If you own an actively trading limited company in the UK then it is important to understand your legal obligations to prepare and submit your company’s tax return to 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 that you will need in order 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 that is 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 in the financial year 2023–2024:
- 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 how about companies that make profits of between £50,000 and £250,000? In this case marginal relief applies. Marginal relief gradually increases the percentage of Corporation Tax that is payable on profits of between £50,000 and £250,000. HMRC provides an online marginal relief calculator so that you can check how much marginal relief you may claim.
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 comply with the law. Specifically, you must:
- Register for Corporation Tax within 3 months of your company beginning to trade or your dormant company resuming trade.
- Keep accounting records (e.g. invoices and receipts).
- Prepare and file with HMRC an accurate and complete tax return within 12 months of the end of your accounting period (see below for more details of the filing process).
- Provide full statutory accounts with your tax return.
- 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 total annual turnover is more than £85,000 or if you think that it will become so within the next 30 days. As a VAT-paying company you will need to ensure that the necessary VAT is collected from your customers and that returns and payments are made to HMRC on time. 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 beginning to prepare your annual Corporation Tax return it is important to gather all of the necessary documents and information that will be needed to complete the return form. Your accountant will prepare and collate the following information before completing 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.
- Your company’s registered name and number.
- Tax reference number.
- Type of company.
- 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 real-time tracking of income and expenditure.
Calculating Your Company’s Taxable Income
To work out your company’s taxable income (i.e. profit) you must first work out the total income generated during the financial year. From this you then deduct the total of your overheads and business expenses. This may include, for example, rent for premises, electricity and heating, insurance, directors’ salaries, marketing costs, IT costs, travel and any bank charges.
For example, were your company to generate sales of £80,000 and have deductible costs of £20,000 then the taxable income would be £60,000.
Understanding Allowable Deductions and Reliefs
Allowable deductions and reliefs can reduce further the Corporation Tax payable by your company. This includes costs associated with any business-related travel, office rent, employees’ salaries and contributions to pension schemes. Many further allowances and reliefs are also available for companies including:
- Capital allowances for businesses with equipment, machinery and commercial 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 a company that is closing to become a sole trader, an ordinary business partnership or a limited partnership business.
- Relief on donations to charities, community amateur sports clubs and grassroots sport.
Exploring the range of available tax reliefs can significantly affect 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 for which your company may be eligible 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 cannot use the online system and you have a “reasonable excuse” then you may submit a paper CT600 form. Once 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.
- 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 then you ought to pay particular attention to any warnings or prompts that you are given.
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 need to ensure also that you have your Government Gateway user ID and password, together with your Companies House password and authentication code. Once you have signed into the Government Gateway, follow the instructions and guidance provided. In addition to submitting the CT600 form and your company accounts, you (or your accountant) may need to provide also a director’s report. The director’s report sets out 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, along with 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 given 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 the 31st of July 2023 then your corporation tax must be paid by the 1st of 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. Not only will this prevent financial penalties but it will also foster 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 must still keep your financial records for a minimum term. 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 to which they relate. Retaining these records 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 and/or director. By investing in the services of a reliable and experienced corporate accountant you can be assured that your tax liabilities will be kept to a minimum and that you comply with your obligations as an owner and/or director.
