The complete guide to accounting for corporation tax
When you start a business, a new tax which you have not come across before may suddenly be on your radar: Corporation tax.
It has its own distinct set of rules, but don’t worry. We’ll explain the basics here, and whether or not it’ll apply to you at all.
Who pays corporation tax?
Corporation tax is mainly paid by limited companies on their profits, so if you set up your business as a sole trader or partnership, it’s not relevant to you. Don’t stop reading though, because it’s useful to know how corporation tax works – and it may be advantageous for you to switch to a limited company model in the future. It tends to give you more control in how you manage tax liability.
Note that in addition to limited companies, any foreign company with a UK branch or office, as well as clubs, co-operatives and other unincorporated associations like community groups, have to pay corporation tax on profits.
What are the rates?
Currently, corporation tax is paid at a flat rate of 19%. However, this is set to change next year when a tiered system will be put in place.
From 1 April, the headline rate of corporation tax will be 25%. Small businesses with profits of less than £50,000 will retain the lower 19% rate. And businesses with profits between £50,000 and £250,000 will be subject to a tapered rate, working out at something between 19% and 25%.
So only businesses with profits in excess of £250,000 will pay the full 25% tax rate from next April.
How do you register for corporation tax?
You need to register for corporation tax with HMRC within three months of starting to do business. Triggers for this could be employing someone, advertising and renting premises – not just buying and selling products and services.
You register online with HMRC through a business account. If you don’t already have one you will be invited to set one up when you visit the .gov website. You’ll create a username, password and need to enter a Unique Taxpayer Reference (UTR) which is a ten-digit number.
You are given your UTR from Companies House, which is where you register your limited company status. In practice, many people choose to register with Companies House and HMRC at the same time and often use an accountant to help them. You may also need to register for payroll with HMRC at this point.
How do you calculate corporation tax?
As part of your compliance with Companies House, you’ll typically have to file a set of accounts which includes a profit and loss account, a balance sheet, notes and a directors’ report – as a minimum.
You then also need to file the accounts with HMRC and complete a corporation tax return, known as a CT600. You do this retrospectively, and it must be done (along with paying any tax bill) within nine months of your company year-end.
Are there any reliefs available for corporation tax?
Yes, there are. Remember, you only pay tax on profit (not turnover) and if you make losses in one year, you can carry those forward to offset profits in future years.
At any given time, there’ll probably be other ways to manage your corporation tax bill. For example, company pension contributions are not subject to corporation tax.
If you are innovative, you may qualify for R&D tax credits which reduce your corporation tax liability or actually give you some money back if you make a loss. And until 31 March 2023, there is a super-deduction on qualifying capital purchases, which will lower your corporation tax bill.
A good accountant will talk you through all the reliefs and allowances that apply to you, as well as taking care of much of the admin and compliance of adhering to corporation tax rules.