Corporation Tax is a tax levied on the profits of limited companies, foreign companies with a UK branch or office, and certain other organizations operating in the UK. Understanding how Corporation Tax is calculated is essential for accurate financial planning and compliance. Here’s a brief overview of the calculation process:
- Determine the Accounting Period: The first step in calculating Corporation Tax is identifying the accounting period for which the tax is due. The accounting period is usually the same as the company’s financial year, although it can be shorter or longer in certain circumstances.
- Calculate the Profits: To calculate Corporation Tax, you need to determine the taxable profits of your company for the accounting period. Taxable profits are typically the accounting profits adjusted for tax purposes, taking into account specific tax rules and allowances.
- Adjustments to Profits: Various adjustments may be required to arrive at the taxable profits. This includes adding or subtracting items that are disallowed or specifically allowed for tax purposes. Some common adjustments include depreciation, capital allowances, and certain expenses.
- Apply the Corporation Tax Rate: Once the taxable profits are determined, they are subject to the prevailing Corporation Tax rate. The current rate is set by the UK government and may vary depending on the size of the company and the level of profits.
- Calculate Tax Liability: Multiply the taxable profits by the applicable Corporation Tax rate to calculate the initial tax liability. However, there may be additional factors to consider, such as allowances, reliefs, and deductions, which can impact the final tax liability.
- Claim Applicable Deductions and Reliefs: Certain deductions and reliefs can reduce the Corporation’s Tax liability. These may include research and development (R&D) tax credits, capital allowances, losses carried forward from previous years, and other specific reliefs available for certain business activities.
- Consider Special Rules and Regulations: Certain industries or business activities may have specific tax rules and regulations that need to be taken into account. Examples include companies involved in oil and gas exploration, financial services, and creative industries. Understanding these rules is crucial for accurate Corporation Tax calculations.
- Submit a Corporation Tax Return: Once the Corporation Tax liability is calculated, it needs to be reported to HM Revenue and Customs (HMRC) by submitting a Corporation Tax return. The return provides detailed information about the company’s profits, adjustments, deductions, and tax liability for the accounting period.
You must pay Corporation Tax on profits from doing business as:
- a limited company
- any foreign company with a UK branch or office
- a club, co-operative or other unincorporated association, eg a community group or sports club
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.
Your accounting period is normally the same 12 months as the financial year covered by your annual accounts.
Profits you pay Corporation Tax on
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.
Stopping or restarting business
Check what you have to do if:
Seeking Professional Assistance: Calculating Corporation Tax can be complex, and it’s essential to ensure accuracy and compliance with tax regulations. Engaging the services of an experienced accountant or tax advisor, like our team at Smart Accounting, can provide valuable assistance in navigating the intricacies of Corporation Tax calculations. We have expertise in helping businesses understand their tax obligations, identifying applicable reliefs and allowances, and ensuring accurate reporting to HMRC.