Demystifying Corporation Tax

As a contractor working through your own limited company, you are required to pay a range of taxes.  This article is designed to help reduce the confusion that can surround Corporation Tax. We explain who has to pay it, how it is calculated and when it is due.

Corporation Tax – the basics

All trading limited companies have to pay Corporation Tax. It is applied to any profit that the company makes during the financial year.

When you register your company with Companies House, HMRC will automatically be informed and they will forward you form CT41G – Corporation Tax registration form and a Unique Taxpayer Reference (which you need in order to use HMRC online services).

Corporation Tax is currently applied at the rate of 19%. It was reduced from 20% in April 2017. It is expected to reduce to 17% by 2020.

Just to confuse everyone, the Corporation Tax year is different to the personal tax year (6^th April to 5^th April). Instead, the Corporation Tax year runs from 1^st April to 31^st March.

Something else to remember. The Corporation Tax year will also be different to your company’s accounting period.

How Corporation Tax is calculated

To calculate the profit upon which you must pay Corporation Tax, you or your accountant will need to add up all your business income, bank interest, capital and other gains. From this, legitimate expenses and reliefs will be deducted.

Corporation Tax at 19% will then be applied to the remaining amount.

Filing and payment deadlines

Corporation Tax return (CT 600) must be filed online within 12 months of your company’s accounting period. However, your company must pay any tax it owes to HMRC within nine months and one day following the end of its accounting period.

For businesses with profits that exceed £1.5 million, payment must be made by instalments.

Alternatively, if your company is trading but has not made a profit, you must inform HMRC that there is ‘nothing to pay’.

Paying Corporation Tax

You are able to pay any taxes owed online. There are different options available depending on the timeframe you have available to pay:

Same day or next day

• Online or telephone banking
• CHAPS

3 working days

• BACS
• Direct debit
• Online by credit or debit card
• At bank or building society

5 working days

• Direct debit

Source: HMRC

Penalties

If your limited company is liable for Corporation Tax and you don’t meet the requirements set out, you may face paying a penalty.

If you’ve made a mistake you must correct immediately. In some instances, HMRC may not penalise you. However, this depends on the circumstances.

A full explanation of the penalties relating to Corporation Tax can be found on the HMRC website.

You may be new to contracting or have been contracting for a while and are finding Corporation Tax confusing, our experienced team would be delighted to provide further guidance. You can contact us on 01962 867550 or via our website.