When you set up in business through a limited company, your annual profits will be subject to corporation tax.
Dealing with your corporation tax issues is one of your accountant’s key tasks. However, it is ultimately the company directors who are responsible for ensuring that a company’s tax affairs are in order.
As a director of a limited company, you therefore need to make sure that your company’s corporation tax liability is accurate, your annual tax return is filed on time and that you pay the corporation tax to HMRC when it falls due.
If you are setting up a limited company for the first time, here is a handy overview of how to comply with the corporation tax rules for UK companies.
Who pays Corporation Tax?
All UK limited companies are subject to Corporation Tax. The tax is charged as a percentage of the annual profits made by a company.
Corporation Tax is not paid by businesses operating as sole traders or partnerships. The individuals running such businesses are classed as self-employed and will pay tax on their business profits through the annual self assessment system.
Corporation Tax does apply to the following organisations, even if they are not incorporated:
- Members’ clubs, societies and associations
- Trade associations
- Housing associations
- Groups of individuals carrying on a business but not as a partnership, (for example, co-operatives.)
Registering your new business
You are legally obliged to inform HMRC that your new limited company has been formed as soon as you have completed the incorporation process.
Once you appoint your accountant, you will need to authorise them to deal with your tax affairs on behalf of your new company. You can do this with HMRC online, or with the relevant paper forms which you can download from this page of the HMRC website.
Sole traders are not liable to pay corporation tax. The self-employed pay income tax via the self assessment process. For more details, read our article on how to set up as a sole trader.
Corporation tax self assessment
Each year, your company is required to complete a corporation tax return (Form CT600). All corporation tax returns must now be filed with HMRC online.
Although your accountant will prepare and submit the CT600 and supporting documents, you must ensure that the information is correct.
Each 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.
Most businesses have a 12 month accounting period, although it is possible to set a shorter period. Your accountant can also apply to change your year end date so that it ties in with other statutory deadlines.
What are the corporation tax rates?
There are currently two different rates of UK corporation tax; the ‘small profits rate’ and the ‘main rate’. The different rates are applied according to the level of profits made by a company.
In the 2014/15 tax year, profits of up to £300,000, will be charged at the ‘small profits rate’ of 20%.
The main rate of corporation tax for the 2014/15 tax year is 21%. From April 2015, the main rate of corporation tax will be cut to 20%, aligning it with the small profits rate. The main rate of corporation tax is charged on profits of £1.5 million and above.
Companies that make a profit between £300,000 and £1.5 million receive marginal relief. This is, in essence, a sliding scale of corporation tax which smooths the increase from the small profits rate to the main rate.
As the small profits rate and main rate of corporation tax are aligned in April 2015, there will be no need for marginal relief calculations for tax years beginning after this date.
Keeping tax records
By law, you must keep all company records for at least 6 years, and it is probably sensible to maintain your records for longer if you can afford the space! Records include all receipts, workings, invoices and tax-related paperwork.
HMRC says it is acceptable to keep records in a legible alternative such as an optical imaging system, where documents are scanned into a computer.
Deadlines and penalties
Your accountant can submit your CT600 return any time between the date of your company year end your statutory filing date. This is typically the latest of 12 months after the end of your year end, or 3 months after you get a notice to deliver a return.
If you submit your corporation tax return late, or the contents are inaccurate, you – and not your accountant – will be charged a penalty.
If your company is liable to pay any corporation tax, you must settle the balance by 9 months and 1 day after your normal due date.
For example, if your year end was 31st December, then your payment will be due on 1st October in the following year.
You must pay the corporation tax liability to HMRC electronically.