Corporation Tax: A Guide for UK Companies

If you're running a limited company in the UK, Corporation Tax is likely on your radar as it plays a fundamental role in the operation of your business...but the specifics might be a bit unclear. Understanding the intricacies of Corporation Tax is essential for business owners to accurately determine their tax liability and remain compliant.

Unlike income tax for individuals, which is levied on your personal earnings, Corporation Tax is a direct contribution based on your company's annual profits. The complexity of Corporation Tax lies in its tiered structure, this means that the tax rate a company pays can vary depending on its profit level. You might qualify for a lower rate in the earlier stages of your business journey, but as your company grows and generates more earnings, you'll transition to the main rate of Corporation Tax which means a higher tax bill.

Corporation Tax can be a complex area for companies in the UK, particularly for those unfamiliar with the intricacies of calculating taxable profits, as well as navigating the different tax rates and filing deadlines.

Our blog will help you understand the basics of Corporation Tax, ensuring your company continues to grow while also maintaining compliance with HMRC.

Who pays Corporation Tax?

It's important to understand who shoulders the responsibility of Corporation Tax. In the UK, there are three main categories of companies required to pay:

• • UK Resident Companies: This applies to any company that's officially registered and operates within the UK, regardless of where it generates its profits. So, even if your company's main customer base is overseas, as long as you're registered in the the UK, Corporation Tax applies.
  • Foreign Companies with a UK Presence: If a company isn't registered in the UK but has a physical presence or conducts business activities within the UK they may still be liable to pay. This could include having a branch office, a subsidiary company, or engaging in activities like selling goods or services directly to UK customers.
  • Informal Groups: This category comprises clubs, co-operatives, and other unincorporated associations that operate for a purpose beyond generating personal profit for their members.

Corporation Tax rates: How much will you pay?

Two key factors determine the Corporation Tax bill for your company:

1. Your company's taxable profits:

Unlike your total revenue, Corporation Tax is levied on your company's taxable profits. This essentially boils down to your company's gross income minus all the allowable business expenses you've incurred throughout the year. Allowable expenses are costs directly related to running your business, like rent, salaries, office supplies, and marketing costs.

2. The UK Corporation Tax rates:

The UK implements a tiered system for Corporation Tax rates, providing relief for smaller businesses. The rate you pay is determined by your company's taxable profits.

Corporation Tax Rates from 1 April 2024

The Corporation Tax system used Marginal Relief for companies with taxable profits between £50,000 and £250,000 - this gradually reduces the benefit until they transition to the main Corporation Tax rate.

Corporation Tax isn't automatically billed. Instead, limited companies use the different tax rates to estimate how much they owe based on expected profits. This means you'll need to plan ahead, calculate the amount due, and then file your tax return.

Submitting your company's tax return: From registration to filing

Fulfilling your Corporation Tax obligations is not just about crunching numbers and calculating your tax liability. It also involves submitting a detailed Corporation Tax return to HMRC, by following these steps:

Registering for Corporation Tax:

The registration process is managed online through the UK government's website. You'll be prompted to provide some key information about your company such as:

• Company Name and Registration Number: These details uniquely identify your company.
• Business Start Date: This defines the beginning of your company's accounting period, which is crucial for tax calculations.
• Main Business Address: This ensures HMRC has accurate contact information for your company.
• Type of Business: Briefly describe the nature of your company's activities.
• Director Information: Provide the names and home addresses of your company's directors.

Don't delay this registration process!  You have three months from officially starting your business activities to register for Corporation Tax. 

Corporation Tax return filing requirements:

This annual return which is the CT600 form, serves as a detailed report on your company's financial performance for the previous accounting period.  Some key elements you'll include:

• Turnover and Profit: This captures your company's total income and net profit for the year.
• Tax Calculations: Based on your profits and the applicable Corporation Tax rates, you'll calculate your liability.
• Allowances and Reliefs: Don't forget to factor in any tax allowances or reliefs your company qualifies for, which can reduce your tax bill.

Submitting your Corporation Tax return:

There are two main ways to file your Corporation Tax return:

• Online Filing: HMRC strongly encourages online filing for its efficiency and convenience. You can submit your return through the government portal using your Government Gateway credentials. This method also allows you to electronically submit your company accounts alongside your Corporation Tax return.
• Paper Filing: While paper filing is still an option, it's generally slower and less convenient. You'll need to download and complete a paper CT600 form from the HMRC website and send it to the designated address.

It's important to note that the deadline for filing this return is 12 months after the end of the relevant accounting period. Even if your company didn't generate any profits, submitting a CT600 return is still mandatory to declare this information.

Making your Corporation Tax payment

Corporation Tax payments are typically due nine months and one day after the end of your company's accounting period. HMRC offers several convenient methods for paying your Corporation Tax bill:

• Direct Debit: Set up a direct debit with HMRC for automated payments.
• Online or Telephone Banking: You can make a one-off payment through your online banking platform or by calling your bank's telephone banking service.
• Debit or Corporate Credit Card: Payments can be made online using a debit card or a corporate credit card (not a personal credit card).
• At Your Bank or Building Society: While less common, you can visit your bank or building society in person to make a Corporation Tax payment.

Corporation Tax filing deadlines can vary and should be settled before submitting your company tax return, based on your accounting period. Larger companies with annual profits exceeding £1.5 million may need to make payments in instalments throughout the year, which are adjusted after the accounting period ends.

Corporation Tax allowances and reliefs

Corporation Tax is calculated based on your company's taxable profits, rather than your overall income. This means you can deduct eligible business expenses from your total income to achieve lower taxable profit amount.

Additionally, you have the opportunity to offset trading losses from the current accounting period against any profits earned during the same timeframe. This strategic move not only decreases the taxable profit but also has the potential to reduce your Corporation Tax bill.

Claiming Tax Reliefs:

Beyond standard allowable expenses and losses, the UK government offers a variety of tax reliefs to incentivise specific business activities or support companies in certain sectors. If you qualify, these reliefs may also help mitigate the amount of Corporation Tax you owe. Here are a few examples:

• Capital Allowances: These reliefs allow you to claim deductions for capital assets used in your business, such as machinery, equipment, and even buildings. This helps spread the cost of these assets over their useful life, reducing your taxable profits in the short term. This includes:
  • Annual Investment Allowance (AIA) - you can claim up to £1 million on certain plant and machinery
  • 100% first year allowances - you can claim the full amount for certain plant and machinery in the year that it was bought
• Research and Development (R&D) Relief: Companies engaged in qualifying research and development activities can claim significant tax relief. This encourages innovation and technological advancement within UK businesses.
• Creative Industry Reliefs: The UK provides tax incentives for creative companies in film, theatre, and video games, reducing Corporation Tax through increased allowable expenses or credits based on spending.
• The Patent Box: This tax relief allows companies to apply a reduced Corporation Tax rate of 10% on profits derived from patented products or services.

Corporation Tax penalties: What happens if you don't file or pay on time?

Corporation Tax penalties can be a real burden for companies, so it's important to understand the potential consequences of non-compliance. These are some of the penalties you could face:

Late Filing Penalties

Companies or organisations that incur late filing penalties for three consecutive tax periods will face higher penalties for subsequent late filings. The initial penalties of £100 will be increased to £500 each.

Late Payment Penalties

Missing the deadline to pay your Corporation Tax to HMRC means you'll be charged daily interest on the amount you owe. This interest starts right away and adds up over time, so it's important to pay on time. The current interest rate is the Bank of England base rate plus 2.5%.

Next steps...

Corporation Tax compliance can be a demanding task for businesses of all sizes. From meticulous calculations to precise reporting and timely payments, ensuring adherence to regulations can be a significant drain on valuable resources.

Seeking professional guidance from a qualified accountant can significantly streamline the process. Our expertise can ensure accuracy and efficiency, while also minimising the risk of errors or missed tax reliefs.