An introduction to Corporation Tax A guide for small businesses
MGCT001 OCT2016 Forum of PrivateBusiness
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An introduction to Corporation Tax A guide for small businesses. Corporation tax is charged on the taxable profits of limited companies, as well as on those of some clubs, societies, associations and co-operatives. This guide provides an introduction to corporation tax for private limited companies. Corporation Tax does not apply to sole traders or partnerships.
What is Corporation Tax? Corporation tax is similar to income tax, but for registered companies. It is charged on the taxable profits of all registered companies that have been incorporated at Companies House. Taxable profit is the amount of profit remaining after the deduction of tax allowable expenses and reliefs. Corporation tax is calculated on various different types of taxable profits and chargeable gains including: • Trading profits - the income from the company’s trading activities after allowable expenses have been deducted. • Capital gains - the chargeable gain or profit made when a company asset such as land or buildings is sold. • Any other income - for example, money made from leasing land or buildings or interest on company savings. Corporation tax is payable on the income and taxable profits made during a specific accounting period, which cannot be more than 12 months long. The accounting period is usually the same as the company’s financial year, which is the period covered by its annual accounts. Accounting periods can sometimes differ from the financial year, for example if accounts cover a period of less than 12 months due to the business being closed down. There is more information about accounting periods at www.gov.uk/corporation-tax-accounting-period. The rate of corporation tax for the financial year starting 1 April 2016 is 20%. The rate of corporation tax is to reduce to 19% from 1 April 2017.
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The corporation tax ‘set up’ process When starting a limited company you must first register (incorporate) it with Companies House. Following incorporation, Companies House will contact HMRC to inform them that the company has been set up. You will then be sent a Unique Taxpayer Reference (UTR) from HMRC within a few days, you will need to provide this everytime you contact HMRC. You will also receive a letter explaining how to set up an online account for company tax returns and corporation tax purposes, and giving the dates for the accounting period. If you do not plan to start trading immediately, you should contact your local corporation tax office to inform HMRC that your company is dormant. However, HMRC must be informed once the company becomes active, and it must be ‘set up’ for corporation tax within three months of the start of the accounting period to avoid penalties.
Within three months of the company becoming active or starting to trade, HMRC must be informed of: • The company’s name and registered number • The main trading address • The date the company started to trade • The main trading activities • The date up to which the annual accounts will be calculated Information can be provided online using the company’s UTR and the details provided will be used by HMRC to work out when the company must pay corporation tax. The initial registration process for an online account takes at least 10 working days to complete as it involves HMRC posting out a 12-digit activation code, which is required when logging on to the online account. A ‘User ID’ (also known as a Government Gateway Account), will also be issued to enable the creation of a password so that information can be reported online to HMRC. You can authorise someone else (agent) to deal with HMRC on your behalf, such as your accountant. To do this they must use HMRCs online authorisation service www.gov.uk/guidance/applying-forclient-authorisation-using-hmrc-online-services or complete form 64-8 https://www.gov.uk/ government/publications/tax-agents-and-advisers-authorising-your-agent-64-8 and send it to HMRC.
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Responsibilities under corporation tax self-assessment Corporation tax is collected under a self-assessment approach known as Corporation Tax Self-Assessment (CTSA). Under CTSA companies do not receive a bill for corporation tax but there are specific things you must do to work out, pay and report your tax: • Register for Corporation Tax when you start doing business or restart a dormant business. Unincorporated associations must write to HMRC. • Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay. • Pay Corporation Tax or report if you have nothing to pay by your deadline - this is usually 9 months and 1 day after the end of your ‘accounting period’. • File your Company Tax Return by your deadline - this is usually 12 months after the end of your accounting period. If no tax is due, HMRC must be informed by the deadline for payment and a company tax return must still be completed. Dormant companies may not have to pay corporation tax or complete company tax returns and HMRC will inform them if this is the case. The tax is payable 9 months and 1 day after your companies accounting year ends, if your profits are £1.5million or less. Profits above £1.5million must be payed in instalments. For more information about the corporation tax process, go to www.gov.uk/corporation-tax.
The rules surrounding corporation tax are complex and this information is intended only as a starting point to understanding the issues involved. It is essential to seek professional advice to ensure that obligations are met and the right amount of tax is paid.
Hints and tips • It is important to be aware of filing and payment deadlines so that documents can be filed and the tax due can be paid on time. • Sufficient time should be allowed to enable an online account to be set up so that information can be filed online with HMRC well within all deadlines. • HMRC will require authority to correspond with an accountant who has been instructed to act as the company’s agent.
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