Corporation tax is a certain amount of money deducted by the government from the net profits of limited companies and organisations such as clubs, societies, associations, co-operatives, charities and other unincorporated bodies.
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Corporation tax was introduced under Labour's Finance Act in 1965. Before this date, UK corporations paid the same taxes as individuals. The change in legislation means that companies are now charged a standard rate of tax on any profits made.
Corporation Tax must be paid to HM Revenue and Customs at the end of each Corporate Tax accounting period. The HM Revenue and Customs is a non-ministerial department of the government that deals with tax collection and state support.
The Corporation Tax period is separate from other HM Revenue and Customs tax periods such as the VAT accounting period. It is also separate from other government agencies, such as Companies House accounting periods.
The Corporation tax period is usually 12 months long and coincides with the 12 month financial year. The financial year begins and ends with the dates covered by the annual report and accounts submitted to Companies House - sometimes known as statutory accounts or audited accounts.
Due to the complexity and importance of Corporation Tax, many companies and organisations prefer to hire an accountant to handle all Corporation Tax issues. There is more information about how an accountant can help with Corporation Tax at the end of this page.
What are 'taxable profits' for Corporation Tax?
Profit is the money left over in a company after the costs of production, employee costs, administrative costs, depreciation, interest and taxes have been paid. The profit belongs entirely to a company's equity shareholders (individuals who have invested money into the company). A certain proportion of a company's profit is usually paid in dividends to the shareholders and a certain proportion is usually held back by the company as retained earnings, useful for business expansion projects, future investment in research and development, paying off debt and investing in plant and equipment assets
'Taxable profits' for corporation tax refers to company profits that are liable for taxation. Taxable profits can include:
- Any profits gained from taxable income e.g. trading profits (profits excluding certain items - such as one off charges- in order to get a fairer overview of a company's finances).
- Capital gains - any profit made from investments (stock, bonds, property) that exceeds the original purchase price.
How to calculate Corporation Tax
To calculate what percentage of your company's profits are taxable, you begin with your company's pre-tax profit figure. This is essentially all of the profit made by the company across the financial year. You then take the following 4 steps:
1. Add any depreciation charges to your overall profit. Depreciation charge is the cost of assets that have decreased in value over time.
2. Deduct your capital allowances - capital allowances are designed to counteract the effect of depreciation by offering tax relief for the reduction in value of assets.
3. Add any other income or chargeable gains. Chargeable gain is capital gain liable for taxation - or put simply, any taxable profits from investments worth more than their purchase price.
4. Deduct any other relevant deductions, allowances, relief or losses.
After taking these four steps, you then:
1. Apply the tax rates relevant to your company's income boundary.
2. Deduct any relevant tax credits and Income Tax your bank deducted before it paid you interest.
3. Deduct any Corporation Tax you may have paid earlier in order to calculate the final amount of Corporation Tax you are required to pay. This calculation can also indicate how much Corporation Tax you are entitled to claim back as overpayment. Overpayment is the term used to describe the act of paying more than is necessary.
Corporation Tax deadlines
HMRC refer to the corporation tax deadline as the 'normal date due'. The official deadline for Corporation Tax varies from company to company depending on the amount of taxable profit said company makes. Unlike other tax obligations, such as Income Tax or VAT, the filing date and the paying deadlines do not fall on the same day.
In addition, if a deadline is missed, companies may face a penalty fee and will be charged interest on any money they owe.
For up-to-date information on deadlines for paying corporation tax please see: HM Revenue & Customs: Deadlines and requirements for Corporation Tax.
How can an accountant help with Corporation Tax?
Dealing with Corporation Tax alone can be a difficult and complex job from the offset. HMRC is strict and inflexible when it comes to deadlines. The government expects you to fill out forms correctly, file and pay your tax on time and avoid making any mathematical mistakes. You will need organisaton skills, good mathematical ability, patience and plenty of time to handle your own Corporation Tax affairs - or else face paying expensive fees.
Alternatively, you could appoint an accountant to handle all of your Corporation Tax obligations according to the recognised accounting standards. HMRC refers to accountants who deal with Corporation Tax as 'Corporation Tax agents'. Accountants acting as Corporation Tax agents stand as middlemen, working on behalf of companies to communicate all necessary tax matters to HMRC. An accountant will be able to:
- Inform HMRC that your company or organisation is liable for Corporation Tax.
- File your Company Tax return and any supporting documents correctly and on time.
- Deal with all correspondence between HMRC and your company on any other Corporation Tax matters.
It is important to note that although an accountant will deal with these matters, your company is still legally responsible for the completion of all tax related tasks. It is therefore important to take your time choosing an accountant. Visit our FAQ page for more advice about choosing an accountant to suit your company's needs.
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