What is Corporation Tax? Rates, allowances and how to calculate it

All UK limited companies must pay corporation tax on their profits, and in this easy-read guide for contractors and business owners, we’ll look at what it is, rates, allowances and how it is calculated, writes Lynne Gowers of contractor accountancy firm Boox, an accredited member of the Freelancer & Contractor Services Association.

What is corporation tax?

Simply put, corporation tax is a tax on limited companies’ profits, so if you are not running your business as a limited company, this isn’t the article for you!

Unlike income tax, companies don’t have a personal allowance -- so as soon as your business starts making a profit, it needs to start paying corporation tax.

In addition to a company’s trading profits, corporation tax is payable on its investments and when assets are sold for more than they cost -- these are known as “chargeable gains.” 

Calculating corporation tax for many companies can be quite complicated as costs may or may not be allowable in different circumstances, and certain allowances and reliefs may be available.

Registering for Corporation Tax

When you set up a limited company, one of the first things to do is register for corporation tax -- this must be done within three months of commencing trading.

Companies House automatically informs HMRC when a new company is registered, and they will send a letter to the registered address, with the company’s UTR (Unique Tax Reference) and form CT41G (Corporation Tax - Information for new companies).

You will need the company UTR for any dealings with HMRC, while form CT41G explains what you need to know about your company being active for corporation tax and what statutory information you’ll need to provide HMRC.

If you engage an accountant, they will normally apply for a corporation tax authorisation code from HMRC to enable them to view your company’s online corporation tax record and file corporation tax returns.   

Corporation tax rates

The UK corporation tax rate (at the time of writing – September 2019) is a standard 19%. Before April 2016, the rate depended on how much profit your company made.

The present government has pledged to keep corporation tax (‘CT’ for short) low, and have said they will cut the rate to 17% in the 2020-21 tax year. But in the current climate of political uncertainty, it is a case of wait and see come Autumn Budget 2019.

When do you pay Corporation Tax?

The CT filing deadline differs from other taxes such as Income Tax and VAT.

Corporation Tax becomes payable before the filing date, in line with when the accounts are due at Companies House. The payment and filing deadline depends on your company’s chargeable and accounting period.

The deadline to pay your CT bill is nine months and one day after the end of your chargeable period for your previous financial year, so if your chargeable period ends on 31st March, your CT deadline will be 1st January (your accounts would be due to be filed at Companies House on 31st December)

Don’t forget that in order to calculate how much Corporation Tax is due, you will have to prepare your company tax return and the deadline for doing that is 12 months after the end of the accounting period it covers. The tax return is on a self-assessment basis, so when it is given to HMRC you are stating that it is correct.

If you are in your first year of trading or extended your year end, you may have two different corporation tax accounting periods, due to the fact that your chargeable period can’t be longer than 12 months.

Confused? Working with a reputable and experienced contractor accountant will prevent you from missing key deadlines and incurring penalties. This is especially the case if you have multiple chargeable periods. As noted, a chargeable period cannot be longer than 12 months however your accounting period can be up to 18 months. (i.e. 2 x corporation tax returns for 1 x set of accounts)  

Corporation Tax Allowances

There are some tax allowances available when it comes to working out how much Corporation Tax your company owes. Basically-speaking, you can deduct the costs of running your business from your company’s pre-tax profit.

These include expenses such as home as office costs, mileage, travel and subsistence if you satisfy temporary working rules, in addition to items such as training. These must be incurred “wholly, necessarily and exclusively” for business purposes.  There are many special rules – such as when the training is provided to the owner/director of a company.

Purchases of assets for use in your business, like equipment, machinery and vehicles are not allowed to be deducted from your company’s income when calculating taxable profit. Instead you may be able to claim capital allowances on these. However that is a topic for another day!

There are also a number of reliefs that you can potentially use to reduce your corporation tax bill. These include Research & Development (R&D) relief, which you may be able to claim if your company works on innovations in science or technology.

Your accountant is best placed to advise you on the allowances, expenses and reliefs available to your business, so make the most of their expertise.

How Corporation Tax is calculated

Calculating corporation tax can get pretty complicated, but the good news is it is your accountant’s job. Here’s a quick overview of how they do it.

To arrive at the amount of corporation tax due, you always start with your pre-tax profit. This is basically your company sales less expenses.

Then:

• Add back any depreciation charges included in your company accounts
• Deduct your capital allowances
• Add any other relevant income or chargeable gains
• Deduct any disallowable expenses such as client entertaining
• Apply Corporation Tax rate of 19% to calculate the gross CT payable

As you can see, not for the faint-hearted! Nor, probably, for very many time-pressed contractors. So to reiterate, we recommend consulting your adviser even if you are one of those ContractorUK readers who feels brave enough to tackle CT single-handedly!