Are you unsure whether your business is liable to pay corporation tax in the UK? Read on as we explain what the current corporation tax rules are, how to calculate the corporation tax you may owe and how we can work with you to meet your corporation tax obligations if eligible.
What is corporation tax?
Looking for a definition of corporation tax? Let us explain. It’s a form of tax owed to HM Revenue and Customs (HMRC) that all companies based in the UK must pay based on their taxable profits, including gross and investment profits.
In the context of corporation tax Vs income tax, the former is the tax companies pay on their profits, while the latter is the tax individuals pay on their income. It’s important to note that you won’t receive a bill detailing the corporation tax you owe – it’s your responsibility to ensure your company pays the corporation tax owed and within the deadlines set.
Who pays corporation tax?
HMRC states that all UK-based limited companies are liable to pay corporation tax on their taxable profits earned during each financial year. These profits not only include trading profits, they also include any chargeable gains, which are profits made on the sale of investments or assets.
In the event a limited company locates its headquarters outside of the UK but also has premises in the UK, corporation tax will only be due on the taxable profits derived from business activities from the UK offices.
HMRC also defines any club, co-operative or unincorporated association, such as a sports club or community group, as being eligible for corporation tax on annual trading profits.
Current UK corporation tax rates
The current corporation tax rate in the UK for all eligible companies and unincorporated associations is 19%. This means that 19% of all taxable profits from your company’s accounting period must be paid in corporation tax to HM Treasury.
Current corporation tax rates differ for ‘ring fence companies’. HMRC describes these companies as those that “make profits from oil extraction or oil rights in the UK or UK continental shelf”.
- Ring fence companies with taxable profits under £300,000 will continue to pay the current corporation tax rate of 19%.
- Ring fence companies with taxable profits above £300,000 will be liable to pay 30% corporation tax.
Remember – chargeable gains are also taken into consideration within your limited company’s taxable profits. The sale or disposal of assets such as land, property, equipment, machinery and shares are included in your corporation tax liability. Those who are self-employed or working in a business partnership will incur capital gains tax instead of corporation tax.
We can work with you to calculate any chargeable gains from your assets, which are based on their market value. If you made a loss following the sale or disposal of an asset, this can be used to reduce your overall chargeable gains for the applicable financial year.
How is corporation tax calculated?
If you employ us to prepare your company accounts and company tax returns, we can calculate your 19% corporation tax bill based on your taxable profits, taking into consideration all chargeable gains, capital losses and capital allowances too.
Calculating chargeable gains is a five-step process:
- Determine the value of your asset at its sale i.e. the amount your company receives for sale or disposal.
- Subtract the figure your company paid for the asset.
- Subtract any funds spent acquiring, selling and/or improving the asset (except maintenance costs).
- Those owning assets prior to December 2017 will need to use the Indexation Allowance Guide from HMRC to determine the “inflation factor” for the year and month the asset was first acquired. Multiply this by the figure paid for the asset and deduct this total from the sale price too.
- Any improvements made to your asset prior to its sale can also be calculated using the same inflation factor and subtracted from your eventual sale price. Once all these figures have been deducted, the remaining figure is your chargeable gain.
When we calculate corporation tax bills for clients, we don’t base it solely on the profits from your company accounts. That’s because we must also take into consideration any capital allowances which can be deducted from any eligible profits for corporation tax.
Typical capital allowances for limited companies and unincorporated associations include:
- Vehicles, equipment and machinery bought for business use – deduct some or all of the value of the item from your profits. You may deduct a percentage of its value to cover depreciation.
- Renovations of commercial space in “disadvantaged” locations.
- Intellectual property
- Structure and buildings
- Research and development – known as R&D corporation tax relief – applicable when your business engages in scientific or technological research or innovations.
When is corporation tax due?
Given the strict penalties for filing late company tax returns and the potential for accruing interest on late or underpaid corporation tax bills, it’s essential that your corporation tax deadlines – determined by your company’s annual accounting date – are strictly adhered to.
Your corporation tax due date is typically nine months and one day after the end of your last accounting period. This is applicable to all eligible companies with taxable profits of less than £1.5 million. Those with taxable profits above this threshold must pay their corporation tax in instalments.
How to pay corporation tax
There are various ways to pay your corporation tax, providing your limited company has completed its corporation tax registration and filed a corporation tax return.
|Payment Type||Payment Speed|
|Faster payments (online or telephone)||Same or next working day|
|CHAPS||Same or next working day|
|Bacs||Three working days|
|Direct Debit||Three working days|
|Debit or corporate credit card||Three working days|
|Bank or Building Society||Three working days|
|Direct Debit (if not previously set up)||Five working days|
It’s also worth noting that if you pay your corporation tax bill ahead of schedule, HMRC is duty bound to pay you ‘credit interest’ at 0.5%. This can be used towards your next corporation tax bill, any other tax bills such as VAT or PAYE, or paid directly into your company’s bank account. This interest is also taxable income.
How we can help you
Our corporation tax services cover the registration of limited companies or unincorporated associations for corporation tax, the preparation of company accounts, company tax returns and the calculation of corporation tax bills.
We can even liaise with you so that you never miss a corporation tax deadline again.
To arrange a free initial consultation on our corporation tax services, please don’t hesitate to contact our friendly, experienced team today on 0800 0523 555 or drop us a line using our online enquiry form to get the ball rolling.
Last updated: 29th July 2020This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.