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What Is Corporation Tax?

There are many figures you’ll have to keep in mind as you run your business, when it comes to corporation tax, UK businesses should consider it one of the most important.

Corporation tax definition

Corporation tax is a tax that is placed on all limited companies, payable against profits. Companies do not have tax-free allowances, so when it comes time to pay corporation tax, UK businesses are taxed on the entirety of their profit. That said, expenses and deductions can be made – i.e., for travel or equipment – making your total corporation tax bill a little smaller.

What is the UK corporate tax rate?

The current UK corporate tax rate is 19% and has been so since 2016. Previously, the corporate tax rate for each company would depend on their profits, varying from business to business. So, to calculate corporation tax, you take your taxable profits and calculate 19%. If your business made £300,000 for example, you would pay £27,000 in tax.

Do I need to pay corporation tax?

Yes, if you run a limited company you need to pay corporation tax and it’s your responsibility as a director to make sure it’s paid. Other businesses or organisations may also need to pay corporate tax, even if they haven’t been incorporated by Companies House. These include:

  • Members clubs and societies

  • Housing or trade associations

  • Co-operatives

If your business structure is not one of the above, or a limited company, then you will pay your tax as an individual, using a self-assessment tax return.

How can I pay corporation tax?

You must tell HMRC that your company has been formed within three months. Then, you can begin submitting a tax return each year. HMRC corporation tax processes are relatively straightforward. You will need to fill in a form known as a CT600 which must contain:

  • Your company name

  • Your company registration number

  • Your registered office

  • Your tax reference number

  • Your turnover and profit for the reported period

  • Tax calculation

  • Details of allowances and reliefs

Remember that your accounts need to be filed not only with HMRC but also with Companies House.

HMRC corporation tax rules state you also need to complete a return even if you have no tax to pay. In this scenario, you simply fill in the form with “nil to pay”.

Above all, you want to make sure you are completely accurate in your reporting. If it’s found that you made an error, you could be fined 0-30% for genuine mistakes, or even 100% of your tax bill for intentional inaccuracies/attempted fraud.

What can I claim as expenses?

In order to reduce your corporation tax bill, you can claim expenses. These need to be justifiable, as HMRC may ask for proof of your claims. Some of the things you can claim as expenses include:

  • Employee salaries (even if you are the only employee)

  • Travel tickets

  • Office equipment

  • Petty cash for buying tea and coffee for the office

There are no strict rules on what can and can’t be claimed, as long as it serves a business purpose. For example, if you ask a client to travel to your office in London and foot their bill for a hotel stay, this is a business expense. Just remember to keep all your receipts and any other supporting documents.

What happens if I make a late payment for corporation tax?

There are two corporation tax deadlines:

  • 12 months after year end

  • Three months after you receive a notice from HMRC to complete a return

If your company makes anything under £1.5 million in profit, then your deadline will be slightly different – nine months and one day after the end of the accounting year.

If you miss your deadline, the following fines will be imposed:

  • After one day: £100

  • After three months: £100

  • After six months: HMRC will make an estimate of your bill and add a 10% penalty

  • After 12 months: Another 10% will be added to your estimated bill

If you still do not pay corporation tax bills after this time, then HMRC can collect the money in other ways, including:

  • Collecting it through your pension or earnings

  • Employing debt collectors

  • Selling your possessions

  • Making you bankrupt

  • Taking it from a bank account you own

  • Taking you to court

In short, HMRC corporation tax is just one of the many functions of HMRC, all of which play a role in professional and personal finances, so it’s best to pay your corporation tax on time.

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