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What Is Corporation Tax in the UK, and Who Pays It?

Corporation tax is a type of tax that must be paid by UK-based businesses on their annual profits (just as workers have to pay income tax ). Since April 2016, the rate of taxation has been fixed at 19%. Before this, the rate of corporation tax paid was determined by the profit amounts that a company had made. Companies — unlike employees, sole traders and the self-employed — do not receive a personal allowance threshold. All of their profits are taxed . However, companies can claim back for more expenses than the self-employed, helping to reduce their overall corporation tax bill.

All limited companies in the UK have to pay corporation tax. This also includes any clubs and societies with membership fees, trade associations and any groups of people with their own businesses. Those that are self-employed as sole traders do not have to pay corporation tax and, instead, must pay income tax on their profits via self-assessment. In a limited company, it is the company director's responsibility to ensure that the right amount of corporation tax is paid by the company and that tax returns are submitted to HMRC on time. Company tax returns must be completed once a year using the form CT600.

Corporate tax returns must be submitted at some point between when your statutory filing date is due and when your company's financial year ends. You may, in some instances, be required to pay corporation tax before your return date is due. If you have a company with a turnover of £1.5 million or more, corporation tax must be paid within nine months and one day following the end of your annual accounting term. Some corporate tax can be paid in instalments depending on the profit made and the circumstances.

Registering with HMRC

Once you have set up your Limited Company, you must inform HMRC and register your business within three months of trading. There are various statuses that HMRC use to determine whether or not a business is officially trading, including “active”, “non-trading”, “trading” and “dormant”. You must check the status of your business and ensure that the correct term is used to describe your business activity. During the registration process with HMRC, you will be required to provide several details including the start-up date of the business (when it was founded), company name, company registration number, the address/location of any business premises, the type of business you are undertaking, the date your annual accounts are made up to and a home address for the company director/s.

Filing Your Corporation Tax Return

HMRC doesn't calculate tax bills for companies in the same way that it does with self-employed individuals. A limited company has to calculate its own tax. The calculations must be sent to Companies House and HMRC. Your CT600 form must include several details including your company registration number and name, details of the registered office, tax reference number information and details of all profits made — as well as details of any allowances and tax reliefs the business is entitled to.

Even if your company doesn't owe any corporation tax, you will still need to submit a tax return to HMRC. If your company has dissolved and is no longer trading, it should have the “dormant” status applied by HMRC. HMRC will then inform you that you no longer have to pay corporation tax.

Late Payments and Penalties

You must be organised in the day to day running of your company's finances. Missing important dates regarding corporation tax and your tax return can have serious consequences. HMRC enforces financial penalties on companies that do not pay their corporation tax on time. Even if you file your return a day late, you will have to pay a fine of £100. If you are six months late with your payments, HMRC adds a 10% penalty onto the amount already owed. If you are 12 months late, this goes up another 10%. You will also be charged interest on the amount owed if your tax bill is paid late. HMRC has the power to recover funds using enforcement, including collecting money owed through directors pensions and savings, taking funds from bank accounts, making your company bankrupt, taking you to court or closing down your company.

If your company is having difficulties paying its corporation tax bill, HMRC suggests getting in touch as soon as possible so that you can set up a payment plan. If your tax return is inaccurate and HMRC feels that errors have been made — either deliberately or mistakenly — you could be fined. If the mistake was as a result of carelessness, a charge of up to 3% on top of the original tax bill could be incurred. If the mistake was deliberate and you tried to conceal it, you may be charged up to the full amount of your tax bill again in fines. Being honest at all times and ensuring that your corporation tax is calculated accurately is very important.

Legally Reducing Your Corporation Tax Bill

There are various ways that you can legally reduce your bill for corporation tax – something that many companies take advantage of. Companies can deduct expenses in the same way as a self-employed individual. These costs get taken off of your tax bill. The expenses have to be for legitimate costs incurred by the business, such as stationery, company travel, etc. If you own the company, paying yourself a wage can also count as a business expense, so paying yourself a wage is a good way to reduce your corporation tax bill. Some limited company owners pay themselves through dividends, as these are charged at a lower rate of tax than income tax. However, dividends are not eligible for a claim as a business expense. Another great way to reduce your bill is to make an early tax payment to HMRC.

We can provide professional advice on all-things corporation tax, whenever you need it. Try our all-inclusive core accountancy service today.

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