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What is corporation tax ?
Corporation tax, also referred to as business tax, has to be paid by all UK limited companies. Limited companies (whether public or private) are incorporated bodies and therefore have their own legal existence that is separate from their owners. The profits that limited companies generate are hence subject to Corporation Tax.
Sole traders and partnerships are both unincorporated businesses, which effectively means there is no legal separation between the owners of the business and the business itself. This is why they do not pay corporation tax, instead they have to fill out a self-assessment tax return where income tax is applied to their business earnings.
Other types of businesses that may need to pay corporation tax despite not being incorporated as limited companies include:
When starting up a limited company, you will need to register for corporation tax. You will be asked to fill in the following details about the business:
You have to do this within 3 months of commencing trade. Depending on the type of business you have, it can be tricky deciding whether your business is ‘trading’. HMRC has certain criteria to determine whether a limited company is ‘active’, ‘trading’, ‘non-trading’ and ‘dormant’, which you can check to make sure you’re compliant.
It is the duty of the company director to fill in the company tax return, file it, and then pay the bill. You can hire an accountant to do this on your behalf, however, responsibility from a legal perspective still rests with the director.
A company tax return has to be completed and filed every year with HMRC. This is also known as the CT600 form. Your company tax return has to be filed with HMRC within 12 months after the accounting period that it covers has ended. Even if your business is loss making, you still need to file a CT600 to declare this matter.
It is very important to remember than even though the deadline to file your corporation tax with HMRC is 12 months after the accounting period that it covers has ended, you must pay the corporation tax in full within 9 months after the accounting period that it covers has ended. This means you effectively have to pay the tax you owe HMRC earlier than the deadline for filing the tax return !
You also have to file your company accounts with HMRC and Companies House. Some of the items you will need to include in the CT600 are your turnover and profit for the reporting period, your tax calculations, and the allowances and reliefs you have made use of.
If your profits are more than £1.5 million then you’ll have to pay your bill in installments. The due dates for these payments depend on the size of your company and the length of the accounting period. For a normal 12 month period, the payments are normally due quarterly with 2 of these installments due before the end of the accounting period.
The installments will be an estimate of the corporation tax liability due for that period with an adjustment required once the final liability has been calculated after the period end.
Do you have projects that develop new products, processes or services, or improve those that are already in existence whereby they lead to an advance in science or technology ? If so, you could qualify for R&D tax relief, be sure to click on the link to explore this more.
Where this is the case and depending on if you qualify under the SME (Small and Medium Size Enterprises) scheme, tax relief is provided in one of two ways. If your business is profitable, then tax relief is provided in the form of an enhanced deduction from taxable profits at a rate of 130% of the qualifying R&D expenditure.
In instances where your business is loss making, you can surrender all or part of the loss for a 14.5% repayable tax credit from HMRC. This means you can receive a cash payment from HMRC.
Every limited company, whether public or private, is required by law to produce financial statements, which are also available for anyone to inspect if they wish. You need to distinguish between statutory accounts and the annual report and accounts.
The statutory accounts are required to be produced under company law and a copy is filed with the Registrar of Companies, where it is available for public inspection. The statutory accounts are an important part of running your business so that your shareholders see how your company is performing. Statutory accounts also keep your records updated with Companies House.
The annual reports and accounts – often referred to as the corporate report – is available to every shareholder and contains:
Every company director has a responsibility to ensure that the statutory accounts are produced and filed with the Registrar of Companies within a set of time. The filing deadlines after the end of the accounting period are as follows:
The reports can be overwhelming to put together, therefore work on them has to start early. Needless to say, it needs to be accurate and relevant.
LAS Accounting can help you:
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