According to the latest government statistics, HMRC received £67 billion in Corporation Tax for 2021 to 2022 and £51.4 billion for 2020 to 2021, representing a 28% increase following the COVID-19 pandemic. For the UK’s public sector, Corporation Tax in 2021/22 was the fourth largest source of income behind VAT (£143 billion), National Insurance (£161 billion), and Income Tax (£225 billion). As a limited company, it is vital that you understand the UK’s corporate tax regime, as this will ensure you file the necessary documents, put aside sufficient tax funds, and make the correct payment before the deadline. Having a sound knowledge of UK corporation tax will help you to remain compliant with corporate tax law and enable you to utilise the system to your advantage by leveraging the exemptions, deductions, allowances, and relief schemes available to your company. In this article, we will explain all you need to know about the UK’s Corporation Tax system.
What is UK Corporation Tax?
Corporation tax is the principal tax paid by limited companies operating in the UK. Corporation Tax is paid on the profits made by limited companies, foreign companies with a UK entity, and clubs.
Under the Corporation Tax rules, a “company” refers to a “body corporate” or an “unincorporated association”. Corporation tax does not apply to sole traders, partnerships or co-ownership schemes. In the case of sole traders, income tax is paid on business profits and capital gains tax is paid on the gains from selling assets.
How are profits taxed?
Corporation tax is paid on:
- a company’s trading profits from doing business
- investments
- any financial gains made when selling assets such as land, shares, or property.
For companies based in the UK, Corporation Tax is paid on all profits from the UK and abroad. For companies that are not based in the UK but with a branch or office here, Corporation Tax is only paid on profits from business activity in the UK.
For the financial year beginning 1st April 2022, the normal rate of corporation tax is 19%. From 1st April 2023, the rates of Corporation Tax are as follows:
- Main rate of 25% for companies with profits over £250,000
- Small profits rate of 19% for companies with profits under £50,000
If your profit is between £50,000 and £250,00, you will benefit from tapered/marginal tax relief (see below).
Corporation tax is paid on the total amount of profits plus any chargeable gains less any deductible payments. Corporation tax is payable at the end of each accounting period (i.e. the period for which its accounts are made up). Company accounting periods are normally 12 months (they cannot be longer than 12 months) and will typically be the same as the financial year for annual accounts. This is not always the case, however, if you have restarted your business or your company stopped trading and became dormant. You will normally receive a letter from HMRC when you first register for Corporation Tax confirming your accounting period. If you are unsure when your accounting period begins and ends, you can check this on the HMRC online Corporate Tax service.
HMRC’s guidance states that if your accounts are for longer than 12 months, your company will need to file 2 returns. This is because your accounting period can’t exceed 12 months. Where your accounts cover a period of less than 12 months, the accounting period normally ends on the same day and hence will also be less than 12 months.
How do I register for corporation tax?
Your company will need to register with HMRC for Corporation Tax when you first start doing business or if it recommences trading after a period of dormancy. You will most likely have been set up with HMRC for Corporation Tax when you registered your company with Companies House. If you have not yet registered for Corporation Tax, you can do so by using HMRC’s online registration service. The Corporation Tax registration process can also be completed by submitting an application form by post, using an agent, or by using third-party software.
To register online, you will need to complete the following steps:
- Go to the HMRC Corporation Tax registration service.
- Login with your company’s Government Gateway user ID and password – if you don’t have one, you can create one.
- Follow the instructions provided – you will need to provide details such as your company’s:
- 10-digit Unique Taxpayer Reference (UTR) – this will have been sent to your registered address by HMRC within 14 days of incorporation
- registration number
- business start date (i.e. when you started trading), and
- annual accounts end date (i.e. when your company’s accounts are made up to).
The rules state you must register for Corporation Tax no more than 3 months after you start doing business (i.e. when you start buying, selling, advertising, renting premises, or employing staff). If you don’t register within the 3-month deadline, you may receive a penalty for late registration.
Once you have submitted your Corporation Tax application form, HMRC will write to you confirming your registration with a deadline for the payment of your first Corporate Tax bill.
Company Tax Returns
Your company must file a Company Tax Return (CTR) to HMRC within 12 months of the end of the accounting period. It is important to note that your company must still submit a CTR even if you have no Corporation Tax to pay.
If you are a sole trader or part of a partnership, you will need to prepare and submit a Self Assessment return rather than a CTR.
Company accounts and tax returns can be submitted online on the HMRC website. Alternatively, a paper form can be used (CT600). Before proceeding with submitting your CTR, you must ensure your company’s annual accounts have been finalised and are “balanced” (i.e. total assets should match your liabilities).
Special Corporation Tax regimes
Most companies operating in the UK are subject to the same standard Corporation Tax regime, however, there are a small number of special regimes in certain sectors. Special regimes have slightly different rules when it comes to how Corporation Tax is calculated. The UK’s special Corporation Tax regimes include:
- Real estate investment trusts (REITs) – whereby a company is exempt from tax on the income profits and capital gains of its qualifying property rental business
- Open-ended investment companies (OEICs) – includes an exemption for certain types of investment income and exemption from tax on chargeable gains
- Investment trusts – including deductions for income distributions and exemptions from tax on chargeable gains
- Tonnage tax – enables ship-operator to pay corporation tax on a fixed notional profit based on the net tonnage of its ships instead of the actual profits
- Oil and gas taxation – Applies to oil and gas extraction companies and includes the Windfall tax announced on 26th May 2022 by the Chancellor of the Exchequer
- Electricity generators – includes an electricity generator levy of 45% with effect from 1st January 2023 until 31st March 2028 if energy is made from nuclear, renewable and biomass sources
- Insurance
- Trade associations
- Residential property developer tax (RPDT) – this is to pay for works to replace unsafe cladding following the Grenfell Tower fire
- Securitisations
Corporation Tax Deductions, Allowances and Reliefs
Corporation Tax Deductions
When preparing your company accounts and determining the amount of Corporation Tax to pay, you can deduct the costs associated with running your business from any profits made before tax. These tax-deductible costs include:
- advertising and marketing costs
- uniforms or protective clothing costs
- financial costs (e.g. bank and insurance fees)
- heating and lighting your business premises
- office costs (e.g. phone and internet)
- rent and business rates
- salaries
- stock and raw materials
- travel costs
Not all costs can be deducted, however, including:
- Accrued pension contributions
- Asset depreciation
- Car lease costs
- Donations not made via Gift Aid
- Entertaining clients
- Fines and penalties
- Gifts to clients
- Income paid as dividends
Corporation Tax Allowances
As a company, you can also claim capital allowances on assets required to run your business, such as equipment, machinery, and business vehicles. There are currently four types of capital allowances for plant and machinery, including the annual investment allowance, 100% first-year allowance, super-deduction, and writing-down allowance. Your accountant will be able to explain which capital allowances you can benefit from and ensure this is properly reflected in your accounts and Corporation Tax calculations.
Corporation Tax Relief
Several Corporation Tax relief schemes are available, all of which can reduce the amount of tax you are required to pay. These schemes include:
- Disincorporation Relief – applies if you are closing your company and switching to a sole trader, ordinary business partnership or limited partnership
- Marginal Relief – from 1st April 2023, provides a graduated increase in Corporation Tax rate between the small profits rate and the main rate on profits between £50,000 (the lower limit) and £250,000 (the upper limit)
- Reliefs for creative industries (CITR) – for profits made from theatre, film, television, animation or video games
- Research and Development (R&D) Relief
- Terminal, capital and property income losses
- The Patent Box – for companies patenting inventions
- Trading losses
Final words
Despite efforts in recent years to streamline the system, UK Corporation Tax remains complex and nuanced. For this reason, no matter the scale of your business, it is imperative that you invest in the services of an accountant who understands your business and will ensure your annual accounts and Corporation Tax is calculated correctly. When it comes to Corporation Tax, expert financial advice is truly “worth its weight in gold”.
