What is corporation tax & who has to pay it?

If you set up your own business, then you’ll probably have to deal with corporation tax. Usually, your accountant will be the person dealing with this, but as a business owner you should understand what corporation tax is and how much your company will be liable to pay.

According to the HM Revenue and Customs website, corporation tax is “a tax on the taxable profits of limited companies and some organisations, including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.”*

That pretty much sums it up in a nutshell. Although, working out how much corporation tax your company should pay is a whole different ballpark.

How much corporation tax do you have to pay?

The key term in HMRC’s definition of corporation tax is “taxable profits” and there’s a lot of confusion about what this consists of. You need to calculate your taxable profits in order to work out how much corporation tax your business will need to pay.

Simplified, taxable profits usually consist of trading profits and capital gains. The term ‘trading profits’ refers to the revenue you’ve generated through trading; the taxable part is the bit left over after you’ve deducted costs, such as raw materials, staff wages etc. ‘Capital gains’ refers to any money you’ve made through selling company assets, which hasn’t been reinvested. There are also other types of taxable profit, such as revenue that has been generated through interest, or other forms of income.

Corporation tax rates apply to profit generated over a fixed period, usually an accounting period that coincides with the financial year (1^st of April to the 31^st of March). If your accounting period doesn’t coincide with the financial year, then it gets a bit trickier. You’ll have to work out your company’s taxable profits over a proportional period in the two financial years.

To work out how much corporation tax your company owes, you’ll need to calculate your taxable profits and apply the relevant tax rate (it’ll change year on year) then take away any tax credits or other taxes that have already been paid. Et voila, you have the amount of corporation tax that needs to be paid.

How do you pay corporation tax?

First of all, you have to tell HMRC that your company is liable to corporation tax. Unlike some other taxes, the payment deadlines and the deadlines for filing are different. You have nine months after your company’s accounting period to pay corporation tax and 12 months after the accounting year to file your Company Tax Return. The Company Tax Return and payment must be submitted to the HMRC online.

Unlike some other taxes, it’s up to your company to work out corporation tax rather than HMRC. For this reason, many companies and start-ups use accountants or tax advisors to calculate and handle the payment of corporation tax.