending to cope with the economic effects of COVID-19, we think the Corporation Tax rate is an area that may come under attack when Chancellor Rishi Sunak is eventually tasked with balancing the books. Have a read of our recent blog post, “'COVID-19 Tax': Expect it and Accept it!?”, which takes a speculative look at the possible future tax changes.
What reliefs can be claimed against Corporation Tax?
If your company has previously made any trading losses, then these could be used to claim a relief from Corporation Tax simply by offsetting them against your business profits in the current accounting period.
Other reliefs are available and can be found on the Gov.uk website.
How is Corporation Tax reported to HMRC?
Every year, your company will need to submit a Corporation Tax return (form CT600) to HMRC. This form will include:
Your company name and registration number,
Your registered office address,
Your Corporation Tax Reference Number,
Details about your company’s turnover and profit for the year,
Your tax calculation,
Details of allowances or reliefs you are claiming for.
The form must be submitted to HMRC through its Online Services portal, along with a set of accounts for the accounting period in question.
It is on this form that the company’s Corporation Tax Liability will be calculated and reported to HMRC.
If no tax is due, or if the company makes a loss, the company must still submit its CT600 and accounts to HMRC.
When does the Corporation Tax return need to be filed by?
A company’s Corporation Tax return must be submitted to HMRC no later than 12 months following the end of the accounting period in question.
Just something to be aware of… if your CT600 is filed late, or is found to be inaccurate by HMRC, you may be charged a penalty, regardless of whether you instructed an accountant to file it for you.
When does the Corporation Tax need to be paid by?
If you company has made a taxable profit of anything up to £1.5m, you’ll need to pay the Corporation Tax liability to HMRC within 9 months and 1 day after the end of the accounting period in question.
As an example, if your accounting period ended on 31st March, your Corporation Tax payment must reach HMRC no later than the following 1st January.
Be careful though… It’s easy to get the deadlines for submission (12 months) and payment (9 months and 1 day) mixed up. We recommend that you set yourself diary reminders to help you remember the two separate deadlines.
How to pay Corporation Tax?
There are several ways that HMRC accepts payment of Corporation Tax liabilities, details of which can be found on the Gov.uk website.
Whichever method you choose, it is important to remember that HMRC must receive the cleared funds by the deadline date to avoid late payment fines. Keep in mind the number of days it will take for payment to clear at HMRC’s end and consider weekends and Bank Holidays.
Who is responsible for the company’s Corporation Tax affairs?
The ultimate responsibility for everything accounts and tax wise for the company is that of the Directors. In respect of Corporation Tax specifically, you should always ensure that:
Your company’s Corporation Tax liability is accurate,
Your company’s Corporation Tax return is filed on time; and
You have paid all outstanding Corporation Tax to HMRC.
Of course, you may have instructed an accountant to help you with the company’s affairs but be aware, that this does not remove any responsibility from your shoulders.
If you are a company director looking for help with your company’s tax affairs, look no further than our proactive and fixed fee Monthly 'FD' Service. In addition to the traditional role of an accountant, this service sees us take on the more proactive role of Finance Director for your business, helping you to monitor your financial performance, seek opportunities for business growth, and maximise tax efficiency. Call us today on 0330 133 2615 to find out more or email us at email@example.com.
About the Author of this Blog post…
Hi, my name is Gordon Roe and I am the Founder and Managing Director of Xtract Accounting. Having worked in an accountancy practice setting for well over a decade, I had become accustomed to the same annual routine for clients - Books in… Analyse… Queries out… Answers in… Finalise… Accounts and Tax Advice out.
Then, in 2020 I realised I could use advancements in technology and software to significantly improve the relationship between accountant and client, and at the same time, provide an insightful and real-time tax advice service. After all, that is what the modern client expects and deserves!
And so, Xtract Accounting was born…
Xtract Accounting are online accountants based in Lincolnshire, who offer proactive small business accountancy services exclusively to Directors and Owner Managed, Micro and SME Limited Companies throughout the UK.
We specialise in helping Directors Xtract more out for the work they put in!
Our monthly 'FD' service with fixed monthly fees, sees us take on the more proactive role of Finance Director, and offers a plethora of benefits including:
Inclusive accounting software provided by FreeAgent,
Your very own dedicated accountant,
Regular insights into how to maximise your tax efficient (or even tax free!) income,
Jargon-free telephone and email support,
Plus, much, much more!
With Xtract Accounting, you can be sure your accounts and tax will be kept up-to-date and organised.
Find out more about us or connect with us on Social Media (below)