If you are running a limited company, you are subject to corporation tax. The rules can be complicated so it’s important to understand them to avoid a penalty. Discover everything you need to know, from corporation tax rates to deadlines, in our ultimate guide

What is corporation tax? 

Corporation tax is paid by UK limited companies and some other organisations on their annual taxable profits.

Taxable profits include: 

• trading profits from doing business
• investments
• selling assets your business owns, such as property, equipment, machinery, land and shares, for a chargeable gain

 There is no threshold for corporation tax, so a company needs to start to pay corporation tax as soon as it makes a profit. 

The current main rate of corporation tax for limited companies and unincorporated associations in the UK is 19%.

There are different rules for ‘ring fence companies’ which HMRC describes as businesses “involved in the exploration for, and production of, oil and gas in the UK and on the UK continental shelf”.

Ring fence companies with taxable profits under £300,000 pay the 19% corporation tax rate, while those with taxable profits above £300,000 are liable to a 30% rate.

Companies are not sent a corporation tax bill so it’s your responsibility to ensure your company pays the tax owed by the appropriate deadline.

Who pays corporation tax?

The following are taxed as corporate taxation:

• UK limited companies
• the UK office or branch of a foreign business
• non-incorporated associations like sports clubs, community groups housing associations, cooperatives, and other

How is corporation tax calculated?

What amount of corporations tax that a business must pay is determined based on the tax-deductible profits. The company must also pay tax on investment income and gains.

A company can earn a trading profit if the income from trading is higher than its expenses for trading. To find out the profit or loss, begin by looking at your company’s financial profit or loss.

The amount is then adjusted to account for tax purposes. This is due to the fact that an account’s loss or profit is not exactly the same as that which can be tax-deductible. Certain costs are exempt from tax purposes, and there could be other allowances that can be claimed.

Common expenditure amounts that are tax-free include depreciation of capital assets and business entertainment expenses.

Tax-exempt tax expenditures include the cost of eligible capital expenditures and tax credits for research and development deductions.

If the earnings are greater than the adjusted expenses for trading then the business will earn an income tax-deductible.

Capital expenditure

If a business incurs capital expenses, the expense cannot be deducted from profits from trading. In contrast, companies may get relief through capital allowances on qualified expenditures.

Businesses may be able to write off all of their costs from the profits of their business by using an annual investment allowance (AIA) however, it can be subject to a limit. The prior cap was PS200,000. It was raised on January 1, 2019, and was increased to PS1,000,000.

Certain kinds of expenses are eligible for the first year allowance (FYA) in the amount of 100% and are not affected by limitations on the AIA limit.

A company might be eligible to take advantage of capital allowances with reduced rates of 18% or 6% depending on the asset being considered.

A new Super Deduction tax reduction temporarily offers greater allowances for spending on specific items of equipment and plant. For capital expenditures that qualify as qualifying beginning on April 1, 2021, to 31st March 2023 businesses can claim:

• A super-deduction that allows an allowance of 130%t for the majority of new machinery and plant investments which normally be eligible for an 18% main rate of writing down allowances.
• an initial allowance of 50% on the majority of new machinery and plant purchases that normally be eligible for 6% of special rate for allowances to write down.

Deciding if an expenditure is tax-deductible and at what amount is, therefore, a bit of a mystery. It is important to verify whether the deduction is allowable and also the tax savings the expense will result in before committing the expense.

How do you sign up to pay corporation tax?

A business must be registered for tax on corporations through HM Revenue and Customs (HMRC). “Starting to conduct business” is a process that involves purchasing, selling, promoting or hiring someone to work for you and renting an office.

Keep adequate company records to ensure that your business can file and prepare an accurate tax return for your company and pay the proper amount of tax for corporations.

When is the best time to prepare a tax return for your company?

To calculate your corporation’s tax liability, you have to prepare a tax return. It is necessary to fill out the CT600 form that outlines your profits and turnover allowances and reliefs you’ve utilized, as well as the tax calculation.

If HMRC sends you a “notice to provide a tax return for a company’ returns’ (CT603), you have to file your tax return within 12 months from the date of the close of the accounting year it is a part of. It is typically the same time frame that is covered by your annual account however it could differ in specific situations. For instance, you could have two accounting times when you start trading. In this case, you’ll have to file two tax returns.

If you’ve suffered losses or do not have corporation tax but you are still required to make a tax return.

It is also mandatory to create a corporate account at Companies House.

If you are a private limited business that does not require the services of an auditor, then you might be able to submit your tax return for your company to HMRC and also your company’s accounts for Companies House at the same time.

How do corporations pay their tax?

The due date to pay corporation tax is based on the number of tax-deductible earnings and the accounting period.

Taxes for corporations can be paid on the internet, as well as through different methods:

Who on staff is accountable for the payment of Corporation Tax?

Directors of companies are legally accountable to ensure that company tax returns are filed in time and that corporation tax is paid by the due date.

Employ an accountant to prepare your tax return and provide advice about tax strategies, however, it is the responsibility of the directors of the company.

Tax deadlines for corporations

The deadline for filing a corporation tax return is one year following the close of that accounting time that it includes.

There’s an additional deadline to pay tax, which is generally 9 months, and one day following the close in the period of accounting.

If you make an income tax deductible of more than PS1.5 million then you must pay corporation tax in instalments. For accounting periods of 12 months typically, tax for corporations is paid out in four quarterly instalments with two of them due before the close of the period of accounting. There are various rules for businesses that earn greater than PS20 million.

Corporation tax penalties

If you submit a tax return that is a late tax return for your company The following penalties will be imposed:

• One day late: PS100
• Three months overdue Another PS100
• Six months behind Your corporation’s tax liability will be calculated and an additional penalty of 10% of the unpaid tax will be added to your tax bill.
• Twelve months late: Another 10% of tax unpaid

Additionally, if you file your tax returns not filed on time three consecutively then. The PS100 penalties will be raised in the hands of HMRC up to PS500 each.

If you submit an incorrect business tax return, then you will be assessed penalties. The amount you are required to pay depends on:

• whether HMRC decides that the mistake was a mishap. But not intentional, deliberate, or even deliberate and the error was concealed
• whether you inform HMRC about the mistake before they realize it (‘unprompted disclosure’) or you tell HMRC when they discover the error (‘prompted disclosure’)

Penalties can also be imposed if you fail to notify HMRC your company is subject to tax for tax on corporations. The penalties include:

• Non-deliberate 30%on your tax bills
• Do not conceal your identity 70% on your tax bills
• Intentionally and hidden Your tax bill is 100% from your tax invoice

The full details of penalties are available on the HMRC website here.

How much tax on corporations will rise

In the budget for March 20, 2021 speech, the chancellor Rishi Sunak declared an increase in corporation tax.

In April 2023, the tax rate for businesses that earn profits over PS250,000 will be 25%. A new rate for small profits will mean that companies earning. Below PS50,000 still have to pay tax on corporations at 19%. Additionally, there will be reduced rates for companies with profits between PS50,000 and PS250,000.

Do you need help with tax planning for corporations?

Sherwin Currid Accountancy can assist in the making of company accounts, tax returns, and corporate tax calculations, as well as offering assistance with tax planning strategies that can be beneficial to you and your business. To learn more about our services or to request a no-cost consultation, contact us at the number 0800 690 6117, or complete our online form for enquiries