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Coping with Corporation Tax

Corporation Tax can cause a big headache for SMEs. Read our guide on how to pay HMRC its tax on the wealth you create.

The good news is that the government lowered rates for small companies by 1 per cent to 20 per cent. The bad news is that you still have to pay up.

What is it?

Corporation Tax is a tax on the profits of limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.

Taxable profits for Corporation Tax include:

  • profits from taxable income such as trading profits and investment profits (except dividend income which is taxed differently)
  • Capital Gains – known as 'chargeable gains' for Corporation Tax purposes

What you need to do and when you need to do it

Unlike other taxes such as Income Tax or VAT, where in most cases the filing and payment deadlines are identical, this is not the case with Corporation Tax. The deadline to pay your Corporation Tax is before the deadline to file your Company Tax Return.

Generally you must:

  • pay by 9 months after the end of your company or organisation's Corporation Tax accounting period
  • file by 12 months after the end of your company or organisation's Corporation Tax accounting period

For example, if your company or organisation's financial year runs from 1 April 2008 to 31 March 2009, and your Corporation Tax accounting period is the same, you must:

  • pay your Corporation Tax for that period by 1 January 2010
  • file your Company Tax Return for that period by 1 April 2010

If your company's profits for an accounting period are at an annual rate of more than £1.5 million, you must normally pay your Corporation Tax for that period in installments, all of which are due before the deadline to file your Company Tax Return.

How to work it out

To work out how much Corporation Tax your company or organisation will have to pay, you need to work out the profits you'll have to pay tax on, known to HMRC as your 'taxable profits for Corporation Tax'.

To work out your taxable profits, you start with your company's pre-tax profit figure (sometimes known as 'profit before tax') in your company's financial accounts for a financial year. You then:

  • add back any depreciation charges you've included in your accounts
  • deduct your capital allowances (they take the place of depreciation charges)
  • add any other relevant income or chargeable gains
  • deduct any other relevant deductions, reliefs, allowances or losses

After doing so you will need to:

  • apply the relevant tax rate(s) to calculate your gross Corporation Tax payable
  • deduct any relevant tax credits and any Income Tax already deducted from interest income your company received (for example the tax deducted by your bank before it paid you interest)

Finally you deduct any Corporation Tax you've already paid, for example tax paid early, to find the amount of Corporation Tax you need to pay, or the amount of Corporation Tax you can claim back as an overpayment.

Corporation Tax financial years

For Corporation Tax, the tax year is called the 'financial year' or 'fiscal year' and runs from 1 April to 31 March. This is different from the tax year for individual taxpayers, which runs from 6 April to 5 April.

The Chancellor sets out the rates of Corporation Tax and various allowances, reliefs and credits in the Budget each year (usually in March or April) and also in the Pre-Budget Report the previous November/December. Normally any changes are announced one or more financial years in advance of the year to which they will apply.

Corporation Tax rates

There are currently two rates of Corporation Tax, depending on the company or organisation's taxable profits:

  • the lower rate - known as the 'small profits' rate
  • the upper rate - known as the 'full' rate or 'main' rate

The Small Profits Rate can be claimed by qualifying companies with profits at a rate not exceeding £300,000.
There is also a sliding scale between the lower and upper rates known as 'Marginal Relief'. If your company or organisation's profits are above the threshold for paying Corporation Tax at the 'small profits rate (previously known as the small companies' rate) but less than the threshold for paying Corporation Tax at the main rate, you may be able to claim Marginal Relief. 

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