Guide to the UK Corporation Tax system

Corporation Tax
Corporation Tax

Every business must pay Corporation Tax on its profits to the HMRC.

That’s why HMRC is by far the most common creditor of the business like limited companies and limited liability partnerships across the UK.

Corporation Tax is the most complex area of taxation and without a proper application of the tax rules; it is easy to make costly mistakes. To make it simple, find out what UK Corporation Tax means, including how it is calculated, how to submit the Corporation tax return and when you have to pay.

This blog post is divided into the following sections:

What is Corporation Tax?

Corporation tax is generally the same as income tax, but it is the name of a tax applied to businesses rather than individuals.

Corporation tax is based on the profits that incorporated businesses generate in a given financial year.

So if you trade as a limited company, your company is liable to pay the corporation tax on its profits.

The current rate of corporation tax is more favourable than the Income Tax.

Who pays Corporation Tax?

All limited companies are liable for the Corporation Tax, and the tax is aligned to the financial year of your business.

Also, there’re some exceptions, such as when starting a new business if the business changes its year-end accounting date.

Corporation tax is payable on any profits the business makes in its financial year. It is also due on any income the business makes from its investments and any profit from selling assets for more than those asset’s actual costs – known as chargeable gains.

The Corporation Tax is paid on profits made in the UK and abroad if a company is UK based, or just on the UK profits if the headquarters is based in the different country.

Also, the following organisations may need to pay it, even if they are not incorporated:

  • Members clubs, societies and associations
  • Groups of individuals carrying out a business like co-operatives
  • Trade associations
  • Housing associations

If you’re a partnership or sole trader, you do not pay corporation tax. Instead, you will pay income tax on your profits via a self-assessment tax return.

It is a responsibility of the directors of the company to ensure that the corporation tax return is paid on time, even if your businesses hire an accountant to prepare the tax calculations and returns.

When do you need to register for Corporation Tax?

The business owner may decide to form a company at any time.

Once your company is registered with the Companies House, you’ll need to register for the Corporation Tax. In most practical cases, at the time of setup, your company is automatically registered for corporation tax.

A company needs to register within 3 months of any business activities starting, and you may get a penalty if you register for Corporation Tax late.

How Can you register for Corporation Tax?

When the decision has been made to set up a limited liability company, the first step is to register with Companies House.

In order to register, either:

Once approved, the Companies House will issue a certificate of incorporation which will show the date of incorporation and the unique company registration number.

Companies House will inform to HMRC the formation of a new company.

Then HMRC will send a letter to the newly formed company at its registered office address by post. The letter will include the company’s Unique Taxpayer Reference (UTR) number.

Keep in mind that the company must register for Corporation Tax online within 3 months of any business activities starting.

What records do you need to keep?

A company must keep details such as:

  • Register of members (shareholders or guarantors)
  • Register of company directors
  • Directors’ service contracts
  • Register of Secretaries
  • People with Significant Control register (PSC register)
  • Records of resolutions and minutes of meetings
  • Directors’ indemnities – security against liability claims or legal costs
  • Contracts relating to purchase of own shares
  • Documents relating to redemption or purchase of own shares out of the capital by a private company
  • Register of debenture holders
  • Instruments creating charges and register of charges – i.e. mortgages or secured loans
  • Certificate of incorporation
  • Memorandum and articles of association, and
  • Share certificates (where applicable)

Besides this, the company is also required to keep the following accounting records:

  • Annual accounts, including profit and loss
  • Bank statement, paying in slips, cheque books and details of amounts paid or received electronically
  • Cash books and other account books
  • Purchase and sales invoices
  • Credit or debit notes (issued or received)
  • Order and delivery notes
  • Records of daily takings
  • Payroll records
  • VAT records
  • Any relevant business correspondence

Do I need paper records for HMRC?

You can keep business records on paper, digitally or as part of a software program. Check out our blog on Top 7 accounting software for small business UK 2020.

HMRC can impose a penalty if your business records are not accurate, complete and readable.

When is Corporation Tax payable?

Corporation tax payable and corporation tax return filing deadlines are different.

Well, the Corporation Tax payment Corporation Tax return filing deadline is different from other taxes.

The deadline of Corporation Tax bill payment is 9 months and a day after the end of your accounting period for the prior financial year.  So if your accounting period ends on 31 March 2020, your Corporation Tax deadline is 01 January 2021.

But you’ll need to prepare the Corporation tax return to work out how much Corporation Tax to pay & the deadline to file your company tax return is 12 months after the end of the accounting period. So in the above example, it will be 31 March 2021

If you have recently started your company, then you may have 2 Corporation Tax accounting periods because of the fact that your accounting tax period cannot be longer than 12 months.

Businesses with more than £1.5 million of profits will need to pay their Corporation Tax in instalments – the process for that is different.

Also, even if your company is loss-making and you have no Corporation Tax due, you still need to declare that with HMRC.

When will you first pay Corporation Tax?

Any corporation tax must be paid electronically by 9 months and a day after the accounting period end.

For example – a company with a year-end 31 March 2020 must pay any corporation tax due by 01 January 2021.

What Are Corporation Tax rates?

The Corporation Tax rate is 19% for company profits. This is currently a standardised rate for all businesses.

In the year 2016-17, the Corporation Tax rate was 20%. Prior to April 2016, tax rate depended on how much profit your company made.

So, the Corporation Tax rate on company profits for the 2020-21 and 2019-20 tax year is 19% – a business with £100,000 in annual taxable profit will pay £19,000 in Corporation Tax.

 

 Rate on profit below £300,000Rate on profit above £300,000
2019-2019% 19%
2018-1919%19%
2017-1819% 19%
2016-1720%  20%

Can you reduce your Corporation Tax bill?

Yes, you can lower your corporation tax bill in the number of ways, like by claiming allowable expenses and deducing business expenses.

Also, there are various corporation tax reliefs available which can reduce your final tax bill if you qualify for them.

Check out our guides for landlord and freelancers on how to reduce their taxes.

The Corporation Tax allowances

As with the personal income tax for sole traders, there are certain allowable business expenses for the company, which can reduce its corporation tax bill.

Any cost that a company incurs solely with the purposes of running the business can be deducted from the profits before tax.

Long lists of expenses qualify, the main ones being:

  • Stock bought for resale
  • Purchase of raw materials
  • Salaries of all employees and contractors
  • Employers’ National Insurance Contributions (NICs)
  • Employer pension contributions
  • Business insurance
  • Business-related travel and accommodation
  • Training fees
  • Accountancy costs

This is just a partial list. Expenses must be ‘wholly and exclusively’ for business reasons, without any personal use.

The company can’t claim for equipment and plant that you buy and keep for the business, as these are known as capital assets. However, you can be able to claim the capital allowances on these.

Corporation Tax reliefs

Your company may also qualify for certain corporation tax reliefs. Reliefs may be available on:

  1. Research & Development (R&D) Relief:

You can be able to claim this if your company works on innovative projects in the field of science and technology.

  1. Creative Industry Tax Reliefs:

This relief allows businesses in the creative industries such as film, gaming, television,  etc., to claim a deduction when calculating taxable profits.

  1. A Patent Box:

The lower rate of Corporation Tax is available on profits earned from patented inventions & certain other innovations.

  1. Disincorporation Relief:

It’s a relief that allows a business to transfer assets to its shareholders without the company incurring the Corporation Tax charge on the disposal of those assets.

  1. Terminal, capital & property income losses, & trading losses:

You could be eligible if you make the loss from trading, the sale or disposal of a capital asset or on property income.

  1. Annual investment allowance:

Under Annual Investment Allowance, 100% tax relief (up to the maximum limit) can be claimed on all qualified business assets purchased in a financial year.

Example: How John pays Corporation Tax

John is the company director of XYZ Ltd, which has an accounting year that is the same as the tax year. In order to work out his Corporation Tax bill, he needs to know 3 things:

  1. The total accounting profit for the year of XYZ Ltd:  £40,000
  2. Costs that aren’t allowable for tax relief (i.e. the cost of entertaining clients): £1,000
  3. Non-day-to-day running costs that are allowable for tax relief (i.e. the cost of a new laptop): £2,000

First, John must work out the amount that XYZ Ltd must pay tax on which is known as the taxable profit:

£40,000 + £1,000 – £3,000 = £38,000 taxable profit

With the Corporation Tax rate at 19%, XYZ Ltd is due to pay:

£38,000 x 19% = £7,600 in Corporation Tax

How to pay your Corporation Tax bill

Once you have worked out how much Corporation Tax you owe and know when your deadline is, it comes time to pay it.

Bear in mind that you need to allow time for your payment to get to HMRC, depending on your payment method.

Payment modeTime it takes to reach HMRC
Online or telephone banking (Faster Payments)  Same or next day
CHAPS
BacsThree working days
Debit card
Credit card (1.5% charge)
Existing Direct Debit
At your bank or building society
New Direct DebitFive working days

Can I pay Corporation Tax early?

Simple answer, yes, a company can pay its Corporation Tax early.

Advantages of paying Corporation tax early

Interest income. HMRC pays an interest (current rate is 0.5%), also known as ‘credit interest’ for paying the Corporation Tax early.

If you are paying corporation tax before the year-end, it will naturally be an estimate.

Such an interest is taxable income.

How is interest calculated?

Interest is calculated from a date you pay your Corporation Tax to the payment deadline.

To claim the maximum benefit of interest, you must pay corporation tax 6 months and 13 days after the starting of your accounting period.

Example

For instance, if your company’s accounting period starts on 1 April 2019 and ends on 31 March 2020, you can pay your Corporation Tax any time between 13 September 2019 (which is 6 months and 13 days after the starting of your company’s accounting period) and 1 January 2021 (which is the deadline for the payment).

HMRC may pay you the interest for a period 13 September 2020 to 1 January 2021 at an annualised rate of 0.5%.

Any disadvantages of paying early?

Yes, the opportunity cost of cashflow. You can earn a higher return on the amount of tax by not paying it early. You can invest this sum to generate a higher return either externally or within the business.

Is Early payment better than late payment?

Corporation Tax Payment deadline is nine months and a day after your year-end. Late payment, even by a single day, will attract penalties. Many businesses owners prefer to pay tax liability well in advance of the actual deadline.

Paying early also means you’re less tempted to spend the tax money on something else.