When you set up 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 corporation tax return (form CT600) is filed with HMRC 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 annual self assessment tax return. For more details on the self-employment route, read our guides on How to set up as a sole trader and Tax for the self-employed
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 current Corporation Tax rates?
Historically, there were two different rates of UK corporation tax; the ‘small profits rate’ and the ‘main rate’. Companies making profits of up to £300,000, were charged at the ‘small profits rate’ which was typically a few percentage points lower than the ‘main rate’ of corporation tax.
Companies with profits of £1.5 million and above paid the main rate of corporation tax, with ‘marginal relief’ being applied to profits between these two figures.
However, this was simplified in April 2015, when the ‘small profits rate’ and ‘main rate’ of corporation tax were aligned, giving the UK a single rate of corporation tax. This simplification removes the need for marginal relief calculations for tax years beginning after April 2015.
The current rate for UK Corporation Tax is 20%. In the 2016 Budget, the Government stated its intention to cut the UK’s rate of Corporation Tax to 17% by 2020.
In addition to his Budget 2016 statement, in July 2016 Chancellor George Osborne announced that he would reduce UK corporation tax to “below 15%” as part of his plans to build a “super-competitive economy” with low tax rates.
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 has made a taxable profit of up to £1.5 million, the corporation tax must be paid by 9 months and 1 day after the end of your accounting year.
For example, if your accounting year end is 31st December, then your corporation tax payment will be due by 1st October of the following year.
You must pay your company’s corporation tax liability to HMRC electronically. If you are late paying, you will be charged interest.
More on tax and limited companies
You can find lots more help and guidance on tax matters in these other ByteStart guides;
- Corporation Tax – How to reduce your bill
- ByteStart’s Guide to the main business taxes
- Capital Allowances – A review of the various schemes available for businesses
- Using Research and Development tax relief to reduce your corporation tax bill
- How setting up a salary sacrifice scheme can reward staff and cut your tax bill
- ByteStart’s Guide to National Insurance Contributions (NICs) for small businesses
Running a Limited Company
- Responsibilities and duties of a limited company director
- Shareholders’ Agreements – Why you should get one if you are setting up a company with others
- 10 advantages of running your business as a limited company over being a sole trader
- How to set up a limited company
- Rules you must follow when naming your limited company
- Can directors be personally liable for a company’s debts?