If you own an actively trading limited company in the UK, it is important to understand your legal obligations to prepare and submit your company’s tax return with HMRC each year. In this step-by-step guide, we will explain the basics of corporate taxation, your obligations as the director of a company, and the documents you will need to prepare your return. We will also cover how to calculate your company’s taxable income, the main deductions and reliefs available, how to complete and submit a company tax return, and how to pay the corporation tax due.
Understanding the Basics of Corporate Taxation
In the UK, Corporation Tax is paid each year on the profits made by companies in the previous financial year. This applies to limited companies, overseas companies with a UK presence, and unincorporated associations (e.g. clubs and co-operatives).
There are currently two rates of Corporation Tax as of 2023/24:
- The small profits rate of 19% for companies with profits under £50,000 and
- The main rate of 25% for companies with profits over £250,000
But what about companies that make taxable profits of between £50,000 and £250,000? In this case, marginal relief applies. Marginal relief gradually increases the percentage of Corporation Tax to be paid between profits between £50,000 and £250,000. To check the exact amount of marginal relief you can claim, HMRC provides an online marginal relief calculator.
Identifying Your Company’s Tax Obligations
As a limited company owner, you must keep on top of your company tax obligations to ensure that you remain compliant with the law. Specifically, you must:
- Register for Corporation Tax within 3 months of your company starting to trade or your dormant company resuming trade
- Keep accounting records (e.g. invoices and receipts)
- Prepare and file an accurate and complete tax return within 12 months of the end of your accounting period with HMRC (see below for more details of the filing process)
- Provide full statutory accounts with your tax return and
- Pay your Corporation Tax bill within 9 months and 1 day of the end of your accounting period – in most cases, this is exactly the same 12-month period as the financial year covered by your company’s annual accounts.
In addition to paying Corporation tax, you are legally obliged to register for Value Added Tax (VAT) if your annual total VAT taxable turnover is more than £85,000 or if you think it will be in the next 30 days. As a VAT-paying company, you will need to ensure that the necessary VAT is collected from your customers and returns and payments are made on time to HMRC. Failure to prepare and submit your Corporate Tax and VAT tax returns on time may result in a penalty of up to 10% of any unpaid tax.
Gathering Essential Financial Documents
Before starting the process of preparing your annual Corporation Tax return, it is important to gather all of the necessary documents and information needed to complete the return form. Your accountant will prepare and collate the following information before they complete the return process:
- Total turnover from trade in the financial year
- Profit and loss account statement (i.e. your statement of income)
- Balance sheet (i.e. your company’s current financial position)
- Bank statements
- Invoices and receipts
- Registered name of the company and company registration number
- Tax reference number
- Type of company and the
- Tax return period
This process will be much easier if your company uses modern accounting software (e.g. Xero or Quickbooks), which will keep your financial records organised and provide a real-time view of your income and expense tracking.
Calculating Your Company’s Taxable Income
To work out your company’s taxable income (i.e. profit), you will first need to work out the total income generated during the financial year. From this amount, you will then deduct the total amount of your overheads and business expenses. This may include, for example, the rental of premises, electricity and heating, insurance, director’s salaries, marketing costs, IT costs, travel, and any bank charges.
For example, if your company generated sales of £80,000 and had deductible costs of £20,000, the taxable income will be £60,000.
Understanding Allowable Deductions and Reliefs
Allowable deductions and reliefs can further reduce the amount of Corporation Tax payable by your company. This includes the costs associated with any business-related travel, office rent, employee salaries, and contributions to pension schemes. On top of this, a wide range of allowances and reliefs are available for companies including:
- Capital allowances for businesses with equipment, machinery, and business vehicles
- Research and Development (R&D) relief
- Creative industries tax relief (CITR) for companies working in the field of theatre, film, television, animation or video games
- Disincorporation Relief for companies that are closing to become a sole trader, ordinary business partnership or limited partnership businesses, and
- Relief on donations to charities, community amateur sports clubs and grassroots sport
Exploring the range of available tax reliefs can significantly impact a business’s tax position. This is why it is important to engage the services of an experienced and trusted accountant who can advise on the deductions and reliefs that your company may be eligible for and to reflect these correctly within your tax return.
Filling Out Your Company’s Tax Return Form
Your Company Tax Return form (CT600) can be completed online through the HMRC website. If you are unable to use the online system and you have a “reasonable excuse”, it is possible to submit a paper CT600 form. Again, your accountant will normally handle this process, ensuring that all of the information provided is correct. The information required by the CT600 form includes the following:
- Company name
- Company registration number
- Tax reference number
- Company type
- Details about the return being filed, including the tax period
- Corporation tax calculation, including turnover, income, chargeable gains, profits before deductions and reliefs, deductions and reliefs, tax calculation, reliefs and deductions in terms of tax
- Information on capital allowances and balancing charges
- Bank details, and
- Declaration (name, date, and status).
Reviewing Your Tax Return for Accuracy
It is imperative that you take the time to review your tax return for accuracy before it is formally submitted to HMRC. This involves checking all of the figures and ensuring that no details have been overlooked. Double-check that the accounts are ‘balanced’ so that your total assets match what you owe. If you use the online filing system or modern accounting software, you need to pay particular attention to any warnings or prompts provided.
Fixing any discrepancies before submission is crucial to avoiding potential issues with HMRC. An accurate and well-reviewed tax return will not only lead to a smoother submission process but will also reduce the likelihood of audits or inquiries by HMRC.
Submitting Your Company’s Tax Return to HMRC
Once you have completed and carefully reviewed the online CT600 company tax return form, it can be submitted to HMRC along with your company accounts.
Before preparing and submitting your return, you will also need to ensure that you have your Government Gateway user ID and password, Companies House password, and authentication code. Once signed into the Government Gateway, follow the instructions and guidance provided. In addition to the submission of the CT600 form and your company accounts, you (or your accountant) may also need to provide a director’s report. The director’s report sets some important details of the business that are necessary for the correct calculation of tax, including the main activity of the business and the names of the directors, including any new director appointments and resignations in the last financial year.
Paying Your Company’s Tax Bill on Time
It is essential that all company owners ensure that the correct amount of Corporation Tax is paid by the deadline provided by HMRC. The deadline for the payment of Corporation Tax is normally 9 months and 1 day after the end of the financial year. For example, if your financial year ended on 31st July 2023, your corporation tax must be paid by 1st May 2024.
HMRC provides various payment methods, including direct debit, bank transfer, and credit card. Paying attention to cash flow and planning finances accordingly is crucial to meeting your tax obligations. This not only prevents financial penalties but also fosters a positive relationship with HMRC.
Keeping Records for Future Tax Returns
Even once you have submitted your Corporation Tax return and paid the bill, your legal obligations as a company owner or director mean that you still need to keep your financial records for a minimum amount of time. According to the HMRC rules for companies, all financial records must be kept for at least six years from the end of the financial year they relate to. This ensures that businesses can provide evidence in the event of an audit or inquiry. This highlights the value of investing in a robust computerised accounting system.
We hope that this step-by-step guide has given you a stronger understanding of the UK’s Corporation Tax regime and your obligations within it as a company owner or director. By investing in the services of a reliable and experienced corporate accountant, you can rest assured that your tax liabilities will be kept to a minimum and that you are compliant with your director obligations.