An introduction to Corporation Tax

UK limited companies are required to pay between 19% and 25% Corporation Tax on the profits they make. Overseas companies with an office or branch in the UK also need to pay Corporation Tax, but only on profits generated from their UK activities. This business tax applies to income received from sales, investments, and chargeable gains from the sale of assets.

All companies generating taxable income in the UK must register with HMRC for Corporation Tax and file Company Tax Returns every year. Below, we explain how to do this, and what you need to do if your company is dormant.

What is Corporation Tax?

Corporation Tax is a direct tax on profits that companies must pay to HMRC. Since 6th April 2023, the rates of Corporation Tax have been:

• 19% for companies with annual profits under £50,000 – the small profits rate
• 25% for companies with annual profits over £250,000 – the main rate

Companies with annual profits between £50,000 and £250,000 can claim Marginal Relief. This provides a gradual increase in the Corporation Tax rate between the small profits and main rates. However, Marginal Relief is not available to:

• non-UK resident companies
• close investment holding companies

Additionally, if company profits go over £250,000, you cannot claim Marginal Relief on the portion of profits between the small profits rate and main rate. In this situation, all profits are liable to 25% Corporation Tax.

Does my company have to pay Corporation Tax?

If your company is carrying on any kind of business activity or receiving any form of income, it is liable to Corporation Tax on all taxable profits. Business activities include:

• buying and selling goods or services
• leasing or buying property
• selling assets
• managing investments and receiving dividend payments
• paying dividends
• earning interest
• paying employees, including directors
• incurring bank charges and fees
• paying legal or accountancy fees
• receiving income from any other source

If your company is not involved in any such activities, it will be classed as dormant (inactive) for Corporation Tax. In such instances, you must contact HMRC as soon as possible to report this dormant trading status.

How and when to register a company for Corporation Tax

Companies must register with HMRC for Corporation Tax no later than 3 months after starting any kind of business activity. To register your company as ‘active’ for Corporation Tax, you will need to sign up for HMRC’s online services by creating a Government Gateway user ID and password. You will then be asked to provide the following details:

• company name
• company registration number (CRN) – you can find this on your certificate of incorporation
• Unique Taxpayer Reference (UTR) – HMRC will send this to your registered office address shortly after company formation
• start date of trading activity – this will determine your company’s accounting period for Corporation Tax, which is normally a 12-month period that correlates with the financial year in your annual accounts
• main trading address where the majority of business activities are carried out
• principal business activities carried out – a Standard Industrial Classification (SIC) code must be used to identify these activities
• accounting reference date (ARD) – this is the date the annual accounts are made-up to, which usually falls on the anniversary of the last day of the month of company formation

When your registration is complete, HMRC will send information to your registered office. This will include the deadlines for paying Corporation Tax and filing a Company Tax Return and annual accounts.

Do I have to file a Company Tax Return?

If your company is ‘active’ for all or part of its Corporation Tax accounting period, you must prepare a Company Tax Return (form CT600) and annual accounts for HMRC. These must be delivered no later than 12 months after the end of the accounting period, even if you make a loss or have no Corporation Tax to pay.

Your company’s accounting period will begin on the day that it becomes active for Corporation tax, which may or may not be the day that it is incorporated at Companies House. Each accounting period will run for a maximum period of 12 months, ending on the accounting reference date (ARD) of your annual accounts.

If your company has been dormant from the date of incorporation or for the entire duration of its most recent Corporation Tax accounting period, you will not have to deliver a Company Tax Return or accounts to HMRC.

What is an accounting period for Corporation Tax?

An accounting period for Corporation Tax begins on the date a company starts trading. This is usually the date of incorporation, unless the company is dormant for a while after it’s been set up.

A company’s accounting period ends on the ‘accounting reference date’ (ARD). This is the end of the company’s financial year and the date that its annual accounts must be made up to. The ARD should fall on the anniversary of the last day of the month of incorporation.

Corporation Tax accounting periods are usually 12 months long and correspond with the financial year covered in the annual accounts. Accounting periods can be shorter than 12 months, but they cannot be longer than 12 months.

In the first year of trading, the financial year may be longer than 12 months if your company starts trading as soon as it is incorporated. If this happens, you will have two accounting periods for the first year and you’ll need to prepare two Company Tax Returns:

• one for the first 12 months covered in the annual accounts
• a second tax return for the additional period covered in the accounts

You will be required to pay tax liabilities arising from any business activities carried out during each accounting period. You must record all financial activities and transactions in your company’s accounting records, which you will use to prepare a Company Tax Return and work out how much tax you need to pay.

Example:

A company is formed on 1 May 2024 and begins trading immediately:

• The company’s financial year starts on 1 May 2024 and ends on 31 May 2025 (ARD). The first annual accounts will cover a 13-month period.

• The company will, therefore, have two accounting periods for Corporation Tax and be required to file two Company Tax Returns. One tax return will cover the 12-month period from 1 May 2024 to 30 April 2025. The second tax return will cover the additional month from 1 to 31 May 2025.

• Thereafter, the company’s accounting period should align with the financial year in the annual accounts, which will run from 1 June 2025 to the ARD (31 May 2026). The company will then file just one tax return for the 12-month period in the annual accounts.

Do dormant companies have to pay Corporation Tax and file tax returns?

Dormant companies do not have to pay any Corporation Tax, provided they have been dormant from the date of incorporation or for the entire duration of their most recent accounting period. If a dormant company receives or spends any money, or becomes involved in any kind of business activity, it will cease to be dormant.

Likewise, dormant companies do not have to file Company Tax Returns unless they are active for Corporation Tax purposes for part of an accounting period. If the company has not traded, the director must tell HMRC that the company is dormant for Corporation Tax.

How and when to file Company Tax Returns

Tax returns must be delivered to HMRC online within 12 months of the end of each accounting period, even if your active company has no tax to pay. You can file tax returns using accounting software or HMRC’s online Corporation Tax service.

To use HMRC’s online services, you will need a Government Gateway user ID and password. You get these details when you register for Corporation Tax. To file your tax return, you must:

• sign into your online HMRC account
• upload the set of annual accounts that matches the accounting period in the tax return
• include Corporation Tax calculations and supporting documentation to show how you reached the figures in the tax return from the figures in the accounts
• include a completed Company Tax Return form CT600

The person submitting the return (usually a director or an appointed accountant or tax advisor) must include a declaration that all information is correct and has been completed to the best of their knowledge.

Please note: you must notify HMRC if you appoint someone to handle your tax affairs.

Paying your Corporation Tax bill

Corporation Tax must be paid electronically to HMRC before the corresponding tax return is due. The deadline for paying your Corporation Tax bill is 9 months and 1 day after the end of each accounting period. This deadline is 3 months before the tax return is due.

If your company doesn’t owe anything, you need to tell HMRC by completing the ‘nil to pay’ form. You’ll still be required to file your Company Tax Return even if you have nothing to pay.

Corporation Tax late filing penalties

Directors are legally responsible for ensuring the company maintains all statutory filing obligations for HMRC.

Failure to meet these requirements and adhere to the imposed deadlines will normally result in a penalty. In severe cases, directors can be personally fined or prosecuted and a company may face compulsory closure if the situation remains unresolved.

Late filing of Company Tax Return

Failure to deliver a tax return and full accounts by the statutory filing deadline will result in a flat-rate penalty of £100 being imposed. A further penalty of £100 will be charged if the return is more than 3 months late.

If a company’s tax return is filed late for 3 or more consecutive accounting periods, the flat-rate penalty will rise to £500. An additional penalty of £500 will be applied if the return is then filed more than 3 months late.

Tax returns filed between 18-24 months late will incur a fine of 10% of the unpaid Corporation Tax liability. Returns that are outstanding for more than 24 months will face an additional 10% charge on the unpaid tax liability.

Late payment of Corporation Tax

Penalties for the late payment of Corporation Tax are determined by the amount of outstanding tax. This is referred to as the ‘potential lost revenue’ or ‘PLR’, which varies from 30% to 100% of the unpaid tax liability. However, HMRC will take into consideration any ‘reasonable excuse’ that a company may have.