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Do you run a small business or a limited company? If yes! Then you’ll need to know about corporation tax.
Corporation tax is the same as income tax for your company, where you, as an individual, pay income tax to HMRC on earning each year; your company will pay corporation tax instead.
Besides, if you submit your corporation tax return late or if it contains errors, then you could be penalised.
So, it’s essential to be aware of some basics and facts related to the Corporation tax.
Here’s the guide to help you understand Corporation Tax in more detail.
What is Corporation Tax?
Any organisation doing business in the UK is required to pay corporation tax on its profits.
If the company in the UK, pays corporation tax on all its profit from the UK, and if the company is not UK based but has a branch here, then it only pays this tax on profits related to UK activities.
Corporation tax also applies to clubs, co-operatives, and other unincorporated associations, like sports clubs and community groups.
You’ll not get a bill for this tax, but you required to calculate, pay, and report on it yourself, or with guidance from your tax advisor or accountant.
What is the Rate of Corporation Tax?
The current tax rate is 19% for company profits.
The taxable profit includes the money you make from business, investments, and selling assets for more than they cost (chargeable gains).
For a chargeable gain, you are required to work out your gain to calculate tax.
Companies involved in oil rights or extraction in the UK or UK continental shelf have different tax rates, known as ring fence profits.
Small business responsibilities
Small businesses have some responsibilities associated with the Corporation Tax.
The first responsibility is to register for Corporation Tax when you start your business.
The second one is you must keep your business’s accounting records, prepare tax returns, and file it by your deadline.
You must do this even if your company made a loss, and you owe no tax.
Finally, you must pay the Corporation Tax you owe by your deadline.
How to pay Corporation Tax?
Firstly, you are required to register for Corporation Tax within three months of starting your business.
However, when exactly you start to do your business is rather complex; here’s HMRC guidance on what counts as trading for tax purposes.
After working out how much corporation tax you need to pay, you’ll need to pay it.
There are varieties of ways to pay it, depending on how urgently you want to pay:
If you want the money to reach HMRC the same or the next day:
- Use faster payment services (online or phone banking).
- Use Clearing House Automated Payment System – CHAPS.
If you want the money to reach HMRC within 3 to 5 working days:
- Use Banker’s Automated Clearing Service – BACS.
- Use Direct Debit – if you’ve set one up before.
- Pay online by corporate credit or debit card.
- Pay at your bank or building society.
If you want the money to reach HMRC within five working days, then set up a new direct debit.
If your payment deadline is on a bank holiday or a weekend, in such case, the payment must reach by the last working day before your deadline to HMRC.
You can find full instructions for payment and HMRC account details here, Pay your Corporation tax bills.
Deadlines for Corporation Tax
A Corporation Tax deadline depends on the accounting period, which is generally the same 12 months as the financial year in your annual account.
Businesses with profit up to £1.5 million must have to pay their tax in 9 months & 1 day after the end of their accounting period.
As an instance, if your business’s accounting period ended on 31 March 2020, your payment deadline would be 1 January 2021, and the tax return deadline would be 31 March 2021.
Deadlines are affected by COVID-19.
Large companies with taxable profits above £1.5 million must pay corporation tax electronically in instalments with different deadlines.
Reliefs on Corporation Tax
You may get deductions on your corporation tax.
You can deduct capital allowance on assets such as equipment, plant and machinery, business vehicle, and business running costs from pre-tax profits.
You can also claim for,
- R&D relief
- The patient box – if your business makes a profit from patented inventions
- Creative industry relief (CITR) – if your business makes a profit from the film, theatre, animation, etc.
- Disincorporation relief – in case you close the company and become a sole trader.
- Capital, terminal, property income and trading losses.
Penalties for late filing of Corporation Tax
If you don’t pay Corporation Tax by the deadline, then HMRC may charge you penalties and interest.
It ranges from £100 for being one day late to 20% of the unpaid tax if you are 12 months late for filling the Corporation Tax.
However, you can appeal against the penalty by writing to your corporation tax office, but for that, you must have a reasonable excuse.
Wrapping up
When it comes to deal with HMRC and Corporation Tax there’s one golden rule – it pays to be organised.
Always make sure that you don’t pay more than you need to by claiming any applicable reliefs.
Pay your Corporation Tax on time and with care to avoid penalties of late submissions.
And if you can’t get your head around any of it, you can always hire an accountant or tax advisor or an accountant to get professional advice.
