What directors need to understand

Corporation tax is the tax that all limited companies, registered and trading in the UK, are required to pay on their profits. It’s the responsibility of company directors to register their business for corporation tax with HMRC within three months of starting to trade.

Once your business has begun turning a profit then it’s required to pay corporation tax, although losses can be carried forward from previous years. If the business is operating at a serious loss then you will not have to pay corporation tax but you will be required to notify HMRC of this fact. 

The amount you’ll be required to pay depends on the annual profits of the company. 

A company’s total profits are calculated on the money made through its usual trading activity, as well as on any investments the company has, any money earned through rental income, and any profits made from the sale of assets. This is why It is so important that the company files accounts and reports profits accurately so the correct amount of tax can be assessed. 

The current rate of corporation tax is 19% and unlike previous rules, regardless of the extent of profits, companies are taxed at a flat rate. The Government was aiming to cut corporation tax to 17%, however due to the pandemic, it will now be raised to 25% for larger firms in 2023 (this is subject to change depending on the new prime minister).

When you pay your corporation tax depends on your company’s accounting period. For many this will be March 31st however if you are unsure you can ask your accountant. The payment is then due nine months and one day following that date and is payable annually. If your company’s profits are below £1.5 million then a one-off payment should be made, however, if your profits exceed £1.5 million typically payment is broken down into four equal instalments. 

It’s a good practice to file and pay any corporation tax as soon as you know how much you owe in case the money is not there later on. 

Failure to meet the deadline for corporation tax can result in a fine being incurred therefore increasing the amount owed. From the moment the payment is late, interest will begin to accrue so it is vital to adhere to payment deadlines. It is also important to communicate with HMRC as the sooner they are aware of your situation the more options will be available to you and the less likely you are to face penalties or court action. 

HMRC helpfully outline the range of penalties depending on the transgression here – although none of them are good.

If you require more time to pay back the full amount of your corporation tax, you may choose to inquire about the possibility of paying in instalments, known as a Time to Pay (TTP) arrangement. HMRC will determine if you are eligible based on a number of factors, including: the amount owed, the likelihood of the company being able to adhere to the proposed monthly payments and how the company has conducted its tax affairs previously. 

The conditions for each TTP arrangement is dependent on the company and the figures involved. A TTP plan can be a lifeline for many companies, but only if you are confident that you can keep up with the monthly payments, as failure to do so can result in the agreement being terminated and HMRC can take steps to wind up the company. 

New research shows that the number of businesses fined by HMRC for deliberately obscuring their corporation tax affairs has climbed to its highest level in four years.

Last year, 62 firms were penalised for purposely sending incorrect information in an attempt to slash the amount of corporation tax they would have to pay, up 35% from 46 in comparison to the previous year.

However, despite this increase, HMRC have begun making reductions on the amount it asks businesses to pay for their tax evasions. With the average corporation tax fine dropping from £17,454 to £4845 last year (a 72% decrease).

HMRC sets the size of a corporation tax fine based on the severity of a firm’s mistakenly filed tax return. If a business deliberately sends incorrect information, HMRC can issue a fine of up to 70 per cent of the tax owed.

If you are unlikely to be able to pay your corporation tax within the 12 month period, you may consider discussing your situation with one of our experienced professional advisors, who will be able to offer advice depending on your specific situation. 

We offer a free virtual consultation to anyone who’s concerned about their tax arrears or any other financial problems that could derail their business in the near future

Once our advisors have a clearer understanding of your position, then they can work with you to produce a range of options and actions you could take immediately as well as help the business in the short and medium term too. 

Running a business can be taxing so make sure corporation tax is one less thing to worry about.