What is corporation tax? Rates, allowances and how to calculate them
All UK limited companies have to pay corporation tax on their profits, and in this easy to read guide for entrepreneurs and business owners we’ll look at what it is, the rates, allowances and how it works. is calculated, writes Lynne Gowers of an accounting firm Box, an accredited member of the Association of Freelancers and Entrepreneur Services.
What is corporation tax?
Simply put, corporation tax is a tax on the profits of limited liability companies, so if you are not running your business as a limited liability company, this article is not for you!
Unlike income tax, companies do not have a personal allowance. So, as soon as your business starts making a profit, it has to start paying corporation tax.
In addition to a company’s trading profits, corporation tax is payable on its investments and when assets are sold for more than they cost – these are known as “taxable gains”.
Calculating corporation tax for many businesses can be quite complicated as costs may or may not be deductible in different circumstances, and certain allowances and reliefs may be available.
Company tax registration
When setting up a public limited company, one of the first things you need to do is register for corporation tax – this must be done within three months of starting business.
Companies House automatically notify HMRC when a new company is registered, and they will send a letter to the registered address, with the company’s UTR (Unique Tax Reference) and Form CT41G (Company Tax – Information for New companies).
You will need the company’s UTR for any dealings with HMRC, while the CT41G form explains what you need to know about whether your company is active for corporation tax and what statutory information you will need to provide at HMRC.
If you hire an accountant, they will normally apply for a corporation tax authorization code from HMRC to enable them to view your company’s corporation tax file online and file tax returns on companies.
Corporate tax rate
The UK corporation tax rate (at the time of writing – September 2019) is a standard rate of 19%. Before April 2016, the rate depended on the profits made by your company.
The current government has pledged to keep corporation tax (“CT” for short) low and has said it will reduce the rate to 17% in the 2020-21 tax year. But in the current climate of political uncertainty, it’s a matter of waiting and seeing the fall 2019 budget come.
When do you pay corporation tax?
The CT filing deadline differs from other taxes such as income tax and VAT.
Corporation tax becomes due before the date of filing, in accordance with the due date of accounts at Companies House. The payment and deposit deadline depends on the taxable and accounting period of your business.
The due date to pay your CT bill is nine months and one day after the end of your billable period for your previous fiscal year, so if your billable period ends on March 31, your CT due date will be January 1 (your accounts would be due to be filed with Companies House on December 31)
Remember that to calculate the amount of Corporation Tax due you will need to prepare your corporation tax return and the deadline to do so is 12 months after the end of the accounting period it covers . The tax return is based on a self-assessment, so when it is given to HMRC you declare that it is correct.
If you are in your first year of business or are extending your year-end, you may have two different corporation tax accounting periods, as your tax period cannot exceed 12 months.
Confused? Working with a reputable and experienced contractor accountant will prevent you from missing key deadlines and incurring penalties. This is especially the case if you have multiple billing periods. As noted, a billable period cannot exceed 12 months, but your accounting period can be up to 18 months. (i.e. 2 x corporate tax returns for 1 x set of accounts)
Corporate tax relief
Certain tax deductions are available when determining the amount of corporation tax your business owes. Basically, you can deduct the costs of running your business from your business’s pre-tax profit.
These include expenses such as home, office expenses, mileage, travel, and living expenses if you comply with the temporary work rules, in addition to items such as training. These must be engaged “entirely, necessarily and exclusively” for professional purposes. There are many special rules, for example when training is provided to the owner/manager of a business.
Purchases of assets for use in your business, such as equipment, machinery and vehicles, are do not may be deducted from your corporation’s income when calculating taxable profit. Instead, you may be able to claim capital cost allowances on them. But that’s a topic for another day!
There are also a number of reliefs that you can potentially use to reduce your corporation tax bill. These include research and development (R&D) relief, which you can claim if your company is working on scientific or technological innovations.
Your accountant is in the best position to advise you on the allowances, expenses and relief available to your company, so take advantage of his expertise.
How is corporation tax calculated?
Calculating corporation tax can get quite complicated, but the good news is that it’s your accountant’s job. Here’s a quick look at how they do it.
To calculate the amount of corporation tax due, you always start from your pre-tax profit. It’s basically your company’s sales minus expenses.
- Add the depreciation charges included in your company’s accounts
- Deduct your depreciation
- Add any other relevant taxable income or gain
- Deduct all non-allowable expenses such as guest entertaining
- Apply the corporate tax rate of 19% to calculate the gross CT payable
As you can see, not for the faint hearted! Nor, probably, for very many time-pressed entrepreneurs. So, to reiterate, we recommend you consult your adviser even if you are one of those ContractorUK readers who feels brave enough to tackle CT on your own!