Corporation Tax is a tax on the taxable profits of limited companies and other organisations including clubs, societies, associations and other unincorporated bodies. This guide gives you a basic overview of Corporation Tax. It tells you what Corporation Tax is, who’s liable and what you must do and when if you are subject to Corporation Tax requirements. It outlines how the tax is calculated and information about the tax rates.
What is Corporation Tax and who is subject to Corporation Tax requirements?
Corporation Tax is a tax on the taxable profits of limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.
Taxable profits for Corporation Tax include:
- profits from taxable income such as trading profits and investment profits (except dividend income which is taxed differently)
- capital gains – known as ‘chargeable gains’ for Corporation Tax purposes
If your company or organisation is based in the UK, you’ll have to pay Corporation Tax on all your taxable profits – wherever in the world those profits come from.
If your company isn’t based in the UK but operates in the UK – for example through an office or branch (known to HMRC as a ‘permanent establishment’) – you’ll only have to pay Corporation Tax on any taxable profits arising from your UK activities.
Corporation Tax financial years and Corporation Tax rates
For Corporation Tax, the tax year is called the ‘financial year’ or ‘fiscal year’ and runs from 1 April to 31 March. This is different from the tax year for individual taxpayers, which runs from 6 April to 5 April.
The Chancellor sets out the rates of Corporation Tax and various allowances, reliefs and credits in the Budget each year (usually in March or April) and also in the Pre-Budget Report the previous November/December. Normally any changes are announced one or more financial years in advance of the year to which they will apply.
Corporation Tax rates
There are currently two rates of Corporation Tax, depending on the company or organisation’s taxable profits:
- the lower rate – known as the ‘small profits’ rate
- the upper rate – known as the ‘full’ rate or ‘main’ rate
There is also a sliding scale between the lower and upper rates known as ‘Marginal Relief’.
This means if your company or organisation’s profits fall between certain limits, you pay the full rate of Corporation Tax but it is reduced by Marginal Relief.
If your Corporation Tax accounting period doesn’t coincide with the Corporation Tax financial year
If your accounting period doesn’t run from 1 April to 31 March and spans two Corporation Tax financial years, you’ll need to apportion your company’s taxable profits between the two financial years on a time basis.
For example, if your company’s Corporation Tax accounting period runs from 1 July 2012 to 30 June 2013:
- The first nine months (274 days) fall into Corporation Tax financial year 2012 (from 1 April 2012 to 31 March 2013). So you’ll pay tax on 274/365ths of your taxable profit at the financial year 2012 rates.
- The remaining three months (91 days) fall into the financial year 2013 (from 1 April 2013 to 31 March 2014). So you’ll pay tax on 91/365ths of your taxable profit at the financial year 2013 rates.
What is an accounting period for Corporation Tax?
Your company or organisation pays Corporation Tax on taxable profits for each Corporation Tax accounting period, which is normally 12 months long and normally matches your company’s financial year. However, certain events or changes of circumstances can cause accounting periods to change. You cannot choose your Corporation Tax accounting period.
What is Corporation Tax Self Assessment?
HMRC also uses the term ‘Corporation Tax Self Assessment’. This simply means that it’s up to you (rather than HMRC) to work out how much Corporation Tax your company or organisation must pay for each Corporation Tax accounting period. In other words you ‘self assess’ your own Corporation Tax. You do this by filing your Company Tax Return to HMRC.
Corporation Tax Self Assessment for limited companies and organisations is a different tax from Self Assessment for individuals, self-employed, sole traders or partners. One common feature is that you self assess your liability for the tax.
What you need to do for Corporation Tax and when
If your company or organisation is subject to Corporation Tax requirements you:
- tell HMRC that it’s liable for Corporation Tax
- pay the right amount of Corporation Tax on time and electronically
- file a Company Tax Return and supporting documents online and in a particular format
There are different deadlines for each of these requirements. If you don’t meet those deadlines, your company or organisation may be charged interest and/or penalties.
Pay before you file
Unlike other taxes such as Income Tax or VAT – where in most cases the filing and payment deadlines are identical – this is not the case with Corporation Tax. The deadline to pay your Corporation Tax is before the deadline to file your Company Tax Return. Generally you must:
- pay by 9 months and one day after the end of your company or organisation’s Corporation Tax accounting period
- file by 12 months after the end of your company or organisation’s Corporation Tax accounting period
For example, if your company or organisation’s financial year runs from 1 April 2011 to 31 March 2012, and your Corporation Tax accounting period is the same, you must:
- pay your Corporation Tax for that period by 1 January 2013
- file your Company Tax Return for that period by 31 March 2013
If your company’s profits for an accounting period are at an annual rate of more than £1.5 million, you must normally pay your Corporation Tax for that period in instalments, all of which are due before the deadline to file your Company Tax Return.
You can deal directly with HMRC or you can appoint us to deal with HMRC on your behalf for your Corporation Tax affairs.
Whatever your needs we are here to help.