Calculating and Paying Corporation Tax
Introduction Corporation tax is charged on the taxable profits of limited companies, as well as on those of some clubs, societies, associations and co-operatives. However, it does not apply to sole traders or partnerships.
Here we provide a guide to calculating and paying corporation tax for private limited companies. It covers some of the tax reliefs and allowances that may apply, and the records that must be kept. It also provides information about the payment of corporation tax, filing of tax returns and the penalties that apply for filing inaccurate or late returns.
The rules surrounding corporation tax are complex and this information is intended only as a starting point to understanding the issues involved. It is essential to seek professional advice to ensure that obligations are met and the right amount of tax is paid.
Tax allowances and the calculation of corporation tax When calculating corporation tax, there are certain allowable expenses and reliefs that can be deducted from net profits to reach the figure for taxable profit:
Business expenditure, which can be offset against chargeable profit when it is incurred wholly and exclusively for the purposes of trade - for example, salaries, power, rent, rates, stationery, telephone, cleaning and advertising expenditure. Business entertainment is not a tax allowable expense.
Depreciation, which is the charge for the write down of tangible assets used in company accounts, is not an allowable expense for tax. Instead, capital allowances are given for qualifying purchases made by the company for assets such as commercial property, fixtures, plant, office equipment and motor vehicles. These capital allowances are then used to reduce the company's tax liability.
Relief for trading losses, which can be set against income or gains from the current or previous accounting period. If the loss is not claimed for some other relief, it will automatically be carried over to be set against future profits from the same trade. If the company ceases to trade, the previous 12 months' losses can be set against trading profits from the previous three years.
Research and Development (R&D) relief, which is available to companies that undertake qualifying R&D projects.
Patent Box, which is for companies that make profits from patented inventions.
Reliefs for creative industries (CITR) that cover profits made from film, theatre, television, animation or video games.
Relief on goodwill and other relevant assets.
Disincorporation relief for anyone who is closing their company and becoming a sole trader or partnership.
An accountant can prepare a corporation tax computation detailing the adjustments that have been made to the company's accounts and income and expenses when calculating the tax due.
Accounting records that must be kept A variety of information, documents and records must be kept to enable the preparation of annual accounts and the company tax return. If adequate accounting records are not kept, HMRC can apply a penalty, which is usually £500 for a first offence. If HMRC believes that accounting records have been destroyed, they can impose a penalty of £3,000 or disqualify individuals from acting as company directors. Once HMRC determines that records are inadequate, it is likely that they will keep returning until they are satisfied that the record-keeping has improved. They will also look much more closely at what tax has been paid and decide on whether they think it is accurate.
Records and documents that must be kept include:
Details of all company assets, such as land, buildings, vehicles and equipment.
Details of all money spent or received by the company.
Information about all debts that the company is owed or owes.
Figures for stock held at the end of the financial year, and the stocktaking used to work out this figure.
Details of all goods or services bought or sold.
Documentary evidence of all money received or spent by the company such as petty cash books, orders, delivery notes, sales and purchase invoices, till rolls, cheque stubs, bank statements and receipts.
Records must usually be kept for at least six years from the end of the financial year to which they relate.
Paying corporation tax In order to pay corporation tax, financial accounts must first be filed with Companies House no later than nine months after the company's financial year end.
Any corporation tax due must be paid within nine months and one day from the company's financial year end, or HMRC must be informed that no tax is due by the same deadline.
Corporation tax can be paid in a variety of ways, including via online or telephone banking, direct debit, credit or debit card, or at the bank or post office. However, corporation tax cannot be paid by post.
Anyone who believes that they will struggle to pay their tax should contact HMRC to discuss the scope to pay in instalments. If they do not do this, HMRC will take enforcement action.
Filing a company tax return A company's completed tax return is due 12 months from the end of the company's financial year (which is usually the same as the accounting period for corporation tax) or three months from HMRC notice, whichever is later. It is filed after payment of the corporation tax due and is the reporting mechanism used to inform HMRC about the company's sales, expenses and profits made.
Three months after the end of the accounting period, HMRC will send the company (and their accountant or agent) a notice to submit a return. If the company is liable for corporation tax but a notice is not received, it is important to contact HMRC before the due date to avoid penalties.
In practice it is usual for a company's accountants to prepare the tax return in association with the company's annual accounts. The company's directors are then responsible for signing off the return, but it is usually submitted online by the accountants before the tax payment is due.
HMRC enquiries and penalties HMRC carries out enquiries into tax returns for two main reasons:
When it requires more information to understand the figures in a return.
As part of a more random checking process to check the accuracy of returns.
HMRC will write to the company informing it that an enquiry is taking place and what information is required. HMRC has 12 months from when the company submits its tax return in which to start an enquiry.
The company's accountants will normally liaise with HMRC during an enquiry but will charge additional fees to cover their time involved in doing this. However, insurance cover is available to cover the costs of an HMRC enquiry.
Flat-rate penalties are charged by HMRC if a company's tax return is not filed on time. Additional tax-related penalties are imposed if the company tax return is completed incorrectly or incorrect accounts and supporting information are filed.
The penalties HMRC imposes for filing incorrect tax returns are based on the reason for the inaccuracy.
If it is possible to prove that 'reasonable care' was taken when compiling the return, penalties will not be incurred. The penalties are calculated based on a percentage of the additional tax that is due.
Hints and tips
It is important to be aware of, and plan for, the cash flow implications of tax liability so that the tax due can be paid on time.
HMRC's Business Payment Support Service may be able to grant a payment extension for companies that experience difficulties in relation to paying a tax bill in full before the payment deadline.
Accounting records must be kept for six years, as HMRC will want to review them if they choose to inspect a company's corporation tax submission.
Contact Ashored for help and support with completing your Corporation Tax Return.
