Corporation Tax - What it is and how it applies to your company

When you start up in business, if you choose to form a limited company then you will have to assess your business each year for corporation tax.

This is essentially a tax on your company’s profits. You have to work out your own tax liability, pay that tax, and ensure you deliver all required information to Her Majesty’s Revenue & Customs (HMRC) on time.

Of course you won’t have to physically do it yourself; getting this right is one of the main reasons you need an accountant.

But it’s something you need to be on top of at all times. As with many tax affairs, if you get it wrong or send required information late, you will be penalised – sometimes with a fine.

Use this guide to know the basics of what you need to do and why.

Register your new business

When you set up your limited company you have a legal obligation to tell HMRC that your company exists and is liable for tax. This is also the time to tell them who your accountant is. Often you will need to fill in a form to authorise your accountant to act on your behalf. You’ll find all the forms and information you need on the HMRC website.

If you are a sole trader, the process is different as you will be registered as self employed. See our article on setting up in business as a sole trader for more details.

Self-assess your business

Once a year you will get a notice from HMRC to file a company tax return. It’s something that’s worth putting in your diary each year, as it is your responsibility to fill out the tax return even if the notice doesn’t reach you for whatever reason.

It involves filling out a company tax return form CT600 plus sending off accounts information prepared by your accountant.

HMRC is encouraging businesses to do this online as much as possible. As well as speeding up the process, the tax calculations are done by the website. Many accountants use special software to prepare company tax returns, and submit them online for you.

Even though you are using an expert to complete your company tax return, it’s worth you checking all of the details and ensuring everything is correct. Legally it is the company’s responsibility to ensure the information sent is true and accurate. And it is you – not your accountant – that will have to pay any penalties for getting it wrong.

Accounting periods

Your business is self-assessed over accounting periods. For most businesses these are 12 months long and match the dates you have your accounts drawn up.

It is possible to set accounting periods for less than 12 months, although not longer.

Payment of Corporation Tax itself is due 9 months and one day after the company's "normal due date" - usually the last day of your annual accounting period.

Company tax return information needed

Each tax return must contain your company name, registration number, the registered office and tax reference number. You will find this on the notice to deliver a company tax return.

What will you pay?

There are two rates of corporation tax depending on the level of profits you make. In 2008/9, you will be charged 21 per cent on profits of up to £300,000. This is known as small companies’ rate. The main rate is 30 per cent on profits of £1.5 million and above.

The small companies' rate will remain at 21% during 2009/10 (plans to increase the rate to 22% were shelved during the November 2008 Pre-Budget Report). Meantime the main rate will drop down to 28 per cent in 2009/10.

For companies that make profits between £300,000 and £1.5 million there’s a scheme called marginal relief, to make it easier for them to move from one rate to the other.

For more information on corporation tax and other current tax rates, see our dedicated tax rates section.

Keeping records

You need to keep all of your records for at least six years, and some would argue it’s sensible to keep them longer than that. This includes all receipts and invoices, plus the record of all sales and purchases made.

HMRC says it is acceptable to keep records in legible alternative such as an optical imaging system, where documents are scanned into a computer.

Deadlines and penalties

You can send your company tax return in any time after the end of your accounting period (your year end). You have to do it by the statutory filing date. This is usually the later of 12 months after the end of your accounting period, or three months after you get a notice to deliver a company tax return.

If you send the tax return in late your company will be charged a penalty. There may also be a penalty if the tax return is incorrect.

If you do owe any corporation tax, this is due nine months and one day after something called your normal due date. This is the last day of your accounting period. If that was 31st December, your tax payment will be due on 1st October.

There may be a penalty and interest charges if you pay it late.

Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.