A Guide to Corporation Tax

UK corporation tax is charged on the profits generated worldwide by any corporate body or unincorporated association. This includes limited and unlimited companies, members’ clubs, political associations, trade associations and authorised unit trusts.

Tax legislation is constantly changing, but here are rules and regulations all companies should be aware of. Here is our quick guide to Corporation tax.

The rate of Corporation Tax

The rate of tax is set by the Chancellor for each financial year running from 1 April. In the 2020 Budget, it was announced that instead of corporation tax being paid at a single rate a higher rate of 25% would be introduced for the 2023 financial year. If your taxable profits are £50,000 or less, you will still pay tax at 19%.

However, if your profits exceed £250,000, you will pay 25% on all of them. Where your profits fall between these to figures, your tax bill will be calculated initially at 25% but some marginal relief will also be applied.

It is vital that companies keep track of these taxes. Tax can have a significant impact on cashflow and should be taken into account when preparing forecasts. Even if your company currently doesn’t pay any tax, it may in coming years, so be prepared.

Registering for Corporation Tax

It is a legal requirement that a company is registered for Corporation Tax within three months of starting to trade. If the company is not correctly registered, it may be liable for penalties.

Initially, you will need to tell HMRC:

• The date you started to do business
• Your Company’s name and Companies House registered number and your business address
• The date to which you intend to make up accounts

HMRC will send you a notice to file a Company tax return (CT600) on a yearly basis. All companies must deliver their Company Tax Return online unless they have a “reasonable excuse”. The return must be accompanied by the computations and a set of accounts.

Calculating Corporation Tax

You can file your company’s tax return any time after your accounting period has ended, however, the deadline that you have to meet is usually 12 months after the end of the period for which your accounts are made up. It is important to note that the accounting periods used for Corporation Tax purposes may not be the same as the period covered by your financial accounts. This is often due to the fact that a tax accounting period cannot exceed 12 months. If your financial accounting period exceeds 12 months, your business will need to submit two tax returns to cover the period.

It is the business’s responsibility to calculate the amount of tax owed under the Corporation Tax Self Assessment regime. This must be disclosed in a company tax return.

Corporation Tax is calculated by taking into account the following:

Tax adjusted profits

Corporation Tax is calculated as a percentage of taxable profits. The profits that you publish in your financial accounts are the starting point, but you need to calculate your tax-adjusted profits in order to get the correct amount.

Disallowable expenditure

There are certain items of business expenditure that do not qualify for a deduction, for example entertaining clients and fines or penalties. Additionally, accounts include a deduction for depreciation of assets in determining the profit for a period, but this notional write down is not allowable for tax purposes.

Capital allowances

Capital allowances may be claimed on the cost of vehicles and equipment used in the business. An accountant will help you determine what capital allowances may be available.

Chargeable gains

This is when your company sells a chargeable asset, for example, land or property for more than it originally cost. The profit made on such a sale is liable for Corporation tax. Chargeable gains can be a complicated area and companies can still claim indexation relief for periods of ownership up to December 2017. To ensure you have taken into account everything, you should consider speaking to a specialist.

What happens if you make a loss?

If a company makes a loss, it can be offset against any profits made in the previous year enabling tax already paid to be refunded, or the loss can be carried forward and offset against future profits. A temporary extension to the loss carry back rules has been announced as a result of the impact of the Covid pandemic. Your accountant will be able to assist you with claiming this relief.

Special Tax Reliefs

Your company may be able to claim for R&D tax relief if it has undertaken work on a project to make an advance in science or technology. There are two types of schemes available depending on the size of the company. Read more about R&D relief in our article here. There are also a number of creative industry tax reliefs that can be claimed by Companies involved in areas such as Film, Animation, Video Gaming, Theatre, and more.

Keeping records

A company must keep its accounting records for a minimum of six years after the end of the financial year to which they relate. You may need to keep some records longer for example if they relate to something the company has purchased which will last for longer than six years, or if HMRC has opened an enquiry in the relevant period.

Dormant Businesses

If your company is dormant, you will not be liable to pay Corporation Tax. However, as soon as you start trading again, it is your responsibility to inform HMRC.
This article is a quick guide to Corporation Tax and should highlight to companies the importance of staying on top of Corporation Tax, even if they currently do not need to pay it. HMRC has the power to make any enquiries they wish into company tax returns regardless of the size of the business. This is just one of the reasons why companies must have a firm grip on their finances and are able to calculate taxes correctly. Tax cannot be ignored and if inaccurate information is supplied to HMRC, you may end up with a penalty.

Using cloud accounting software can make it easier to keep track of all your sales and costs. Hiring an accountant can also be beneficial as they will have the experience to calculate your Corporation Tax liability and advise you when t pay it, providing you with peace of mind that it is sorted.