Paying taxes is no one’s favourite activity, and unlike for individuals, there is no provision for tax-free allowances for companies, which means shelling out corporation tax is mandatory. But even so, it does not have to be hard!
To simplify things, we have provided a quick breakdown of how corporation tax filing works and the kinds of reliefs you can apply for. Even if you are working with an accountant (and you certainly should), it is vital as a company director to be responsible for your corporation tax – hence this guide! So let us start with the basics:
What is corporation tax?
All UK limited companies pay corporation tax as a percentage of their profits. For the tax year 2023-24, corporation tax is fixed at 25% for businesses with profits over £250,000. For companies making profits of less than £50,000, the tax is 19%. Taxation between those amounts is on a sliding scale with the more profit you earn, the higher the tax rate. Other bodies (apart from limited companies) that might need to pay it include:
- Cooperatives
- Trade associations
- Housing associations
- Members’ clubs and societies
- A foreign company which has a UK branch or office
While the corporation tax applies to all of a company’s profits, you can apply for various claims and deductions to reduce your tax burdens, such as capital allowances, R&D tax relief, Annual Investment Allowance (AIA), and qualifying charitable donations.
How to register with HMRC as a limited company
You must inform HMRC of your limited company within three months of the day you start trading. Details you need to mention include:
- The date your business began
- Company name and registration number
- Company main address
- Type of business
- Names and addresses of the company directors
- The date you will be making company accounts up to
How to pay corporation tax
Eligible bodies must submit form CT600 (company tax return) to HMRC as well as Companies House once a year. The form needs to include:
- Company name
- Registration number
- Registered office address
- Tax reference number
- Turnover and profit for the period in question
- Tax calculation
- Details of reliefs and allowances
If you do not have any tax to pay that year, you must submit the “nil to pay” form. And if your company has stopped trading, you must let HMRC know so that it can record you as “dormant” for tax purposes.
You also need to submit your corporation tax return during the period between the date of your company year-end and the statutory filing date. The statutory filing date is 12 months after the year-end or three months after you get a notice from HMRC to deliver a return, whichever is the last to end.
When you pay the actual tax amount depends on how much taxable profit you have made. If it is under £1.5 million, you must pay up within nine months and one day before the end of the accounting year.
You may pay in instalments if it is more than £1.5 million. Remember that if the tax bill deadline falls on a weekend or bank holiday, you must send it over by the previous working day.
What are the corporation tax penalties for late tax filing?
HMRC stipulates the following penalties for delays in corporate tax filing:
- A day after the deadline – £100
- Three months after the deadline – an extra £100
- Six months after the deadline – 10% penalty on unpaid tax (as estimated by HMRC)
- 12 months after the deadline – an additional 10%
Also, if you submit your returns late three times consecutively, the £100 penalties will be increased to £500 each. And if you cannot afford to pay the corporation tax amount for whatever reason, you must contact HMRC immediately to set up a payment plan or seek help from corporation tax accountants.
What are the corporation tax penalties for inaccuracies?
The penalty for inaccurate corporate tax returns depends on whether or not it was done on purpose and whether you disclose the mistake voluntarily.
- If the mistake was pure carelessness, you are charged 0-30% if you admit it yourself and 15-30% if HMRC catches it.
- If it was deliberate but not concealed, you are charged 20-70% if you own up and 35-70% if HMRC catches it.
- If it was deliberate and concealed, you are charged 30-100% if you disclose the fact and 50-100% if you do not.
To avoid paying penalties, it is best to find expert help and ensure accurate corporation tax computation.
Corporation tax reliefs you should apply for
Reductions on a tax bill are always welcome, and luckily, there are several ways you can do so while filing your annual returns. Some of the deductions you can make to your profits before tax include:
- Capital allowances for the assets you buy and use for business purposes (also known as plant and machinery)
- R&D tax relief, if you are working on an innovative project designed to advance science or technology (such as by building a new product or improving on an existing one)
- Relief on goodwill and relevant assets when you buy a business with qualifying intellectual property
- Reliefs for creative industries (such as theatre and film) if your business pays for production and has a decision-making role
- The Patent Box, which gives you a lower corporation tax rate of 10% on the profits you make from the patented inventions that you own or have exclusive rights to
- Disincorporation relief, when you transfer certain business assets to company shareholders who will keep running the business in an unincorporated form
- Relief on losses incurred during trading, on property income and while selling or disposing of a corporate asset (usually by offsetting the loss against other profits during the same accounting period)
- Terminal loss relief if your business stops trading altogether
- Marginal relief, which gives you a gradual increase in corporation tax rate from the “small profits” rate to the main rate
In addition, HMRC may run periodic relief and recovery schemes, as it did during the coronavirus pandemic. As always, ask your corporation tax accountants about which of the corporation tax reliefs apply to you specifically and whether there are any provisions you should be aware of.
There are two other ways to reduce your corporation tax bill:
- Paying yourself a salary – As a company director, your salary is a business expense, which means your company’s taxable profits go down. You will still need to pay income tax on it, so you might want to keep the salary under the higher-rate threshold.
- Make an early payment – If you pay your corporation tax bill earlier than the required date, HMRC will repay some of it as interest at 0.5%.
Bottom line
It can be tricky to keep track of corporation tax rules, but it is worth the effort to understand where your money is going and what exemptions you are eligible for. Consult Lyel Accountants to ensure your books are always in order, and be punctilious about submitting your returns. HMRC will be happy, and you will be free to run your business your way. Good luck!
