Corporation tax refers to tax limited companies must pay to HMRC, based on their profits. Corporation tax liability is the legal obligation for said companies to pay tax on their annual profit.
All new businesses must be registered with Companies House, meaning HMRC will be immediately informed of its existence. Your company will then receive a form for the HMRC register for corporation tax. You will also receive information on filing your corporate tax returns and how to get started, as well as your unique taxpayer reference. You will have three months to respond and ensure HMRC has the correct information regarding your company.
You may seek the assistance of your company accountant to do so and ensure that all accounts are up-to-date to ensure you do not face any corporate tax penalties. However, the responsibility for ensuring all financial information is correct lies with the company directors. You must approve the CT600 for before submitting to Companies House, with all payments met.
Who pays corporation tax?
When it comes to who pays corporation tax, the legislation applies to:
- UK registered limited companies
- Foreign companies with branches in the UK
- Unincorporated clubs and associations
Ignoring these payments will result in fines attributed to your business. The amount you pay for corporation tax liabilities does not depend on the size of your company, but on your annual profits. For example, the corporation tax rate for the 2016/17 tax year was 19% taxable profits charged.
While smaller companies could take advantage of the ‘small profits rate’ before 2015, this is not the same today. The flat rate is charged across all companies but is expected to be reduced by 1% in 2020, to 18%. It’s important to note also that should you sell any company asset, you will need to pay corporation tax on all profits, also known as chargeable gains. The corporation tax liabilities is payable on all business trading:
- Sale or disposal of business assets
- Profit from sales, rent etc.
- Income from savings deposits
When is the corporation tax deadline?
You must file your corporate tax return within 12 months of your company’s accounting period. As previously advised, you may entrust this to your accountant, but it is the directors’ responsibility to ensure this is done . Should your business make a profit of up to £1.5 million, you will need to pay taxes owed to HMRC within nine months and one day from the end of your accounting period. Failure to do so will result in financial penalties for your company. HMRC will always suggest to set up a direct debit to ensure you do not forget and, if you do not have corporation tax liability, you must declare to HMRC you have ‘nil to pay’.
You must now file your corporate tax returns online. You are no longer able to do so by post without a reasonable excuse.
Corporation tax penalties
All companies will face corporate tax penalties, even if you file your return one day late. The corporation tax penalties are as follows:
- One day over the deadline: £100
- Three months after the deadline: An additional £100
- Six months after the deadline: HMRC will estimate what your corporation tax bill should be, and include an additional 10% penalty
- 12 months: Another 10% of your unpaid tax
If you happen to be six months past the corporate tax deadline, HMRC will write to you with a ‘tax determination’, as mentioned above. Your company will not be able to appeal this submission and must pay the interest and penalties. However, if you have a reasonable excuse, you should write to the corporation tax office. If you fail to file 3 tax returns in a row on time all of the £100 penalties will be increased to £500.
How can I avoid penalties?
You must take reasonable care of your company finances and understand the importance of paying debts due. For example, stating filing the corporate tax return was too difficult is not a valid excuse. To avoid HMRC penalties, you must:
- Send your return on time. This is, perhaps, the most simple. You need to ensure all information provided is true, and all calculations are correct
- Inform HMRC if your company has taxable profits but has not been sent a ‘notice to deliver company tax return’
- Tell HMRC if you are unsure what you have to do and ask for advice when filing the return
- Keep company records for at least six years (more information below)
Keeping accurate tax records
When filing corporate tax returns, the importance of accurate records is crucial. You must keep details of your company assets, liabilities, income, expenses and ‘stock in hand’ at the end of your financial year to provide correct information to HMRC. Similarly, you must keep items such as bank statements, annual accounts, invoices and any other relevant data safe. This information must then be stored for a minimum of six years.
HMRC Time to Pay Arrangement
Should you make a mistake when submitting your corporate tax liability, you must tell HM Revenue & Customs immediately. Doing so may reduce the penalty incurred, or remove it altogether. However, if your company is facing cash flow problems and is struggling to pay corporation tax, or even VAT and PAYE, when due – a time to pay agreement may be a suitable option. HMRC time to pay agreement is a legal arrangement, where your company proposes to spread money owed across an agreed timescale. You will need to provide evidence to support your proposed repayment plans.
If you are struggling to pay your corporation tax returns, we can help negotiate on your behalf. Our business rescue experts will provide guidance on aiding your business.