Corporation Tax is a tax that all budding entrepreneurs and senior directors must get right. Any money your business makes has overheads deducted, legislated expenses deducted, and there you have your profits. Well done if you have kept in the black during these troubled times.
It is highly beneficial to, even if it makes your eyes glaze over, to learn and to understand how to calculate your business’ Corporation Tax. Especially if your business is a “small” business, it is essential to comply with the HMRC Corporation Tax requirements as it will be extremely hard for you to claw your way back out of a tax debt plus penalties.
What is small business corporation tax?
As stated above, all limited companies have to allocate funds from their profits to the payment of Corporation Tax, no matter how small and insignificant you might think you are. Corporation Tax is calculated on your company net profits. These profits can be as a result of different sources. For example, you might have had your business make some investments in a friend’s business or in the stock market. Your business might be selling capital assets and, because you are an intrepid entrepreneur, you have made more on it than it cost you. That is profit and must be used in the calculation of your Corporation Tax.
The tax is paid annually to HMRC, with various dates stated below, and must be paid within nine months of the end of your financial year. See the managing of payments and deadlines on holidays etc., and make sure you pay ahead of time as the HMRC does not accept delays.
If you are new to Corporation Tax, the first step is knowing that Corporation Tax is self-assessed. It is not a calculation done by the HMRC. It is your responsibility or your company’s accountant’s responsibility, in conjunction with you signing off, to calculate how much Corporation Tax is owed and is based on the size of your company and your due dates. You then pay it timeously to HMRC in advance of filing your company tax return (CT600). The CT600 must be filed with HMRC within 12 months of the end of the financial year.
To say this in the briefest manner possible: if your financial year is January 1 to December 31, you need to make payment of any Corporate Tax calculated within nine months and one day of the financial year-end. Based on the dates stated for the example financial year, the resulting payment date in this instance will be before October 1st. You must remember not to pay this on the day. The funds must arrive in the HMRC account by October 1st. See the payment methodology section for guidelines on time taken for payments to travel to HMRC bank accounts. In addition to this, you will need to file the full tax return of your company before December 31st.
The Corporation Tax of 2018/19 has gone down, and your tax submission for 2020/21 will be calculated at 18%.
It is important for you to note that tax due dates are subject to a few parameters, which start off with company size. While you might think you are small compared to Apple or SpaceX, you might indeed fall into the large company category. See here for your company size category and then consult this guide for assistance with various due dates and payment staggering options:
Small company due dates
This category of company has a Corporation Tax due date within nine months and one day of the end of an accounting period, i.e. if your accounting period ended on 31st May 2020. The company’s Corporation Tax is due on 1 March 2021.
Large company due dates
The due dates for a large company are more complex. The payments must be actioned in a maximum of four instalments. The staggering of them is thus:
1) due six months and 13 days after the beginning of the accounting period;
2) final payment is due three months and 14 days after the end of the accounting period;
3) 2 additional instalments can be planned within this window period. They must be paid three months after any previous instalment. They must fit within the accounting period parameters.
Here is an example of common accounting reference dates:
Accounting Period End Date
31 Dec 2020
14 Jul 2020
14 October 2020
14 Jan 2021
14 Apr 2021
For each payment (excluding the final instalment), the amount paid must be the lower of A or B:
A is achieved by taking the Corporation Tax liability and applying the fraction 3/y. ‘y’ is the number of months in the accounting period (eg for a 12-month period, the fraction is 3/12th); and B is the total Corporation Tax liability, for the accounting period, minus payments already made.
The balance is then paid as the final payment.
If your business carries on a ring-fence trade, your accountant can advise on the related calculations.
There will be a lot of estimating your Corporation Tax liability but reviewing the instalment payments made if there is a significant change in the company’s estimated tax liability and/or when calculating the next payment due.
Interest is charged/paid on underpayments/overpayments.
Very large company due dates
This category of company has the following staggered payment allowances for a 12-month accounting period:
1) Make the first payment within 2 months and 13 days after the start date of the accounting period;
2) Make the second payment within 3 months after the first instalment;
3) Make the third payment within 3 months after the second instalment; and
4) Make the fourth payment, the balance after calculations and payments, within 3 months after the third instalment.
As with large companies, the payments made should be the lower of A or B. See here.
These circumstances come with special rules. Hence, discuss these with your accountant and plan accordingly:
Company pays the Bank Levy
Company carries on a ring-fence trade
There will be a lot of estimating of your Corporation Tax liability but review the instalment payments made if there is a significant change in the company’s estimated tax liability and/or when calculating the next payment due.
Interest is charged/paid on underpayments/overpayments.
How to determine the size of your company
Generally, and subject to legislative changes or new precedents, the size of a company for a period is decided by the size of its augmented profits for the accounting period against which tax payments are being made. The current general application of the sizing terminology is based on the following:
Your business shall be categorised as small should there be less than or equal to £1, 500, 000 augmented profits
Your business shall be categorised as a large company should there be more than £1, 500, 000 and less than or equal to £20, 000, 000 augmented profits
Your business shall be categorised as a very large company should there be more than £20, 000, 000 augmented profits.
Of course, business is never as clear cut as that, and HMRC acknowledges the following exceptions to accommodate accounting and business reality:
a company is not treated as large or very large for a period where its liability for the period is less than £10, 000; and
a company is not treated as large for a period where its augmented profits for the period do not exceed £10, 000, 000, and it was not a large company or a very large company in the 12 months immediately preceding the accounting period (other than by virtue of this exception).
The above figures are adjusted by the following factors:
1: If the accounting period is less than 12 months, the figure is prorated.
2: If the company has 51% group companies, the figure is reduced by the number of 51% group companies, including the company, i.e. the number of other companies + 1.
Special rules are as follows:
In the circumstance that, from 11 March 2020, Corporation Tax is based purely on capital gains and it would be very large;
In the circumstance that the company pays the bank levy;
In the circumstance that the company carries on a ring-fence trade; and
If, on 6 April 2020, a non-resident company owes Corporation Tax on property income or gains, or profits from loans, or derivatives for the purposes of its UK property business.
Augmented profits due dates
The simplest way to define the term augmented profits is thus: the total taxable profits plus any legislated exempt distributions received, with the exception of those from group companies, which is based on at least 51% ownership.
It is recommended that you allocate time with your accountant to obtain guidance regarding paying and receiving dividends as well as understand where distribution is exempt from Corporation Tax fully.
Related 51% subsidiary due dates
To clearly explain this, it is best to use an example, in which our example has:
Company B, as a related 51% group company of Company A in an accounting period.
1) Company A is a 51% subsidiary of Company B;
2) Company B is a 51% subsidiary of Company A; or
3) Company A and Company B are both subsidiaries of the same company.
It is recommended that you allocate time with your accountant to obtain guidance on the applicable exclusions, including where a company is deemed to have not carried on a trade or business in the period.
Corporation tax can be paid in the following ways:
Time taken to reach HMRC
Online or telephone banking (faster payments)
Same or next day (including weekends and bank holidays)
Same working day
3 working days
Direct Debit (if already set up)
3 working days
Online by debit or corporate credit card
3 working days
At bank or building society
3 working days
Direct debit (if not already set up)
5 working days
Companies should manage their calculations, sign offs and payments to ensure that the required payment amount reaches HMRC on the last working day BEFORE deadlines, weekends and bank holidays (unless paying by Faster Payments).
From 6 April 2019, a security deposit for Corporation Tax might be requested BY HMRC if a taxpayer has a poor compliance record. The security deposit request might also be made if, for example, an individual or individuals have had a previous business that accrued a tax debt or went into liquidation or went into administration, and the individual or individuals are now setting up a new company or endeavour.
It is important to note that a person can be fined if they fail to comply with a requirement to give security as stipulated by the HMRC, and this compliance should be actioned for every request from the HMRC.
Interest and penalties
The HMRC is aware of challenges that arise in the process of doing business. Instead of battling silently through, a company must contact the HMRC and notify them of any difficulty being experienced in meeting its payment obligations, such as from COVID-19. A request may be submitted to apply for consideration of a Time to Pay arrangement. The company’s previous tax payment history will count for or against the application, which gives business owners more reason to keep tax payments up to date and timeous. When you need leniency from the HMRC, they consider such for a business with a stellar record.
In the circumstance that interest is going to be charged, it will be charged at the rate of 2.6% on Corporation Tax if the payments were not made by the first normal due date. Refer to the different due dates listed above: small company due date, large company due date, very large company due date.
If the second and following staggered payments are not made on the due dates, then interest is charged at the rate of 1.1%. The calculation of this lower rate interest is applied from the due date of the second or following staggered payment. The calculating of which ends on the earlier date full payment is made and the normal due date for the payment of Corporation Tax.