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Last updated: 26 Jan 2022
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Understanding Corporation Tax and how it works

Business owners need to understand the fundamentals of Corporation Tax and your filing obligations. In this article we’ll take you through the ins and outs of Corporation Tax to make your filing and payment process as simple and streamlined as possible. 
What is corporate tax?

Getting this tax process right from the start will help ensure that your business is set up correctly to meet the annual reporting requirements without fail.     

What is Corporate Tax?

Corporate Tax is essentially tax that companies are required to pay on the annual profits they make. No matter how large or small your company, if you make a profit then you will owe HMRC Corporation Tax (19%). This is calculated on your business’s annual income minus essentials such as costs of goods, marketing, R&D and operating costs etc. It is important for you to keep track of these costs to ensure you can calculate your Corporation Tax with ease.

When are corporate taxes due?

When are corporate taxes due? 

The deadline for Corporation Tax varies by country but in the UK the deadline is based on your business’s specific accounting period (if profits are less than £1.5m). Your deadline to pay is nine months and one day after the end of your accounting period for your previous financial year. 

This is very important to note as the deadline is different to other taxes. The rules are very precise and can be complicated but with careful planning you’ll be able to meet the deadline with minimal problems.

Things to note: If your business makes more that £1.5 million in profits then the above will not apply because you will need to pay your Corporation Tax in instalments. If your business makes a loss, and therefore no Corporation Tax is due, you will still need to declare this to HMRC to remain compliant. 

Can you defer Corporation Tax payment?

Can you defer Corporation Tax payment ? 

If you are unable to meet your payment deadline then you must let HMRC know in advance to avoid penalties. We know that the business climate can be uncertain and with the COVID-19 pandemic there is more turmoil than ever before. If you cannot pay your bill due to COVID-19 then HMRC has created Time to Pay (TTP) to help you and other businesses arrange a new payment deadline that you can meet. The TTP arrangement with HMRC could be applicable for a range of tax obligations, not just Corporation Tax, so make sure you review your situation carefully to make the most of it. If you qualify for TTP then the repayment deadline could be up to 12 months, but it is based on your specific circumstances. If you cannot pay your bill for reasons other than COVID-19 then you must still contact HMRC to discuss your situation - you may be able to pay in monthly instalments.

What are the penalties for late filing?

What are the penalties for late filing of Corporation Tax returns? 

If your circumstances change or if you’ve made a mistake then you must let HMRC know as soon as possible. Don’t worry as HMRC will carefully consider your situation. Whatever your circumstances, it is important to be honest with HMRC so that they can take that into consideration. If you file your Corporation Tax return late then the following penalties will apply: 

Time after your deadline Penalty
1 day £100
3 months Another £100
6 months HM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax
12 months Another 10% of any unpaid tax

 

How do you calculate Corporate tax?

How do you to calculate Corporate Tax? An example. 

The current Corporation Tax rate for 2020/21 is 19%. If, for example, your company has a taxable profit of £30,000 then the Corporation Tax you will need to pay will be £5,700 based on a 19% tax rate. Remember, your taxable profit is minus operational costs e.g. costs of goods, marketing etc.

 

How do you pay corporation tax?

How do you to pay Corporation Tax?

Paying your Corporation Tax is simple as there are a number of ways you can do so. Whatever method you decide, you must take into account the time needed to process the payment as failure to do so may result in a late penalty. 

Time needed to process the payment Method of payment
Same day or next day
  • online or telephone banking (Faster payments)
  • CHAPS
  • through your online bank
3 working days
  • Bacs
  • Direct Debit (if you've set one up before)
  • online by debit or corporate credit card
  • at your bank or building society
5 working days
  • Direct Debit (if you have not set one up before)
Don't forget! If your deadline falls on a weekend or bank holiday, make sure your payment reaches HMRC on the last working day before it. 

 

Get in touch
We’re happy to help

Corporation Tax can seem complicated but it doesn’t have to be if you set up the right processes to ensure you file with HMRC correctly and on time. Once these processes are in place then you can roll them over year-on-year. Whatever your circumstances, it is important to keep HMRC updated so that they can take it into consideration. If you need any further guidance, please get in touch and our team of dedicated experts will be happy to help. 

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