Any company based in the UK must pay corporation tax on its profits, The complexity of the corporate tax system means that there is no single effective tax rate which can capture the whole tax regime. Instead, effective tax rates vary between firms and between investment projects.
Corporation Tax is calculated and paid annually based on your ‘Corporation Tax accounting period’, which is usually the same as your company’s financial year. If your company is based outside of the UK, it must pay corporation tax on all taxable profits that were made in the UK.
Taxable profits for Corporation Tax include the money your company or association makes from:
- doing business (‘trading profits’)
- selling assets for more than they cost (‘chargeable gains’)
If your company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad. If your company isn’t based in the UK but has an office or branch here, it only pays Corporation Tax on profits from its UK activities.
Corporation tax rates
The most applicable rate would probably have been the small profits rate of 20%, tailored for companies with annual profits of £300,000 or less.
The other principle rate applied to firms with profits of £300,000 or more; and was known as the main rate.
In 2015, the government announced the rate would be kept at 19% until 2019 with plans to reduce to 18% in 2020, however in the 2016 budget, a further planned reduction was announced that will see the rate drop to 17% by 2020.
If your profits fell between £300,000 and £1.5m prior to April 1 2015, you may be able to apply for marginal relief, which means that your corporation tax bill is reduced by a certain amount, depending on the precise amount of profit you make.
You don’t get a bill for Corporation Tax. There are specific things you must do to work out, pay and report your tax.
- Register for Corporation Tax when you start doing business or restart a dormant business. Unincorporated associations must write to HMRC.
- Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
- Pay Corporation Tax or report if you have nothing to pay by your deadline – this is usually 9 months and 1 day after the end of your ‘accounting period’.
- File your Company Tax Return by your deadline – this is usually 12 months after the end of your accounting period.
How to calculate Corporation Tax
To calculate what percentage of your company’s profits are taxable, you begin with your company’s pre-tax profit figure. This is essentially all of the profit made by the company across the financial year. You then take the following 4 steps:
- Add any depreciation charges to your overall profit. Depreciation charge is the cost of assets that have decreased in value over time.
- Deduct your capital allowances – capital allowances are designed to counteract the effect of depreciation by offering tax relief for the reduction in value of assets.
- Add any other income or chargeable gains. Chargeable gain is capital gain liable for taxation – or put simply, any taxable profits from investments worth more than their purchase price.
- Deduct any other relevant deductions, allowances, relief or losses.
You may be able to make a claim for:
- Research and Development (R&D) Relief
- The Patent Box if your company makes a profit from patented inventions
- reliefs for creative industries (CITR) if your company makes a profit from theatre, film, television, animation or video games
- Disincorporation Relief if you’re closing your company and becoming a sole trader, ordinary business partnership or limited partnership
- terminal, capital and property income losses
- trading losses
Refund or interest on your Corporation Tax
If your company or organization pays too much Corporation Tax, HM Revenue and Customs (HMRC) will repay what you’ve overpaid and may also pay you interest on it.
HMRC’s interest rate is 0.5%.
Use your Company Tax Return to tell HMRC if you think you’re due a Corporation Tax refund (known as a ‘repayment’) and how you want it paid.
You can either:
- get it paid directly to your company’s bank account or someone else’s account – include the account number and sort code on your tax return
- use it to pay your next Corporation Tax bill or a late filing penalty
- use it to pay other tax your company owes, eg PAYE or VAT
HMRC will pay you interest if you’ve:
- paid tax early (known as ‘credit interest’)
- paid more than your company owes (known as ‘repayment interest’)
The interest is taxable – include it as income in your Company Tax Return.