Guide to Corporation Tax in the UK

From April 2023, the UK government is changing the rates of corporation tax for businesses, including limited companies. You can find out more about the changes in our blog UK Corporation Tax is changing from April 2023.

This blog provides information about the arrangements businesses must make to register for corporation tax, to calculate the tax due and how to notify HMRC about the amount of tax to be paid.

Who pays Corporation Tax?

A business must pay Corporation Tax on any profits if it is a:

• limited company
• foreign company with a UK branch or office
• club, co-operative or other unincorporated association such as a community group or sports club.

There is no threshold for corporation tax. A business, usually a limited company, must pay corporation tax when it makes a profit.

For many years in the UK, the level of Corporation Tax was set at a flat rate of 19%. However, as highlighted in our blog, rates are changing from April 2023, when companies will pay Corporation Tax up to a maximum of 25% on the profits they make.

HMRC does not calculate the amount of Corporation Tax a company must pay. It is the responsibility of the company directors to prepare a Corporation Tax return, notify HMRC of any tax due and to pay such tax by the due date. Most companies engage an accountant or tax advisor to prepare Corporation Tax returns, but the legal responsibility still lies with the company directors to submit the information to HMRC.

When must a business register for Corporation Tax?

A company must register with HMRC when it starts trading. A company can register online with HMRC. Most register with HMRC when the company is set up with Companies House. If a company is dormant and decides to start trading again, the Corporation Tax registration process needs to be completed again.

A company can also register by post, using an agent or using third-party software. Regardless of the way a company is registered, the process must be completed within three months of starting to trade.

What records need to be kept?

The directors of a company have a legal responsibility to keep accounting records. This means information about the company itself, and financial and accounting records must be kept. Most companies engage a finance professional to do this work for them and to calculate tax due. HMRC expects companies to keep the following information at a minimum:

• details about directors, shareholders and company secretaries
• the results of any shareholder votes and resolutions
• promises for the company to repay loans at a specific date in the future (‘debentures’) and who they must be paid back to
• promises the company makes for payments if something goes wrong and it’s the company’s fault (‘indemnities’)
• transactions when someone buys shares in the company
• loans or mortgages secured against the company’s assets.

HMRC carry out regular checks of businesses to ensure they are paying the correct amount of tax. As accountants, you should be prepared to assist your clients in responding to any compliance checks HMRC may perform.

A business must keep records for six years from the end of the last accounting period end they relate to, or longer if:

• they show a transaction that covers more than one of the company’s accounting periods
• the company has bought something that it expects to last more than six years, such as equipment or machinery
• the Company Tax Return is overdue
• HMRC has started a compliance check into a Company Tax Return.

How is a company tax return prepared?

At the end of each accounting period, a company must prepare a ‘Corporation Tax for Company Tax Return’. The return is commonly known as ‘Form CT600’.

Form CT600 is prepared using information about a company (such as company name and registration) and its finances (including its turnover, the trading profit or loss and the amount of tax to be paid).

Taxable profits for Corporation Tax include the money a company makes from:

• trading (‘trading profits’)
• investments
• selling assets for more than they cost (‘chargeable gains’).

If a company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad. If a company isn’t based in the UK, but has an office or branch in the UK, it only pays Corporation Tax on profits from its UK activities.

If a company reports a trading loss, Form CT600 still needs to be completed and submitted to HMRC by the due date even if there is no tax to be paid. The Form is usually prepared by the company’s finance professional and must be reviewed and certified by a company director.

The deadline for submitting Form CT600 to HMRC is usually 12 months after the end of the accounting period the return covers. However, the deadline for actually paying any tax due is shorter, and is usually nine months and one day after the accounting period ends. It’s important company directors monitor the achievement of these deadlines as there are heavy fines and penalties for missing a deadline. In extreme circumstances, a company may be closed down and its assets liquidated if evidence is found the submission of corporation tax information was being deliberately avoided.

Fines and Penalties for missing an HMRC deadline

There are penalties if you do not file your Company Tax Return by the deadline. These are as follows:

If a Corporation Tax return is late three times in a row, the £100 fines are increased to £500 each. Penalties are also imposed if a business doesn’t tell HMRC it owes corporation tax. The penalties are:

• Non-deliberate: 30% of tax owed
• Deliberate but not concealed: 70% of tax owed
• Deliberate and concealed: 100% of tax owed.

How can a Corporation Tax bill be reduced?

Businesses have access to a range of reliefs and allowances which mean the level of corporation tax due can be reduced. For instance, HMRC allows tax relief on property and equipment expenses through the Annual Investment Allowance and companies investing in Research and Development can claim R&D tax credits. There are many tax reliefs and allowances available and accountants are expected to advise clients accordingly.

How Initor Global can help with your corporation tax work

At Initor Global we have accountants and tax specialists who can meet your outsourcing needs. Our experts can prepare your clients annual accounts, company tax returns and calculate any tax due to ensure all deadlines are met.

If you want to find out more about our accountancy and tax services, or arrange a free consultation, please contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.

You can also call us on 0203 519 2121.