What is Corporation Tax? Everything you need to know

iStock 515452269 | What is Corporation Tax? Everything you need to know
By Tali Marotta | 7th November 2023 | 7 min read

HMRC collected £83 billion in Corporation Tax last year.  

Corporation Tax is one of the ways that governments raise revenue, and the money collected is used to fund public services and infrastructure. 

Collecting it is a serious business: companies that fail to pay face stiff penalties. Because of this, it’s crucial everyone knows the basics of Corporation Tax. That way they can check if they’re liable.  

So, if you’ve ever had questions like “What is Corporation Tax?”, “How do I pay Corporation Tax?” or “When is Corporation Tax due?” then you’re in the right place. 

Corporation Tax explained – a quick summary  

In the UK, Corporation Tax has been around in one form or another since the Finance Act of 1965. Before then, businesses had to pay the same income rates as individual taxpayers. 

Corporation Tax is typically calculated on the company’s net income – the amount of money the company earns after subtracting all expenses. Taxable profits for Corporation Tax include the money your company or association makes from doing business (trading profits), from investments and  from selling assets for more than they cost (chargeable gains). 

The accounting period is normally the same 12 months as the financial year covered by company’s annual accounts. 

Every business registered as limited with Companies House has to calculate if they owe this money. However, it’s always worth double checking if your organisation is liable even if it’s not “limited”: clubs or societies might also owe this money. 

Furthermore, every liable entity always has to file a Company Tax Return (which deals with Corporation Tax), even if it owes nothing.  

Should your business be paying Corporation Tax?  

Here are some general points to remember when it comes to Corporation Tax liability:  

  • Limited companies are subject to Corporation Tax. 
  • Any UK-based organisation is considered a “tax resident” if it was incorporated there or if central management has a base there.  
  • Sole traders are not subject to Corporation Tax. However, they must check if they have to pay income tax, as well as any other obligations.  
  • There are some exemptions for charities and other not-for-profits, but nevertheless, they might have to pay money on non-charitable income.  

When do I have to pay Corporation Tax?  

You should pay Corporation Tax (or report if you have nothing to pay) by your deadline. This is usually 9 months and 1 day after the end of your accounting period.  

If your business has profits greater than £1.5 million, HMRC might ask you to pay Corporation Tax in instalments. This is the “Quarterly Instalment Payment” (QIP) regime.  

Calculating your Corporation Tax  

Although we urge you to use a specialist, you can also find information about calculating Corporation Tax on the HMRC website.  

As we saw earlier, Corporation Tax is based on a company’s taxable profits. When working out what you owe, that means some factors may not count, such as depreciation, whereas other things might. These include some expenses, allowances and reliefs.  

You’ll pay the “small profits rate” of Corporation Tax (which is 19%) unless your business makes a profit of £50,000 or more. From there, the amount increases gradually up to the full rate of 25% on a profit of £250,000. The increase between £50,000 and £250,000 is called “tapering relief” or “marginal relief”.  

What a (tax) relief  

So, what can help you reduce your Corporation Tax bill? There are different types of tax relief you and (ideally) a financial expert need to look at to decide if they’re relevant.  

These include:  

  • Research & Development Credits – these can be up to 130% on qualified R&D expenditure.  
  • Capital allowances – applicable to certain types of machinery, equipment and vehicles.  
  • Charitable donations – money given to registered charities. This can often be deducted from pre-tax profits.   
  • Loss carryover – where you can carry forward or back business losses to offset against future or past profits.  
  • Other deductions – your accountant, bookkeeper or other tax advisor will tell you what is an appropriate deduction. These can include salaries, office supplies, and professional fees.  

How to pay Corporation Tax  

We’d always recommend working with a professional, such as a bookkeeper or an accountant, to make sure that your tax affairs are properly set out and calculated.  

These professionals often use specialised software for the job. You can file directly with HMRC using its online forms, but only if your tax affairs are of a smaller scale or quite simple.    

Meanwhile, your Corporation Tax payments are usually processed online, but it’s also common to pay via bank transfer or over the telephone.  

Regardless of the method you use, you should always keep records of your tax payments for at least six years.  

Penalties and Corporation Tax  

HMRC has a range of penalties that it can impose – dealing with everything from late payers to people who are deliberately covering up their liabilities.  

To ensure you don’t end up with a penalty, you should make sure your Company Tax Return is accurate and complete, that you tell HMRC if you have profits chargeable to Corporation Tax (if you didn’t get a notice), that you keep records, and that you supply information to HMRC if asked.  

If in doubt, you should contact HMRC or speak to a qualified professional. Furthermore, you should tell HMRC if you have made a mistake. Contacting them and explaining what has happened might reduce any penalty or ensure you avoid one altogether. This is different from “prompted disclosure,” which is where you tell HMRC of an issue either because they are already looking or because you believe they are going to find out.  

PLR and penalties 

If you don’t tell HMRC you are liable for Corporation Tax – and you don’t have a good excuse – HMRC will charge you for potential lost revenue (PLR). This is based on the amount of tax HMRC thinks you owe.  

HMRC will charge up to 30% of PLR if you’re careless with your Company Tax Return. If you deliberately sent incorrect information, the penalty is up to 70% of PLR, and if you took more steps that suggest actions were deliberate and an attempt to conceal, the penalty is up to 100% of the potential lost revenue. 

It’s also worth mentioning that you will be penalised for a late Company Tax Return, even if you don’t owe any Corporation Tax. Also, note that if you don’t meet your obligations for other taxes and duties, these can stack on top of what you owe HMRC for any Corporation Tax issues.  

Make things easier with IRIS Elements  

Did you know IRIS is the largest third-party online filer with the UK Government? In all, 91 of the top 100 UK accountancy firms use our solutions, and 50,000 SMEs use our cloud bookkeeping platforms and software.  

That means when we made our IRIS Elements accountancy and bookkeeping platform, we did so on the back of more than four decades of being the go-to choice of finance professionals.  

This cloud platform can be configured to create the right solution for you – whether you need to carry out basic tax returns or take into account complexities like Research & Development, Insurance, or Groups and Consortium relief.  

IRIS Elements Tax

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