Business Tax (or Corporation Tax) is a type of tax that companies are required to pay to HMRC on their profits. The amount of tax that needs to be paid depends on how much profit the company made after the allowable expenditure has been deducted. Accounting records have to be kept accurate and tax calculated correctly to keep HMRC happy. Although the Company Tax Return (also knows as the CT600 form) needs to be submitted to HMRC at the latest by 12 months after the end of the accounting period, the tax has to be paid at the latest by 9 months and 1 day after the end of the accounting period.
In brief, the important dates to remember are as follows:
– payment of tax: 9 months and 1 day after the end of the accounting period* at the latest
– submission of tax return: 1 year after the end of the accounting period at the latest
The accounting period in the end of which companies have to submit their Corporation Tax Return varies from company to company: most company have a 12-month accounting period starting the day the company started trading. It is known as the Chargeable Accounting Period.
Late tax payments, late filing of the company tax return, errors in returns and failure to keep records all incur penalties.
In this blog we will detail and clarify the transgressions and their applicable penalties.
Late Tax Payment Penalties
For late tax payments or if a lower amount is paid than the one that is due, interest is charged. The interest rates are set by HMRC and they apply to both large companies that are required to pay their tax by installments as well as to smaller businesses that can pay their tax in one payment.
The rates charged at the moment are 1.10% for underpaid quarterly installments and 2.60% on late final payments.
In case the company overpay its Corporation Tax or pays it early, then HMRC pays interest to the company. However, the interest rates that HMRC pays to companies in such situations is lower than the amounts charged by them on overdue tax: at the moment the rate is 0.05%. This interest that HMRC owes the company is taxable, however this amount of interest is an allowable deduction against non-trading interest.
Late Return Penalties
As mentioned earlier, there are penalties for submitting the Corporation Tax Return late. If a company fails to submit the Corporation Tax Return to HMRC in time, it will face both flat rate penalties and percentage penalties as follows:
- £100 for submitting up to three months late and £200 for submitting more than 3 months late. For repeat offenders, these amounts are higher.
- In addition to the amount above, 10% of the Corporation Tax relating to the return period can be charged when the return is 6-12 months late, increasing to 20% for over 12 months late
Penalties for Errors in Tax Returns and Documents
The good news is that a company can amend a return it has submitted up to 12 months after the filing date.
Penalties apply for incorrect information stated in the tax returns and documents. This is based on the percentage of the extra tax due, depending on what gave rise to the error, as follows:
- Due to lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
- Deliberate, the penalty will be between 20% and 70% of the extra tax due
- Deliberate and concealed, the penalty will be between 30% and 100% of the extra tax due
The percentage can be reduced if the company informs HMRC about the errors, helps them work out the extra tax due and also gives HMRC access to check the figures.
If the company made an error despite taking reasonable care, then no penalty will arise.
Penalties for failure to keep records
For companies, the penalty for not keeping the required records for the correct length of time is up to £3000 per Chargeable Accounting Period.
Accounting records must be retained by a business, including a company or its agent (for example its accountant) for at least six years after the end of the accounting period. Take note that this period of 6 years is extended if an inquiry by HMRC is taking place. It is also important to remember that HMRC will make it obligatory for businesses to keep records digitally.
Penalties for not letting HMRC know the company started trading
It is very important to let HMRC know the company started trading as soon as this happened. This must be done at the lates by the end of 3 months since the company started its business activities. HMRC has very detailed criteria by which to determine when a company has started trading.
Usually, to inform HMRC that the company has started trading, all is necessary is for you to fill in and submit a “new company details form”.
In case HMRC has not been informed that the company started trading, then a penalty can arise based on a percentage of the “potential lost revenue” which is the Corporation Tax that would be due. This ranges from 0% (if reasonable care was taken) to 100% (if the act was deliberate and concealed) of the potential lost revenue for HMRC.
Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
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