Corporation Tax is a tax levied on company profits. The tax was first introduced in 1965 and Corporation Tax Self Assessment (CTSA) was introduced in 1999 following the successful introduction of Income Tax Self Assessment.
CTSA requires companies to work out their own tax bill and account for the self assessed amount of corporate tax.
Who pays Corporation Tax?
Corporation Tax typically applies to profits made by limited companies, members’ clubs and to trade and housing associations. It is NOT payable by partnerships or LLPs. Partners are instead subject to Income Tax on their share of partnership and LLP profits.
Corporation Tax is payable by UK resident companies and by non-resident companies with a permanent establishment in the UK.
Corporation Tax is payable on adjusted profits for each accounting period. The adjusted figure is known as ‘Profits Chargeable To Corporation Tax’ or PCTCT. The calculation of PCTCT includes a significant number of adjustments to the accounting profit.
How is Corporation Tax charged?
Corporation Tax is charged by reference to income or gains arising in an accounting period. An accounting period first begins when a company starts to trade and will end 12 months later or earlier if the company prepares its accounts to an earlier date. Accounting periods cannot exceed 12 months in length and usually mirror the periods for which a company draws up its annual accounts.
How much Corporation Tax is payable?
Corporation Tax is calculated at the rate applicable to a financial year. A ‘financial year’ starts on 1 April and ends on 31 March. The 2016 financial year commenced on 1 April 2016 and is known as FY 2016.
Different rates apply for ring-fenced profits.
The main CT rate dropped to 20% from 1 April 2015. This reduction to 20% resulted in the unification of the main CT rate and the small profits rate.
As previously announced the CT rate from 1 April 2017 will be reduced to 19% and set at this rate for 2018 and 2019. As announced in the 2016 Budget from 1 April 2020 the CT rate will be further reduced to 17%.
A new 8% Bank Corporation Tax supplementary charge came in to effect on 1 January 2016.
A company must notify HMRC if it is liable to pay Corporation Tax. This must be done within 12 months from the end of the relevant accounting period.
Filing a company tax return
HMRC send a notice to file (form CT603) after the end of the company’s accounting period. In most cases a company’s tax return must be submitted within 12 months from the end of the accounting period.
Online Corporation Tax filing is compulsory for company tax returns.. Company tax returns have to be filed using the iXBRL data standard using either HMRC’s own software or third-party commercial software.
There are only two exemptions from online filing:
The statutory filing date to submit a company tax return is usually the later of:
What needs to be filed?
A company tax return must be submitted using software approved by HMRC and in the required format. The submission must include the company’s Self Assessment return alongside details of any trade and other losses such as capital losses.
The following must also be included in the return:
Amending a return
A company has a right to amend its return, including the Self Assessment within 12 months from the statutory filing date. Examples of when a return may be amended include claims for group relief and elections rebasing for capital gains.
HMRC have 9 months from the date a return is filed to correct any obvious errors, omissions or errors of principle. Note that the correction of errors does not involve any judgment by HMRC as to the accuracy of the figures in the return. These types of questions are instead dealt with under the enquiry regime (see below).
In situations where a company amends its return, HMRC have a further 9 months to correct any obvious errors, omissions or errors of principle relating to the amendment.
Penalties for late submission
There are penalties for late submission of company tax returns. There is a standard penalty of £100 for a late submission of the return within 3 months of the due date and a £200 penalty if the return is over 3 months late.
Companies that submit late returns for 3 or more accounting periods in a row are subject to penalties of either £500 or £1,000. The first penalty is for submissions up to three months late and the second if the return is more than 3 months late.
There are also tax based penalties for companies that do not file a return within 18 months of the end of the relevant accounting period and which have not paid the tax due. These penalties can be either 10% or 20% of the unpaid tax depending on the lateness of the filing.
HMRC can enquire into a company’s tax return to check if the return has been prepared correctly or if further information is required.
The main rules for HMRC enquiries are as follows:
HMRC have the power to make an assessment, known as a discovery assessment if they become aware of information suggesting that a Self Assessment return was wrong.
If the return was wrong as a result of fraudulent or negligent conduct, HMRC can make a discovery assessment or determination up to 21 years after the end of the relevant accounting period.
For cases not relating to fraudulent or negligent conduct the time limit is 6 years after the end of the relevant accounting period.
Corporation Tax payments
All Corporation Tax and related payments must be made electronically.
There are special rules for companies with taxable profits over £1.5m, which are covered later in this guide. All other companies have a fixed date for the payment of Corporation Tax which is 9 months and 1 day after the end of the relevant accounting period. Note that a company is required to pay the tax due in advance of the filing deadline for a company tax return.
Interest and penalties can be charged by HMRC for payments received after the due date.
All companies and organisations subject to Corporation Tax must keep appropriate business records. The background records that must be kept include but are not limited to the following details of the company’s:
For tax purposes, the records must be held for at least 6 years from the end of the relevant accounting period. In certain situations such as when a return is submitted late, the records must be held for longer. You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example:
But there are certain records that you must keep in their original form. These include:
Companies are also required to keep:
A company is usually defined as ‘large’ for the purposes of Corporation Tax if it has taxable profits of £1.5m or more.
The main exceptions to this rule are as follows:
Quarterly instalment payments
There are special rules for growing companies and where an accounting period is for less than 12 months.
For accounting periods starting on or after 1 April 2019, very large companies with annual profits of £20m or more will be required to pay CT in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period. Where a company is a member of a group, the £20m threshold will be divided by the number of companies in the group.
Calculating quarterly payments
As a number of the payments are due during the accounting period, a company is required to make an estimate of its current year tax liability by the 7th month of the accounting period.
As the estimated tax liability will rarely be the same as the final liability a company can make top-up payments to the instalments to ensure that the payments are adequate.
Interest and penalties
There are different interest rates for the period up to the normal due date for payment (i.e. 9 months and 1 day after the beginning of the accounting period) and afterwards. This is because the earlier payments are based on estimates.
Penalties can be levied if a company is found to have failed to make instalments or to have made instalments which were insufficient.
Groups of companies
There are special arrangements which allow groups of companies to make instalments on a group-wide rather than company by company basis.
How we can help
We would welcome the opportunity to assist you in completing your company’s or companies’ tax returns or resolving any disagreements you may have with HMRC regarding your company’s tax affairs.