How does Corporation Tax work in the UK?

What Corporation Tax is

Corporation Tax is the tax a limited company pays on its profits. Unlike Self Assessment, there is no bill sent to you, the company works out what it owes, pays it, and files a return to show the calculation. The responsibility to get all three right sits with the company and its directors.

As soon as a company starts trading it must tell HMRC and register for Corporation Tax. From then on it has an annual cycle of calculating profit, paying the tax and filing the return. Understanding how that cycle works helps you set money aside in good time and avoid surprises.

What's taxed

Corporation Tax is charged on a company's taxable profits, which come from more than just trading. In broad terms it applies to:

• Trading profits, the profit from your main business activities.
• Investment income, such as interest the company earns.
• Chargeable gains, profits from selling assets like property or investments for more than they cost.

Importantly, taxable profit is not the same as the profit in your accounts. Some costs shown in your accounts are not allowable for tax (client entertaining is a common example), and some tax reliefs reduce the figure below your accounting profit. The company tax return reconciles the two, which is a large part of what makes the calculation more involved than it first appears.

The rates and marginal relief

The UK has a two-rate system for Corporation Tax, with a tapering band in between.

• Small profits rate, 19% where profits are £50,000 or less.
• Main rate, 25% where profits are above £250,000.
• Marginal relief between £50,000 and £250,000, which tapers the rate so it rises gradually rather than jumping. The effective rate within this band works out at 26.5%.

The band thresholds are reduced if a company has associated companies or an accounting period shorter than 12 months, which can push more profit into a higher effective rate than owners expect. That is one of several reasons the headline rate rarely tells the whole story for a growing group of companies.

Paying and filing

Corporation Tax has an unusual quirk: you pay before you file. The two deadlines are different, and both are tied to your accounting period rather than a fixed calendar date.

Paying, 9 months and 1 day after year end

For most smaller companies, the Corporation Tax is due 9 months and 1 day after the end of the accounting period. So a company with a 31 March year end must pay by 1 January. Very large companies pay in instalments on a different timetable.

Filing, within 12 months of year end

The company tax return (the CT600) and the supporting accounts and computations must be filed with HMRC within 12 months of the end of the accounting period. Because this is three months after the payment deadline, it is good practice to prepare the company accounts and figures early so you know what to pay well before the money is due, rather than the other way around.

Missing either deadline has consequences: HMRC charges penalties for a late return and interest on tax paid late, so planning the cash flow around these dates is important.

Reliefs and allowances

A correctly prepared return claims every relief and allowance the company is entitled to, which can meaningfully reduce the bill. Without quoting figures that change year to year, the main areas to be aware of are:

• Capital allowances on qualifying equipment, machinery and certain other assets, which let you deduct the cost against profit under specific rules.
• Research and development (R&D) relief for companies carrying out qualifying innovative work, valuable but tightly defined, so it needs care.
• Loss relief, which allows trading losses to be set against profits of other periods in defined ways.
• Allowable expenses incurred wholly and exclusively for the business, deducted in arriving at trading profit.
• Reliefs on certain costs such as pension contributions made by the company.

The rules, rates and limits for these reliefs change regularly, and several have detailed conditions, so this is an area where professional advice tends to pay for itself. Claiming correctly is as much about not missing a relief as it is about not overclaiming one. Forward planning through tax planning often achieves more than anything done after the year has closed.

Getting it right

Corporation Tax is more involved than it looks: taxable profit differs from accounting profit, the rate depends on your profit level and your associated companies, the payment and filing deadlines are different, and the reliefs are detailed and changeable. Each of these is a place where a company can pay too much or fall foul of a deadline.

We prepare company accounts and Corporation Tax returns so the calculation is correct, every relief is claimed, and you know what to pay and when, well ahead of the deadline. If you would like your company's tax handled properly, or simply want to understand your position, request a consultation and we will talk it through.