What is corporation tax, and how does it work?

All business owners must understand the applicable taxes payable, including corporation tax for limited companies. 

It is essential to file your corporation tax returns and pay them to HMRC on time. Missed deadlines can result in hefty fines.

This tax is paid as a percentage of taxable profits, usually yearly. Also known as corporate tax, or company tax, we’ve answered the following questions here to clarify how it works:

• What is corporation tax?
• How much corporation tax do limited companies pay?
• What is a company tax return?
• What expenses can I deduct before paying corporation tax?
• How does making a loss impact my corporation tax bill?
• How do I pay corporation tax?
• How can I simplify my tax returns?

Corporation tax is calculated against your company profits. 

We’ll explain which expenses are deductible a little further below. Taxable profits are the amount of money the business has made when deducting all eligible costs from your revenue.

Allowable expenses include a range of costs required to run the company, including rent, salaries, purchasing materials, utilities and advertising. 

Corporation tax is payable at 19%, based on your revenue less tax-deductible expenses.

Directors are responsible for maintaining accurate records and keeping them for at least six years – this is so that, should HMRC launch an investigation, you can provide supporting evidence.

Failure to keep records can result in a fine or even disqualification as a director, so keeping your information safe is crucial.

This ta is inherently related to businesses (or corporations), so sole traders and partnerships do not pay this tax. 

These are different trading structures with different types of tax payable. For example, a self-assessment tax return for a sole trader is submitted annually after the end of the tax year. 

Please visit our guide, explaining What is a sole trader, for more information.

Your company tax return is simply the form you file annually with HMRC. This return includes calculations of your taxable profits and all the figures that affect your tax bill.

Completed company tax returns include several elements, such as:

• Company accounts – for small businesses, that’s usually just your simplified balance sheet which you prepare when you file your statements with Companies House.
• CT600 – this is the official HMRC form, and you need to submit one even if you don’t owe any tax (for example, you’ve made a loss).
• Tax calculations – necessary since some expense types, such as client entertainment or asset depreciation, are not tax-deductible.
• Any supplementary documents or explanations to support the figures submitted.

Note that larger companies may need to submit full sets of financial statements. Still, if you are classed as a micro-entity or a small company, you have reduced obligations to file anything aside from an abbreviated balance sheet.

Many expenses wholly associated with running a limited company are deductible – which means you subtract your outgoings from your profit before you arrive at a figure that is subject to corporation tax.

However, it isn’t always obvious which types of expenses aren’t allowable, so we’d recommend reviewing the government guidance.

Capital allowances are amounts you can spend on assets to run your business without needing to pay tax. These apply to investments in machinery, tools, and business vehicles.

The Annual Investment Allowance, set at £1 million to 31st December 2021, has now reverted to £200,000.

If you spend less than the allowance, you won’t need to perform any calculations based on the cost of your capital investments and can claim the full amount in the year of acquisition (note that cars are an exception).

Corporation tax reliefs are another potential option to reduce your bill if your business conducts certain eligible activities. Tax reliefs apply to:

• Research and development work
• Goodwill (such as unregistered trademarks or customer relationships)
• Losses in the trading year
• Disincorporation – when you are closing a limited company to become another trading structure

Learn more about corporation tax relief here.

Corporation tax is only payable on profits after deducting eligible expenses, allowances and tax reliefs. You won’t have any to pay if you make a loss.

Businesses can carry losses forward, so if you made a loss of £10 in year one and a £30 profit in the following year, you would be able to deduct your year one loss and pay tax in year two only on £20.

First, you’ll need to register with Companies House to incorporate your limited company. Once you’ve done this, register for corporation tax with HMRC within three months.

HMRC assigns the company a Unique Tax Reference (UTR), and it’s crucial to keep this number safe since it’s extremely important! 

If you have a UTR for your self-assessment tax returns as a company director, please remember that the company is a separate legal entity. You will need to record the different reference numbers for each type of tax return.

All limited companies need to file this return, and you’ll usually receive a Notice to Deliver a Company Tax Return from HMRC.

However, even if you don’t receive a reminder, you will still be obliged to file a return within 12 months of the end of your accounting year and could be fined or charged interest for late returns or payments.

While you have 12 months to file your return, the payment due date for the tax itself falls earlier, typically nine months and one day after your accounting period ends.

Once you have filed your corporation tax return, you will receive a calculation showing the amount payable and the deadline.

Please visit our publication explaining How to pay corporation tax for a more detailed look at the options.

Tax returns can be complex, and it’s often well worth consulting an experienced accountant to ensure your returns are accurate.

Countingup is an innovative hybrid accountancy app and business current account, designed specifically for small companies and self-employed professionals.

The functionality allows you to record expenses with one-click receipt capture, transmit your records instantly to your accountant, and review trading performance and profits in real-time.

Having an advanced accountancy app and a streamlined integration with your banking can significantly reduce the time it takes to prepare corporation tax returns and ensure you have all the information you need at your fingertips.

Find out more about how Countingup can take the strain out of accounting. Download the app today to get started!