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 an introduction to corporation tax for private limited companies. Covering what corporation tax is, how to set up the corporation tax process with HM Revenue & Customs (HMRC), and company responsibilities under corporation tax self-assessment.
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.
What is corporation tax? Corporation tax is charged on the taxable profits of all registered companies that have been incorporated at Companies House. Taxable profit is the amount of profit remaining after the deduction of tax allowable expenses and reliefs. Corporation tax is calculated on various different types of taxable profits and chargeable gains including:
Trading profits - the income from the company's trading activities after allowable expenses have been deducted.
Capital gains - the chargeable gain or profit made when a company asset such as land or buildings is sold.
Any other income - for example, money made from leasing land or buildings or interest on company savings.
Corporation tax is payable on the income and taxable profits made during a specific accounting period, which cannot be more than 12 months long. The accounting period is usually the same as the company's financial year, which is the period covered by its annual accounts. Sometimes the accounting period differs from the financial year, for example if accounts cover a period of less than 12 months due to the business being closed down.
The rate of corporation tax for the financial year starting 1 April 2022 is 19%. From 1 April 2023, the rate will increase to 25% for profits over £250,000. The rate for small profits under £50,000 will remain at 19%. A tapered rate will be introduced for profits between £50,000 and £250,000.
The corporation tax set-up process Anyone starting a limited company must first register (or incorporate) it with Companies House. Companies that are registered online will normally be registered with HMRC for corporation tax at the same time.
However, companies that register with Companies House by post or via an agent or third-party software must register for corporation tax separately within three months of the company becoming active or starting to trade. This involves providing the following information to HMRC:
The company's name and registered number.
The main trading address.
The date the company started to trade.
The main trading activities.
The date up to which the annual accounts will be calculated.
The details provided will be used by HMRC to work out when the company must pay corporation tax. If a new company has not yet started trading, it can be registered with HMRC as dormant. However, HMRC must be informed once the company becomes active.
It is usual for a company's accountant to act as the company's agent and liaise with HMRC directly in relation to corporation tax issues. Companies must provide agents with authority to correspond with HMRC on their behalf by completing the 'Authorising your Agent' form 64-8.
Responsibilities under corporation tax self-assessment Corporation tax is collected under an approach sometimes known as corporation tax self-assessment (CTSA). Under CTSA companies do not receive a bill for corporation tax but must:
Check their filing and payment deadlines to ensure these are met.
Prepare annual accounts.
Calculate and pay the tax due on taxable profits (after taking into account any allowances or reliefs due).
Report the details to HMRC by filing a company tax return each year.
If no tax is due, HMRC must be informed by the deadline for payment and a company tax return must still be completed. Dormant companies may not have to pay corporation tax or complete company tax returns and HMRC will inform them if this is the case.
Contact Ashored for help and support with your Business and Corporation Tax.