What is Corporation Tax?

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When you set up a limited company, your annual profits will be subject to Corporation Tax.

Dealing with your corporation tax issues is one of our key tasks as accountants. However, it is ultimately the company directors who are responsible for ensuring that a company’s tax affairs are in order.

As a director of a limited company, you therefore need to make sure that your company’s corporation tax liability is accurate, your annual tax return is filed on time and that you pay the corporation tax to HMRC when it falls due.

Who pays Corporation Tax?

All UK limited companies are subject to Corporation Tax. The tax is charged as a percentage of the annual profits made by a company.  Sole traders are not liable to pay corporation tax. The self-employed pay income tax via the self-assessment process.

Corporation tax self-assessment

Each year, your company is required to complete a corporation tax return (form CT600).  Although your accountant will prepare and submit the CT600 and supporting documents, you must ensure that the information is correct.

Accounting periods

Most businesses have a 12 month accounting period, although it is possible to set a shorter period. Your accountant can also apply to change your year-end date so that it ties in with other statutory deadlines.

What are the current Corporation Tax rates?

The current rate for UK Corporation Tax is 20%. In the 2016 Budget, the Government stated its intention to cut the rate of Corporation Tax to 17% by 2020.

Deadlines and penalties

Your accountant can submit your CT600 return any time between the date of your company year -end your statutory filing date. This is typically the latest of 12 months after the end of your year end, or 3 months after you get a notice to deliver a return.

If you submit your corporation tax return late, or the contents are inaccurate, you – and not your accountant – will be charged a penalty.  If your company is liable to pay any corporation tax, you must settle the balance by 9 months and 1 day after your normal due date.  For example, if your year end was 31st December, then your payment will be due on 1st October in the following year.

You must pay the corporation tax liability to HMRC electronically.

CIS 

The Construction Industry Scheme (CIS) is a scheme created by HMRC for tax from contractors and subcontractors. The scheme is designed to minimise tax evasion within the construction industry.

CIS applies to all contractors and subcontractors, whether sole traders, partnerships, or companies, who are working within the mainstream construction industry.  If in doubt about whether or not a specific activity falls under CIS, it is recommended to refer to HMRC’s guidance.

CIS rules apply to all payments made by a contractor to a subcontractor under a construction contract, but does not apply to employees. Failure to comply with the scheme may result in expensive penalties.

Registration

All contractors and subcontractors must register with the scheme before any construction start using HMRC’s online tax registration service. HMRC will then set up a contractor scheme for the business/individual.

Penalties

HMRC operates an extremely tough penalty regime for those within the CIS scheme. Contractors need to ensure that they keep not only their books and records up to date but also that they are not late in submitting returns or making payments of CIS tax deducted.