Corporate Tax in UK
As you commence trading you may soon discover that corporation tax is one of the most important taxes you'll have to calculate and pay.
Corporation tax is paid by UK limited companies and some other organisations. It is based on the annual profits that a company makes. All profits are taxable however, certain specific expenses can be deducted, and there are allowances you can make use of to help reduce your tax liability. Corporation tax specifically applies to the following for a limited company:
- Trading profits – earnings generated from doing business
- Selling assets such as land, property, shares, and machinery for a chargeable gain
Payment of corporation tax
Corporation tax has to be paid by all UK limited companies. Sole traders and partnerships don’t pay corporation tax, instead they have to fill out a tax return and apply income tax to their earnings.
There are however, other organisations that may need to pay corporation tax despite not being incorporated as limited companies. These include:
- Housing associations
- Membership organisations
- Clubs and societies
Responsibility for paying Corporation Tax
The company director, or directors, are responsible for making sure Corporation Tax returns for a company are filed with HMRC, and that all taxes have been paid, by the appropriate deadline. Many companies hire tax specialist accountants to prepare Corporation Tax returns, but the legal responsibility still lies with the company directors.
Corporation Tax payment
Corporation Tax can be paid electronically, at a bank or at a post office. The Corporation Tax bill can be paid by CHAPS, online or over the telephone if same day payment is required. BACS transfers, direct debits and credit or debit card payments usually take around three working days. For full instructions on how to pay your corporation tax, consult the UK Government website.
Corporation Tax deadline
Your Corporation Tax return deadline is usually 12 months after the end of the accounting period the return covers.
You must also note that the deadline to pay a Corporation Tax bill is separate and is usually 9 months and one day after the accounting period ends. Note that large companies can be liable to pay Corporation Tax in instalments, with some of these payments falling due in the accounting year (rather than after the year-end).
Missing deadlines will result in penalties.
Penalties if you do not pay Corporation Tax on time
If you are unable to pay a company’s Corporation Tax bill on time, the company will be charged interest on the balance outstanding.
If payments are not made, HMRC may pursue one of several courses of action to ensure the outstanding Corporation Tax is paid; these include:
- Contacting debt collection agencies
- Recovering the money directly from your bank or building society account
- Selling your assets
- Initiating court proceedings
- Liquidating the company and closing your business down
It is critical that outstanding Corporation Tax is paid on time, as the implications of not paying can be severe – they may even put your business in jeopardy.
If you are unable to pay your outstanding Corporation Tax, HMRC may be able to help through setting up a payment plan. They must be contacted as soon as possible, not after deadlines have passed.
Note that large companies that are required to pay by instalments can incur a penalty if payments are not made on time.
Ring Fence Corporation Tax
Ring Fence Corporation Tax (RFCT) is like Corporation Tax, except it is only paid by companies involved in production of oil and gas in the UK, as well as the UK Continental Shelf (which includes parts of the North Sea, the North Atlantic Ocean, Irish Sea, and the English Channel). The Ring Fence Corporation Tax main rate is 30%.
Does the United Kingdom have low Corporation Tax rates?
As of 2020, the United Kingdom had the third lowest Corporation Tax main rate of the G20 nations. The lowest main corporate tax rate of the G20 is Singapore (17%).
Do you have to pay Corporation Tax on dividends?
Dividends are payments that companies make to shareholders when it has made a profit. Businesses do not need to pay Corporation Tax on dividends; however, if the individual shareholder receives dividends greater than £2,000 they will need to pay Income Tax on this.
Are dividends deductible from Corporation Tax?
Paying out dividends will not reduce your Corporation Tax bill. Corporation Tax is paid on a company’s profits before any dividends are paid out.
This means a dividend is not a tax-deductible expense and therefore does lower the profits of a company, nor does it appear on the company’s income statement.
Do sole-traders pay Corporation Tax?
Sole traders do not pay Corporation Tax; instead, they are required to pay tax on their business profits via self-assessment.
How do you pay less Corporation Tax in the UK?
There are many opportunities where companies can ensure they are paying only their fair share of Corporation Tax.
Through careful and detailed tax planning, you can minimise your Corporation Tax bills, while enjoying tax efficiency in several other areas, including:
- Tax relief on property and equipment through capital allowance claims
- Tax relief for innovative companies through R&D tax credits
- Patent box tax relief
- Much more…
We are a team of experienced tax advisers is the biggest in the region, offering strategic advice that can turn business tax planning into an opportunity, not an endurance test.
If you would like to discuss your options with one of our dedicated business tax experts, get in touch today and the our team will be more than happy to help.