Limited companies are required to pay 19% corporation tax on the profits they make. Overseas companies pay corporation tax only on profit generated from their UK activities. This tax applies to income received from sales, investments, and chargeable gains from the sale of assets.
Since 1st April 2017, corporation tax is charged at the single rate of 19%. Companies who generated profit prior to 1st April 2017 were charged 20% on profits.
If your company is active, you must register with HMRC for corporation tax no later than 3 months after starting any kind of business activity. You will be required to keep accounting records of all income and expenditure to work out how much corporation tax your company owes and prepare Tax Returns for HMRC.
If your business is dormant (inactive), you must contact your local corporation tax office as soon as possible to report this dormant trading status.
- Does my company have to pay corporation tax?
- How and when to register a company for corporation tax
- Do I have to file a Company Tax Return?
- What is an accounting period for corporation tax?
- Do dormant companies have to pay corporation tax and file Company Tax Returns?
- How and when to file Company Tax Returns
- How and when to pay corporation tax
- Corporation tax late filing penalties
Does my company have to pay corporation tax?
If it is carrying on any kind of business activity or receiving any form of income, it is liable for corporation tax on all taxable profits. Business activities include:
- Buying and selling goods or services.
- Leasing or buying property.
- Selling assets.
- Managing investments and receiving dividend payments.
- Paying dividends.
- Earning interest.
- Paying employees, including directors.
- Paying bank charges and fees.
- Paying legal or accountancy fees.
- Receiving income from any other source.
If your company is involved in any such activities, it must be registered with HMRC as ‘active’ for corporation tax within 3 months of any business activity taking place. At this time, you will be required to provide HMRC with certain information about your company, which will be used to determine it’s deadlines for paying corporation tax and filing Company Tax Returns. The required information is outlined in the next section.
How and when to register a company for corporation tax
You must register your company online with HMRC no later than 3 months after starting any kind of business activity. To register it as active you must sign up for HMRC’s online services and provide the following details:
- Company name.
- Company registration number (CRN) – you can find this on your certificate of incorporation.
- Unique Taxpayer Reference (UTR) – HMRC will send this to your registered office address shortly after company formation.
- Start date of trading activity – this will determine your company’s accounting period for corporation tax, which is normally a 12-month period that correlates with the financial year in your annual accounts.
- Main trading address where the majority of business activities are carried out.
- Principal business activities carried out – a Standard Industrial Classification (SIC) code must be used to identify these activities.
- Accounting reference date (ARD) – this is the date the annual accounts are made-up to, which usually falls on the anniversary of the last day of the month of company formation.
Do I have to file a Company Tax Return?
If your company is active for all or part of its corporation tax accounting period, you must prepare a Company Tax Return for HMRC and deliver it no later than 12 months after the end of the accounting period, regardless of whether it makes any taxable profit in that time.
The required documents include form CT600, full annual accounts, tax computations and/or calculations, and any supplementary pages.
Your company’s accounting period will begin on the day it starts trading and thus becomes active for corporation tax, which may or may not be the day it is incorporated at Companies House. Each accounting period will run for a maximum period of 12 months, ending on the accounting reference date (ARD) of your annual accounts.
If your company has been dormant from the date of incorporation or for the entire duration of its most recent corporation tax accounting period, you do not have to deliver a Company Tax Return.
What is an accounting period for corporation tax?
An accounting period begins on the date a company starts trading. For most, this is the date of company formation, unless it is dormant for a period of time after incorporation. An accounting period will end on the accounting reference date (ARD), which is the end of a company’s financial year and the date its annual accounts must be made up to. The ARD should fall on the anniversary of the last day of the month in which it was incorporated with Companies House.
Corporation tax accounting periods will usually be 12 months long and correspond with the financial year in the annual accounts. Accounting periods can be shorter than 12 months but they cannot be longer than 12 months.
In the first year of trading, the financial year may be longer than 12 months if it starts trading as soon as it is incorporated. In such instances, a company will have two accounting periods for its first year and it will be required to prepare two Company Tax Returns (one for the first 12 months in the annual accounts, and a second for the additional period in the accounts).
You will be required to pay any tax liabilities arising from business activities carried out during each accounting period. You must record all financial actives and transactions in your company’s accounting records, which you will use to prepare a Company Tax Return and work out how much tax it has to pay.
A company is formed on 1st May 2016 and begins trading immediately:
- The financial year starts on 1st May 2016 and ends on 31st May 2017 (ARD). The first annual accounts will cover a 13-month period.
- The company will, therefore, have two accounting periods for corporation tax and be required to file two Company Tax Returns. One tax return will cover a 12-month period from 1st May 2016 to 30th April 2017. The second tax return will cover the additional month from 1st – 31st May 2017.
- Thereafter, its accounting period should align with the financial year in the annual accounts, which will run from 1st June 2017 to the ARD (31st May 2018). The company will then file just one Tax Return for the 12-month period in the annual accounts.
Do dormant companies have to pay corporation tax and file Tax Returns?
No, they do not have to pay any corporation tax, provided they have been dormant from the date of incorporation or for the entire duration of their most recent accounting period. If a dormant company receives or spends any money, or becomes involved in any kind of business activity, it will cease to be dormant.
Likewise, dormant companies do not have to file company tax returns unless they are active for corporation tax purposes for part of an accounting period. If the company has not traded then it can write to HMRC to advise that the company was dormant and will not need to file any documentation. HMRC will write back and confirm when they next expect to receive Corporation Tax information. In such instances, HMRC will send a ‘Notice to deliver a Company Tax Return’ to the registered office. This must be completed for the period of activity prior to the company becoming dormant.
How and when to file Company Tax Returns
Tax Returns must be delivered to HMRC online within 12 months of the end of each accounting period, even if your active company has no tax to pay. You can file tax returns using accounting software or HMRC’s online corporation tax service. To use HMRC’s online services, you will need a Government Gateway user ID and password – you can get this by registering for an online account. To file your tax return, you must:
- Sign into your online HMRC account.
- Upload the set of annual accounts that matches the accounting period in the tax return.
- Include corporation tax calculations and supporting documentation to show how you reached the figures in the tax return from the figures in the accounts.
- Include a completed Company Tax Return form CT600.
The person submitting the return (usually a director or an appointed accountant) must include a declaration that it is correct and complete to the best of their knowledge.
How and when to pay corporation tax
Corporation tax must be paid electronically to HMRC before the corresponding tax return is due. The deadline for paying corporation tax is 9 months and 1 day after the end of each accounting period.
Corporation tax late filing penalties
Directors are legally responsible for ensuring the company maintains all statutory filing obligations for HMRC. Failure to meet these requirements and adhere to the imposed deadlines will normally result in a penalty. In severe cases, directors can be personally fined or prosecuted and a company may face compulsory closure if the situation remains unresolved.
Late filing of Company Tax Return
Failure to deliver a Tax Return and full accounts by the statutory filing deadline will result in a flat-rate penalty of £100 being imposed. A further penalty of £100 will be charged if the return is more than 3 months late. If a company’s tax return is filed late for 3 or more consecutive accounting periods, the flat-rate penalty will rise to £500. An additional penalty of £500 will be applied if the return is then filed more than 3 months late.
Tax Returns filed between 18-24 months late will incur a fine of 10% of the unpaid corporation tax liability. Returns that are outstanding for more than 24 months will face an additional 10% charge on the unpaid Corporation Tax liability.
Late payment of corporation tax
Penalties for the late payment of corporation tax are determined by the amount of outstanding tax – this is referred to as the ‘potential lost revenue’ or ‘PLR’, which varies from 30% to 100% of the unpaid tax liability. However, HMRC will take into consideration any ‘reasonable excuse’ a company may have.