Understand the Basics of Corporation Tax
UK limited companies are required to pay Corporation Tax on their profits, with rates ranging from 19% to 25%, depending on the company’s earnings. Similarly, overseas companies with a UK office or branch must pay Corporation Tax, but only on profits generated from their UK-based activities. This tax applies to income from sales, investments, and chargeable gains from the sale of assets.
Any company that generates taxable income in the UK must register with HMRC for Corporation Tax and submit Company Tax Returns annually. In the following sections, we explain how to register, file returns, and handle requirements if your company is dormant.
What is Corporation Tax?
Corporation Tax directly applies to company profits, and companies must pay this tax to HMRC. Since 6th April 2023, the Corporation Tax rates are as follows:
- Companies with annual profits under £50,000 pay 19% (the small profits rate).
- Companies with annual profits over £250,000 pay 25% (the main rate).
For companies with profits between £50,000 and £250,000, they can claim Marginal Relief, which gradually increases the tax rate between the two thresholds. However, Marginal Relief is not available to:
- Non-UK resident companies
- Close investment holding companies
Furthermore, if a company’s profits exceed £250,000, it cannot apply Marginal Relief to the portion of profits between the small profits and main rates. In this case, the entire profit amount is subject to the 25% Corporation Tax rate.
Does my company have to pay Corporation Tax?
If your company is carrying on any kind of business activity or receiving any form of income, it becomes liable for Corporation Tax on all taxable profits. For example, business activities include:
- Buying and selling goods or services
- Leasing or buying property
- Selling assets
- Managing investments and receiving dividend payments
- Paying dividends
- Earning interest
- Paying employees, including directors
- Incurring bank charges and fees
- Paying legal or accountancy fees
- Receiving income from any other source
However, if your company is not involved in any of these activities, it will be classified as dormant (inactive) for Corporation Tax purposes. In such cases, you must promptly contact HMRC to report your company’s dormant status, ensuring that all obligations are properly managed.
How and when to register a company for Corporation Tax
Companies must register with HMRC for Corporation Tax no later than 3 months after beginning any business activity. To register your company as ‘active’ for Corporation Tax, you first need to sign up for HMRC’s online services by creating a Government Gateway user ID and password. Afterward, you will need to provide the following details:
- Company name
- Company registration number (CRN) – found on your certificate of incorporation
- Unique Taxpayer Reference (UTR) – HMRC sends this to your registered office shortly after company formation
- Start date of trading activity – This date sets your company’s accounting period for Corporation Tax, which typically aligns with your annual financial year
- Main trading address – Where the majority of business activities occur
- Principal business activities – Identified using a Standard Industrial Classification (SIC) code
- Accounting reference date (ARD) – The date annual accounts are made up to, usually falling on the anniversary of the company’s formation
Once your registration is complete, HMRC will send important information to your registered office. This will include deadlines for paying Corporation Tax, as well as for filing your Company Tax Return and annual accounts. By adhering to these steps, you ensure that your company remains compliant with HMRC regulations and avoids any potential penalties.
Do I have to file a Company Tax Return?
If your company is active during all or part of its Corporation Tax accounting period, you must prepare a Company Tax Return (form CT600) and annual accounts for HMRC. Additionally, you need to submit these documents no later than 12 months after the accounting period ends, even if the company made a loss or owes no Corporation Tax.
Your company’s accounting period begins on the day it becomes active for Corporation Tax, which may not always match the incorporation date at Companies House. Each accounting period runs for a maximum of 12 months, ending on your accounting reference date (ARD).
On the other hand, if your company has been dormant since incorporation or throughout its most recent Corporation Tax accounting period, you won’t need to file a Company Tax Return or accounts with HMRC.
By keeping these rules in mind, you ensure your company stays compliant and meets all required filing obligations with HMRC.
What is an accounting period for Corporation Tax?
A Corporation Tax accounting period begins on the date a company starts trading, which is typically the same as the incorporation date unless the company remains dormant after its formation.
The accounting period ends on the accounting reference date (ARD), marking the end of the company’s financial year and the deadline for preparing its annual accounts. The ARD usually falls on the anniversary of the last day of the month in which the company was incorporated.
Corporation Tax accounting periods generally last 12 months and align with the financial year covered by the annual accounts. While these periods may be shorter than 12 months, they cannot exceed this limit.
In the first year of trading, the financial year could exceed 12 months if the company starts trading immediately after incorporation. If this happens, you will have two accounting periods in the first year, requiring two Company Tax Returns:
- One return for the first 12 months covered in the accounts.
- A second return for the additional period covered by the accounts.
You must pay tax liabilities for any business activities conducted during each accounting period. Every financial transaction must be recorded in your company’s accounting records, which will be used to prepare the Company Tax Return and determine the amount of tax owed.
Example:
A company is incorporated on 1 May 2024 and starts trading immediately:
- The company’s financial year begins on 1 May 2024 and ends on 31 May 2025 (ARD), covering a 13-month period for its first annual accounts.
- As a result, the company will have two accounting periods for Corporation Tax. One tax return will cover the 12-month period from 1 May 2024 to 30 April 2025, and the second return will cover the additional month from 1 May 2025 to 31 May 2025.
- From then on, the company’s accounting period will align with the financial year in the annual accounts, starting on 1 June 2025 and ending on 31 May 2026. The company will file a single tax return for the 12-month period covered by the annual accounts.
By following these rules, your company ensures that its tax obligations are met and its financial activities are accurately reported to HMRC.
Do dormant companies have to pay Corporation Tax and file tax returns?
Dormant companies do not pay Corporation Tax if they have remained dormant from incorporation or throughout their most recent accounting period. However, if the company receives or spends money or engages in any business activity, it will no longer be considered dormant.
Likewise, dormant companies do not file Company Tax Returns unless they have been active for part of an accounting period. If the company has not traded, the director must notify HMRC that the company is dormant for Corporation Tax.
How and when to file Company Tax Returns
You must file tax returns with HMRC online within 12 months of the end of each accounting period, even if your active company has no tax to pay. You can use accounting software or HMRC’s online Corporation Tax service to complete this process.
To use HMRC’s online services, you need a Government Gateway user ID and password, which you receive when registering for Corporation Tax. To file your tax return, you must:
- Sign in to your HMRC account
- Upload the set of annual accounts that corresponds to the accounting period
- Include Corporation Tax calculations and supporting documents showing how you arrived at the figures
- Complete and submit Company Tax Return form CT600
The person submitting the return, usually a director, accountant, or tax advisor, must declare that all the information provided is accurate to the best of their knowledge.
Note: If you appoint someone to manage your tax affairs, you must notify HMRC.
Paying your Corporation Tax bill
You must pay Corporation Tax to HMRC electronically before the corresponding tax return is due. The deadline for paying your Corporation Tax bill is 9 months and 1 day after the end of each accounting period. This is 3 months before the tax return deadline.
If your company doesn’t owe any tax, you must inform HMRC by completing the ‘nil to pay’ form. However, you are still required to file your Company Tax Return even if no tax is due.
Corporation Tax late filing penalties
Directors must ensure that the company meets all statutory filing obligations with HMRC.
Failure to comply or meet deadlines leads to penalties. In severe cases, authorities may impose personal fines or prosecution on directors. Additionally, if the situation remains unresolved, the company could face compulsory closure.
Late filing of Company Tax Return
Failure to file a tax return and full accounts by the statutory deadline results in a £100 flat-rate penalty. If the return is more than 3 months late, an additional £100 penalty applies.
If a company files its tax return late for 3 or more consecutive accounting periods, the penalty increases to £500. A further £500 penalty is imposed if the return is still more than 3 months late.
For returns filed 18-24 months late, there will be a 10% fine on the unpaid Corporation Tax liability. If the return remains outstanding for more than 24 months, an additional 10% charge will apply to the unpaid tax.
Late payment of Corporation Tax
Penalties for the late payment of Corporation Tax depend on the amount of outstanding tax, referred to as the ‘potential lost revenue’ (PLR). The penalty can range from 30% to 100% of the unpaid tax liability. However, HMRC may consider a company’s ‘reasonable excuse’ for late payment when determining the penalty amount.
Do you have any other questions?
Corporation Tax applies to all limited companies based on their profits, so it’s essential to maintain accurate records and submit the correct forms to HMRC. We’ve discussed the basics of tax calculations, deadlines, and the importance of compliance to avoid penalties.
If you’re seeking further information, explore the Startxpress Help Center and Blog for more in-depth resources.
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