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Corporation Tax

A tax on the profits of companies and other incorporated entities operating in the UK.

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Comprehensive Guide to Corporation Tax in the United Kingdom

Corporation Tax is a key aspect of the UK’s tax system, levied on the profits of companies and certain other organisations. This guide provides a detailed overview of Corporation Tax in the UK, including regulations, rates, procedures, and important considerations for businesses operating in the country.

1. What is Corporation Tax?

Corporation Tax is a tax on the profits made by companies and other qualifying organisations in the UK. It applies to:

  • Limited companies
  • Foreign companies with a UK branch or office
  • Clubs, societies, associations, and other unincorporated bodies

Corporation Tax is calculated on taxable profits, which include:

  • Trading profits (from business activities)
  • Investment income (e.g., dividends, interest)
  • Capital gains (profits from selling assets like property or shares)

Unlike personal income tax, there is no tax-free allowance for Corporation Tax. Companies must pay tax on all taxable profits.

2. Corporation Tax Rates

Current Rates (as of April 2023):

The Corporation Tax rate depends on the level of a company’s taxable profits:

  • Main Rate (25%): For companies with taxable profits over £250,000.
  • Small Profits Rate (19%): For companies with taxable profits of £50,000 or less.
  • Marginal Relief: For companies with profits between £50,001 and £250,000, a sliding scale applies, effectively creating a tapered rate between 19% and 25%.

Key Points:

  • The thresholds for the Small Profits Rate and Marginal Relief are reduced proportionally if the company has associated companies (e.g., subsidiaries) or if the accounting period is shorter than 12 months.
  • Companies with profits over £250,000 pay the full 25% rate, regardless of the number of associated companies.

3. Who Needs to Pay Corporation Tax?

Corporation Tax applies to:

  • UK-resident companies on their worldwide profits.
  • Non-UK resident companies on profits from their UK activities (e.g., a UK branch or permanent establishment).

A company is considered UK-resident if it is incorporated in the UK or if its central management and control are exercised in the UK.

4. Registering for Corporation Tax

When to Register:

  • Companies must register for Corporation Tax with HM Revenue & Customs (HMRC) within 3 months of starting business activities (e.g., buying, selling, advertising, or employing staff).

How to Register:

  1. Incorporate the Company: When registering a company with Companies House, HMRC is automatically notified, and the company is registered for Corporation Tax.
  2. Online Registration: If the company is not automatically registered, you can register online via the HMRC website.

You will need:

  • The company’s Unique Taxpayer Reference (UTR), sent by HMRC after incorporation.
  • Details of the company’s business activities, accounting period, and contact information.

5. Filing and Paying Corporation Tax

Accounting Period:

  • A company’s Corporation Tax accounting period is usually the same as its financial year (up to 12 months).
  • If the financial year exceeds 12 months, the company must file two Corporation Tax returns (one for the first 12 months and another for the remaining period).

Filing a Corporation Tax Return (CT600):

  • Companies must file a Corporation Tax return (form CT600) online via HMRC’s website.
  • The return must include:
    • Details of taxable profits.
    • Adjustments for tax purposes (e.g., disallowed expenses).
    • Any reliefs or allowances claimed.

Deadlines:

  • Filing Deadline: 12 months after the end of the accounting period.
  • Payment Deadline: 9 months and 1 day after the end of the accounting period.

For example:

  • If the accounting period ends on 31 March 2024, the Corporation Tax payment is due by 1 January 2025, and the return must be filed by 31 March 2025.

How to Pay:

Corporation Tax can be paid via:

  • Direct Debit
  • Online banking
  • Debit/credit card
  • BACS/CHAPS transfer

6. Tax Reliefs and Allowances

The UK offers several reliefs and allowances to reduce Corporation Tax liability:

a) Annual Investment Allowance (AIA):

  • Companies can claim 100% tax relief on qualifying capital expenditure (e.g., machinery, equipment) up to £1 million per year.

b) Research and Development (R&D) Tax Relief:

  • Small and Medium-Sized Enterprises (SMEs): Can claim up to 186% of qualifying R&D costs as a deduction.
  • Large Companies: Can claim under the Research and Development Expenditure Credit (RDEC) scheme, which provides a taxable credit worth 20% of qualifying R&D expenditure.

c) Patent Box:

  • Companies can apply a reduced Corporation Tax rate of 10% on profits derived from patented inventions.

d) Loss Relief:

  • Companies can carry forward trading losses to offset future profits or carry them back to offset profits from the previous year.

e) Capital Allowances:

  • Companies can claim tax relief on the depreciation of certain assets, such as vehicles, machinery, and buildings.

7. Penalties for Non-Compliance

Failure to comply with Corporation Tax obligations can result in penalties:

  • Late Filing of Tax Return:
    • 1 day late: £100 penalty.
    • 3 months late: Additional £100 penalty.
    • 6 months late: 10% of unpaid tax.
    • 12 months late: Further 10% of unpaid tax.
  • Late Payment of Tax: Interest is charged on overdue payments.

Deliberate underreporting or evasion can lead to significant fines and legal action.

8. Country-Specific Considerations

a) Double Taxation Treaties:

The UK has an extensive network of double taxation treaties with other countries, ensuring that companies are not taxed twice on the same income. Companies operating internationally should review these treaties to determine their tax obligations.

b) Brexit Implications:

  • Post-Brexit, UK companies trading with the EU may face additional tax and customs considerations. For example, VAT rules and cross-border tax arrangements have changed.
  • Companies should ensure compliance with both UK and EU tax regulations.

c) Making Tax Digital (MTD):

The UK government is rolling out the Making Tax Digital initiative, requiring businesses to maintain digital records and submit tax returns using compatible software. While MTD for Corporation Tax is not yet mandatory, businesses should prepare for its future implementation.

9. Practical Tips for Businesses

  • Hire an Accountant: The UK tax system can be complex, and professional advice can help ensure compliance and optimise tax efficiency.
  • Use HMRC’s Online Services: Register for HMRC’s online services to manage Corporation Tax, file returns, and make payments.
  • Keep Accurate Records: Maintain detailed records of income, expenses, and assets to support your tax return and claim reliefs.
  • Plan for Tax Payments: Set aside funds throughout the year to cover Corporation Tax liabilities and avoid cash flow issues.

10. Useful Resources

By understanding the UK’s Corporation Tax system and following the procedures outlined above, businesses can ensure compliance and take advantage of available reliefs and allowances. If in doubt, consult a tax professional or contact HMRC for further assistance.