Private limited companies are required to pay Corporation Tax on all forms of taxable income. To do so, a company must be registered with HMRC as ‘active’ for Corporation Tax purposes. This must be done no later than 3 months after carrying on any type of business activity, which includes:
- Buying and selling goods and services
- Renting or buying property or land
- Paying directors and employees
- Managing investments and receiving dividend income
- Issuing dividends to shareholders
- Paying company formation and accountancy fees through the business bank account
- Receiving any other form or income, including bank account interest
Corporation Tax accounting period
A limited company’s accounting period for Corporation Tax begins on the day it becomes active for Corporation Tax. It ends on the accounting reference date (ARD). Accounting periods are normally 12 months long and they usually correspond with the financial year in the company’s annual accounts. An accounting period can be shorter than 12 months, but it may not exceed 12 months.
Corporation Tax liability is determined by the amount in profits generated in each accounting period. A Company Tax Return must be prepared and filed each year to report this income to HMRC and work out how much tax is owed.
In the first year of trading, many companies have to prepare two Company Tax Returns because their annual accounts cover more than 12 months. In such instances, one tax return should be prepared for the first 12 months and a second return should be prepared for the additional period in the accounts.
These returns must be filed together, along with one set of full annual accounts. Thereafter, a company’s accounting periods and financial years should align, unless deliberate changes are made to either of these dates.
How to register a company for Corporation Tax
Companies House will inform HMRC when your new company is registered, so there is no need to contact them yourself. HMRC will assume your company is active, unless you notify them to the contrary by registering your company as ‘dormant’ (inactive) for Corporation Tax purposes.
Within a few weeks of incorporation, you will receive a letter from HMRC. It will be delivered to your registered office address. This letter will contain your company’s Unique Taxpayer Reference (UTR). It will also include details of your accounting and tax obligations, an overview of the information you have to send to HMRC, and guidance on how to set up an online account for filing tax returns and paying tax.
If your company is active, you will be required to provide the following information to HMRC:
- Date you started trading as a limited company
- Company name and registration number
- Main address where business activities take place
- Nature of your company’s main business activities
- Date you will make your annual accounts up to
You can register with HMRC and file this information online. To do so, you will need to create a Government Gateway account and provide your company’s Unique Taxpayer Reference.
When this information has been submitted, HMRC will work out your Corporation Tax accounting period and issue a letter confirming the deadlines for paying Corporation Tax and filing Company Tax Returns.
Company Tax Returns
At the end of each financial year, you must prepare a Company Tax Return and deliver it to HMRC. This should be done online. The return will show how much Corporation Tax your company owes (if any) on the profits it made during its most recent accounting period. You will pay corporation tax on:
- Income from sales
- Income from renting out property or land
- Interest made on money held in deposit
- Income from selling company assets (capital gains)
- Any other type of business-related income
All of these taxable profits should be added together. Any relevant deductions should be taken off before you calculate the corporation tax liability. Your company will be subject to strict deadlines and requirements for corporation tax and you must:
- Pay Corporation Tax on taxable profits no later than 9 months and 1 day after the end of your accounting period. This is usually the end of your financial year.
- File a tax return no later than 12 months after the end of your Corporation Tax accounting period.
The amount of Corporation tax you owe will depend on how much profit you make. This tax is currently set at a flat rate of 19% (2021-22)
How and when to submit a Company Tax Return
You must prepare a Company Tax Return and statutory accounts for HMRC no later than 12 months after the end of each corporation tax accounting period, regardless of whether your company makes any profit during that time.
Your tax return should be filed online on Form CT600 with full statutory accounts and computations or calculations that clearly illustrate how the final figures were reached. If you are filing two returns to cover a period in excess of 12 months, you must file two CT600 forms but only one set of accounts.
Paying Corporation Tax
Corporation Tax should be paid electronically no later than 9 months and 1 day after the end of each accounting period. Please note: your tax must be paid before your tax return is filed.
You will pay 19% Corporation Tax on all forms of taxable income generated from any type of income (from sales, renting of property, sale of company assets) as well from bank interest received from money held on deposit.
What is marginal relief for Corporation Tax?
Marginal relief only applies to companies that generated income prior to 1st April 2015. Before this date, there were two rates of Corporation Tax, the small profits rate of 20% on profits up to £300,000, and the main rate of 21% on profits above £1.5m.
Companies can claim marginal relief on taxable company profits between £300,000 and £1.5 million. From 1st April 2015 until 31st March 2017, the Corporation Tax rate was 20%. Since 1st April 2017, the Corporation Tax rate has been set at 19%.
Corporation Tax on overseas profits
All limited companies registered in the UK are required to pay a flat rate of 19% Corporation Tax on all taxable income. This means they have to pay tax on overseas profits and chargeable gains. Overseas sales and foreign branches of a UK-registered business are simply an extension of the UK business.
Any trading losses that arise from non-UK sales or foreign branches can be relieved against UK profits.
Double taxation relief
Double taxation relief is applied when a UK business is taxed overseas on income which is earned through an overseas branch. This enables companies to offset overseas tax against what they pay to HMRC in the UK. Relief is restricted to the amount of UK tax the business pays on profits generated from overseas branches.
Optional exemption from tax on overseas profits
UK companies can elect for exemption from UK corporation tax on the profits they make from their overseas branches. The exemption must begin before the start of the company’s accounting period. This decision requires careful consideration. Once election is made, it is permanent and you will not be able to relieve overseas trading losses against UK profits.
Controlled Foreign Company rules
The UK government recently made changes to the Controlled Foreign Company (CFC) legislation that deals with foreign income. The CFC rules were introduced as an anti-avoidance measure to prevent UK-resident companies from artificially diverting their profits to countries with lower tax rates.
Only profits that have been artificially diverted from the UK are taxed, rather than catching profits diverted from any country. This enables UK-based businesses to be more competitive in the global economy and create more jobs and investment.
Additional business taxes
You must register for register for VAT if your annual taxable turnover exceeds, or you expect it to exceed, the VAT threshold. It is currently set at £85,000 (2021/2022 tax year). Voluntary registration is possible if your turnover is less than the threshold. There are a number of benefits to voluntary VAT registration.
If you employ any staff, you must register as an employer and operate PAYE. You will deduct Income Tax and National Insurance Contributions (NICs) from your employees’ wages each pay period. You may also have to pay employer’s Class 1 NICs if your employees earn above a certain amount.
The accounts and tax obligations of a limited company can be a little tricky. You must follow Generally Accepted Accounting Principles (GAAP), so it would be advisable to seek advice or assistance from an accountant or professional tax advisor if you have no previous experience with such matters.
Stamp Duty tax
Stamp Duty is a type of land tax that is payable when you buy property in the UK. In relation to limited companies in the UK, Stamp Duty is also a kind of tax that is sometimes payable upon the transfer of shares in a company limited by shares. If the transferee (the new shareholder) pays more than £1000 for the shares, 0.5% of the transaction value must be paid to HMRC in Stamp Duty tax.
This tax is not applicable if the shares are transferred from one person to another for free, regardless of their value. Capital gains tax may also apply if a profit is made from the sale of shares. This is payable by the transferor (the original shareholder who sells the shares).
Dormant company requirements
If your company is dormant (not trading), it does not have to be registered for corporation tax but you must contact your corporation tax office to tell HMRC that the company is dormant. You will find their contact details on any official mail received from HMRC. Your dormant company will not have to pay tax or file tax returns until it starts trading. However, you must still complete an annual Confirmation Statement (formerly called an ‘annual return’) and dormant company accounts for Companies House each year.
Tax compliance checks for limited companies
A tax compliance check is the term for any kind of check carried out by HMRC to ensure individuals and businesses are paying the correct amount of tax, and adhering to their tax obligations and other statutory requirements. A check may be carried out for many reasons, such as:
- Ensuring proper tax and accounting records are being kept.
- To check that tax returns have been filed.
- To confirm the accuracy of filed returns and accounts.
HMRC will contact you or your accountant if they wish to carry out a compliance check and they will tell you what it is they wish to review. When the check has been completed, HMRC will write to you to tell you the results. You may be asked to pay additional tax if it turns out that you owe more, or you may be repaid tax and interest if you have paid too much.
Penalties can be imposed if HMRC believes you have deliberately underpaid or over-claimed tax.
Common causes of tax penalties
Most tax penalties are caused by late filing of tax returns (Self Assessment, Company Tax Returns, and VAT returns) and late payment or underpayment of any tax owed, including Income Tax, National Insurance Contributions, Employers’ National Insurance, Corporation Tax, and VAT.
Other common causes include:
- Failing to register a new business (sole trader, limited company, limited liability partnership)
- Deliberate acts of fraud and tax evasion
- Errors in tax returns
- Failing to maintain proper and accurate accounting records
- Failing to file payroll information, or filing it late
Click here to read more about late filing penalties for limited companies.
