As Benjamin Franklin memorably said, there are only two certainties in life: death and taxes. And it’s fair to say no truer word has been spoken – and keeping on top of your tax liabilities and obligations can become a full-time job if you’re not careful. Whether it’s payroll taxes like National Insurance, VAT for those registered, or Corporation Tax, no-one likes doing it, but you can’t ignore it.
Corporation Tax is perhaps the most common tax you will encounter as your business grows. This explainer should help demystify it and help you stay ahead of the game.
What is it?
Corporation Tax is very similar to a kind of Income Tax for companies. However, companies don’t have a tax-free personal allowance as individuals do. So, as soon as you start making a profit, you need to start paying CT at the correct rate. Since the Summer Budget in 2015, the government announced legislation setting the Corporation Tax main rate (for all profits except ring fence profits) at 19% for the years starting 1 April 2017, 2018, and 2019 and at 18% for the year starting 1 April 2020.
What counts as taxable income?
You will be liable for Corporation Tax on the profits you generate from doing business, as well as any investments you make. You will also have to pay CT on the sale of any assets for more than what you paid for them. These chargeable gains can include land and property, equipment and machinery, and company shares.
When do I pay it?
Firstly – and most importantly – you must pay your Corporation Tax by 9 months and 1 day after the end of your accounting period. Your accounting period is usually your financial year, but you may have two accounting periods in the year you set up your company. Make sure to check with your accountant so that you have your accounting periods correctly laid out and aligned.
If you’ve just started your business, you may have two Corporation Tax accounting periods due to the fact that your accounting period can’t be longer than 12 months.
To pay your CT you will need to prepare your company tax return, and the deadline to file that return is 12 months after the end of the accounting period it covers.
How do I pay it?
HMRC kicked off its Making Tax Digital initiative five years ago, aimed at taking the administration of the tax system entirely online. And while CT isn’t completely part of that system yet, the intention to make paying CT as smooth as possible is clear, with HMRC offering a range of options for payment. Many will go through on the same or the next working day. They include Online and telephone banking and CHAPS. Meanwhile, if you choose to pay by Direct Debit or through the company credit/debit card, it may take up to three working days.
So be sure to factor that in because the same caveat applies here as to all good financial management: don’t leave the preparation of your accounts to the last minute – you may find that you are facing an unexpectedly high corporation tax bill that you can’t pay. If that happens then you may face a penalty: one day late and it will cost you £100; three months late brings another £100 charge before HMRC begins to calculate both your liability and a stiffer penalty based on the size of your bill.
As experts in the field, we work to help our clients to decide what’s right for them as their business grows. We’re here for whatever you need, and you can contact us for help and support in a number of areas, from tax and payroll to accounting and banking.