What is Corporation Tax?May 18, 2020
Anna’s just off the back of a great year. All of those hours, days, and weeks of hard-work have paid off. She’s now a Company Director.
In her new role as Company Director of a popular furniture retailer, Anna is now responsible for the company’s corporation tax.
While brushing up on her rusty vat and accounting knowledge, Anna discovered that all limited companies are obligated to pay a Corporation Tax rate of 19% for the 2020/21 tax year.
It’s worth noting that as we continue to see the impact of the coronavirus pandemic on limited companie sacross the UK, the government’s tax deferral scheme means businesses will be given tax relief for VAT payments due in the period from 20 March until 30 June 2020 only. This may be extended, but we just don’t know at this moment in time.
In the article, we will uncover exactly what corporation tax is, who has to pay, how to pay it, and how to register with HMRC. We’ll also discuss what corporation tax allowances may be available to you and outline the required deadlines and what consequences await you if you miss these deadlines.
How much Corporation Tax do I have to pay?
Since April 2016, the standardised Corporation tax rate has been 19%. Prior to April 2016, the rate of corporation tax you paid depended on how much profit your company made.
A simple way to calculate your Corporation Tax liability is to multiply your business profits for the tax year by 19%
For example, a business that makes £100,000 in annual profit is liable to pay £19,000 inCorporation Tax to HMRC.
You must pay the Corporation Tax that applies to your company’s accounting period for Corporation Tax. You can use HMRC's online service to verify your company’s accounting period.
Your accounting period can’t be any longer than 12 months and is usually the same as the financial year covered in your businesses annual accounts.
To ensure you’re not paying any more Corporation Tax than you ought to be, it's really important to keep accurate records of all your business expenses and costs. This allows your business to calculate how much Corporation Tax you owe and claim back allowable expenses- which we’ll explain later on in the article.
How to Register for Corporation Tax
As soon as your limited company or unincorporated association is up and running, you must tell HMRC within three months of incorporating your business with Companies House.
If you are restarting a business, you must inform HMRC by reregistering for Corporation Tax.
When you register with HMRC, you’ll need to provide the details of the following:
- The start date of the business (also the start date of the company’s first accounting period.
- The company name and Unique Taxpayer Reference (this is supplied by the Companies House when you incorporate).
- The company’s main address and type of business.
- Name and home address of theCompany Director(s).
- The date you’ll make your annual accounts up to.
Once your company's registration has been approved, you’ll be able to sign in and record your tax within your Company Annual Return. HMRC will also send you notifications of Corporation Tax deadlines to the company’s main address.
How to pay Corporation Tax
Corporation tax bill payment options are flexible. Whichever method you choose, HMRC must receive the payment by the deadline date to avoid a fine.
Corporation Tax is also payable within nine months of the end of your financial year so there are no excuses!
To pay your Corporation Tax, your company must submit acompany tax return form called a CT600.
If, for whatever reason, your payment deadline falls over the weekend or on a bank holiday, your payment must be acknowledged by HMRC on the last working day before.
To ensure there aren’t any misunderstandings down the road, we’ve provided you with an approximate timeline of accepted payment methods:
Same day/next day delivery
- Online and Telephone banking
Three Working Days
- Direct Debit
- Online payment by debit or corporate credit card.
- At your bank or building society
Five Working Days
- Direct debit(if you haven’t set one up before)
What are Corporate Tax Allowances?
As we touched on earlier, your company may be eligible to claim some Corporation Tax allowable expenses which inevitably reduces the amount you'll have to pay tax on and ultimately lower your tax bill.
By keeping a record of your expenses, you can deduct the costs of expenses that have been incurred purely for the purpose of the business. Although, if you or your employees get use from the expense (e.g. entertaining clients/work night out/office dartboard), it must be treated as a benefit.
Examples of allowable expenses include train tickets, hotel accommodation, training, and office equipment.
There are no set rules on exactly what can and can’t be claimed, but the expenses must be ‘wholly and exclusively’ for business use.
National Insurance Contributions also qualify as a business expense, which ensures they’re deducted from the company’s taxable profits.
What are Corporate Capital Allowances?
You may be able to claim capital allowances for the purchase of your business assets.
In contrast to tax allowances, business assets are not allowed to be deducted from your company’s income when calculating your taxable profits.
Business assets cover integral facets of your business operations such as your raw materials, equipment, machinery, and vehicles.
Again, you must record the purchase of your business assets to be able to claim back your capital allowance. If you paid £10,000 for a new piece of equipment but forgot to claim the capital allowance, you could end up paying an unnecessary £1,900 extra in Corporation Tax.
Corporation Tax Deadlines
Submitting your Corporation Tax return on time is the key to staying in HMRC’s good books. Failure to adhere to HMRC deadlines can result in limited companies having to apply for a Company Voluntary Arrangement.
A company must submit their tax return anywhere between the date of the company’s accounting year end and their statutory filing date.
The statutory filing date can either be 12 months after the company’s year end, or three months after you receive a payment notice from HMRC. If the dates are different, you have until the latest date stated to submit your tax return.
When it comes to actually paying your corporation tax bill, things are slightly different. You may be obligated to pay your tax bill before your return is due.
If your company has made an annual taxable profit of anything up to £1.5m, your company is required to pay their corporation tax within nine months and one day after the end of the accounting year.
If your company earns more than £1.5m in taxable profits a year, HMRC requires you to pay your corporation tax in instalments.
Corporation Tax Late Penalties
The responsibility of paying Corporation Tax falls on the shoulders of the company director. Even if your company hires an accountant to deal with your corporation tax payments, the company director will be the one to pay the penalty if anything goes awry!
To ensure the punctuality of filing tax returns and accurate payments, HMRC imposes strict penalties on companies who fail to comply with the regulations.
These penalties can be split into three categories:
- Penalties for late tax returns
- Penalties for lateCorporation Tax payments
- Penalties for inaccurate information
Late Tax returns
HMRC has set out the following penalties for companies who are late submitting their tax returns:
- Miss your tax return deadline by one day - £100 fine.
- Miss your tax return deadline by three months - An additional £100 fine.
- Miss your tax return deadline by six months - HMRC will estimate your total Corporation Tax bill and fine you an extra 10% on top of this amount.
- Miss your deadline by one year - An additional 10% is added to your estimated tax bill.
HMRC also adheres to a three strikes policy - if your tax return is late three times in a row, the £100 fines are increased to £500 each.
If your company has a reasonable excuse for the late submission of their tax returns, then you can appeal by writing to your company’s Corporation Tax office. This can be found on any recent tax forms or letters from HMRC.
Late corporation tax payments
If your company fails to pay their tax bill on time, you’ll be charged late interest payments of 3.25% on the amount of money you owe from the date your tax should have been paid to the date you pay it. You may also incur a penalty or surcharge.
HMRC have strong enforcement powers to recover any money owed, which include:
- Collecting owed payments through your earnings or pension scheme.
- Instructing debt collection agencies to collect the money.
- Taking your personal assets and selling them (England, Wales or Northern Ireland).
- Taking money directly from your bank or building society accounts (England, Wales or Northern Ireland).
- Taking you to court.
- Filing you bankrupt or closing down your business.
If you’re struggling to pay your VAT, HMRC advise that you contact them ASAP, as you may be able to set up a payment plan.
Alternatively, if you've simply forgotten your payment date, you should contact the Self-Assessment helpline on 0300 200 3822.
If your company files a tax return with inaccurate information, you run the risk of being fined by HMRC.
The amount you have to pay depends on whether HMRC believes the information was deliberately incorrect, whether you tried to hide it or whether you admitted your mistake before HMRC finds out.
If HMRC come to the conclusion that:
- You were careless - Your company could be charged anywhere between 0 and 30% of your tax bill if you admit it, or 15-30% if HMRC beats you to it.
- The inaccuracy was deliberate but not concealed - Your company faces a fine anywhere between 20 and 70% of the extra tax due if you admit it, or 35-70% if HMRC beats you to it.
- The inaccuracy was deliberate and concealed - Your company faces a fine anywhere between 30 and 100% of the extra tax due if you admit it, and 50-100% if you don’t.
If you notice any underpaid tax or inaccuracy in your accounts after filing your tax returns, you must send an amended copy to Companies House requesting that the original accounts be replaced by the new, accurate records.
If you want to make any changes to your company tax return, you’ll usually have to do this 12 months before your filing deadline date.
You may also be able to reduce your company's fine by negotiating with HMRC and helping them to work out what extra tax is due and giving them access to check the company's figures.
Get in Touch
If you are in need of advice or support navigating issues of insolvency, please do not hesitate to get in touch with us. At 180 Advisory Solutions, our licensed insolvency practitioners have years of experience helping businesses to navigate financial distress, abiding by HMRC regulations.