how it is calculated and when it needs to be paid
Companies pay Corporation Tax based on their profits. The profits chargeable to Corporation Tax may not be exactly the same as the profits before tax figure in the year end financial statements. Some of these differences include:
Permanently Disallowed Expenses: From the accounts figure there maybe some items that are permanently disallowed as a tax deductible expense, for example entertaining suppliers or customers. This means that whilst entertainment is a valid business expense for the accounts it is not a tax deductible expense, spending on entertainment will not reduce your tax bill.
Temporarily Disallowed Expenses (timing differences): Other items, like pension contributions, are only allowed in the financial year they are actually paid over and not when they are provided for in the year end accounts.
Depreciation of fixed assets is generally not allowed but instead Capital Allowances or an Annual Investment Allowance are given as a deduction.
Dividends: UK dividends payable and receivable are outside the scope of corporation tax
Other differences: There are claims, like the R&D allowance, that create a different tax deductible expense when compared to the expense in the accounts.
Corporation Tax rate. Once the profits chargeable to corporation tax have been calculated then the correct corporation tax rate needs to be applied. HMRC treat each year ending 31 March as the corporation tax year.
For the year ended 31 March 2018 all companies will pay tax at a rate of 19% of the profits chargeable to corporation. The previous year it was 20%. If then a company has a year end of 31 December, for the 2017 year it will pay tax at 20% for January to March 2017 and 19% for April to December 2017.
When is the tax due to be paid? Ignoring companies that are on quarterly payments, in general corporation tax is due 9 months and 1 day after the year end. Therefore a company with a 31 March year end should pay its tax by 1 January the following year. If tax is paid early interest is paid by HMRC, if tax is paid late they charge interest. A tax return also has to be filed within 12 months or there will be penalties.
HMRC is set-up to only process tax periods that are 12 months or less. Therefore if a company has a 13 month financial period for its accounts, 2 company tax returns will have to filed and the corporation tax due is payable on 2 separate dates: 9 months and a day after the end of each tax return.
And unlike other taxes, when corporation tax is paid the payment reference changes every year, the last number increases by 1 for each company tax return period.
This leads to the main point we try to get the directors of start-up companies to understand: unlike PAYE which is deducted immediately an employee is paid, corporation tax is not due until 9 months and a day after the year end. Make sure you do not spend all the company’s bank balance because you may well be spending the tax that will become due.
Don't worry! This blog is just a simplified version of the corporation tax rules. Rates and rules may change in the future. The comments above may seem complicated but in this short space they cannot cover every possibility or scenario. If you are our client we will look after all this for your company. But if you are stuck with your corporation tax or would like a second opinion on a tax matter then please get in touch.