Corporation Tax

What is corporation tax?

Corporation tax is a tax charged on the profits earned by companies and other organisations. It's a direct tax on your company profits and it is calculated as a percentage of a your company's taxable profits. 

1. Corporation tax payable: The amount that your company owes is determined by subtracting allowable expenses from its total profits for a given financial year. The resulting taxable profits are then subject to the applicable corporation tax rate, which is set by the government.
   
   

2. Purpose of corporation tax:  Corporation tax is charged to raise revenue for the government and to ensure that companies contribute to the funding of public goods and services. The government periodically reviews and adjusts the rate of corporation tax to maintain its competitiveness and to support economic growth.

3. Fines & Penalties: It's important for companies to accurately calculate and pay their corporation tax obligations, as failure to do so can result in fines and penalties.

4. Filing: Companies are required to file a corporation tax return with the tax authorities each year, which must include details of their taxable profits and tax payments.

Completing a corporation tax return

Completing a corporation tax return involves providing information about your company's taxable profits, tax payments, and other relevant details to HM Revenue and Customs (HMRC).

Here is a step-by-step guide to help you complete your corporation tax return:

1. Gather information: Before you begin completing your corporation tax return, gather all the relevant information and records, including your company's financial statements, tax computations, and other supporting documentation.
   
   

2. Register for corporation tax: If your company is newly formed, you will need to register for corporation tax within three months of starting to do business. If your company is already registered, you do not need to take any further action.
   
   

3. Complete the online form: You can complete your corporation tax return online using HMRC's online service, which is available through the government's website. The form will ask for information about your company, including its taxable profits, expenses, and other relevant details.
   
   

4. Provide details of taxable profits: You will need to provide details of your company's taxable profits for the accounting period, which is typically the same as your company's financial year. This will include information about your company's total income and allowable expenses.
   
   

5. Declare any tax payments: You will need to declare any corporation tax payments that your company has made during the accounting period.
   
   

6. Submit the return: Once you have completed the corporation tax return, you will need to submit it to HMRC within 12 months of the end of your accounting period.
   
   

7. Keep records: It is important to keep accurate records of your company's financial transactions and tax returns for at least six years in case of an HMRC enquiry.

How is corporation tax calculated?

To calculate your corporation tax, you need to determine your taxable profits for the financial year. This is done by subtracting allowable expenses from your total profits for the year. Once you have calculated your taxable profits, you can then apply the current rate of corporation tax, which is 19%.

Here is an example of how to calculate corporation tax:

Let's say your company has total profits of £100,000 for the financial year and you have allowable expenses of £20,000. To determine your taxable profits, subtract the expenses from the total profits:

£100,000 - £20,000 = £80,000 (taxable profits)

Next, apply the corporation tax rate of 19% to the taxable profits:

£80,000 x 19% = £15,200 (corporation tax liability)

This means that your company would have to pay £15,200 in corporation tax for the financial year.

It is important to note that there may be other factors, such as tax reliefs and deductions, that can affect the calculation of your corporation tax liability. Therefore, it is recommended that you seek professional advice from an accountant or tax advisor to ensure that you are accurately calculating and paying the correct amount of corporation tax.