Corporation Tax 201112 Beginner’s Guide & Tax Rates

This is where you can learn all about Corporation Tax – what it is, the rates, who needs to do it, what you need to do for it, submCorporation Tax 2011/12itting online, what an ‘accounting period’ is, and how to work out your taxable profits.

Corporation Tax is a tax on the taxable profits of not only limited companies, but also other organizations, such as clubs, societies, associations, and other unincorporated bodies.

This article will give you a basic overview of Corporation Tax.
What is Corporation Tax, and who is subject to the requirements?

Taxable profits for Corporation Tax include:

Profits from taxable income, such as trading profits or investment profits (except dividend income, which is taxed differently)

Capital Gains – for Corporation Tax purposes, this is known as ‘chargeable gains’

If your company, or organization, is based in the UK, no matter where your profits come from, you will have to pay Corporation Tax on all of your taxable profits.

If, however, your company isn’t based in the UK, but operates in the UK – for example, through a branch or office (known to HMRC as a ‘permanent establishment’) – you’ll only pay Corporation Tax on any taxable profits arising from your UK activities.
What you need to do for Corporation Tax, and when you have to do it

If your company (or organization) is subject to Corporation Tax, you must:

Tell HMRC that it’s liable for Corporation Tax

Pay the right amount of Corporation Tax, on time

File a Company Tax Return, along with supporting documents

For each of these requirements, there are different deadlines. If, for whatever reason, you don’t meet these deadlines, your company or organization may be charged interest, and/or penalties.

Pay before you file

Unlike other taxes, such as Income Tax or VAT – where in most cases the filing and payment deadlines are the same – this is not the case for Corporation Tax. The deadline to pay your Corporation Tax is before the deadline to file your Company tax Return.

Generally speaking, you must:

Pay by 9 months after the end of your Corporation Tax accounting period.

File by 12 months after the end of your Corporation Tax accounting period.

If your company’s profits for an accounting period are at an annual rate of more than £1.5 million, normally you must pay your Corporation Tax for that period in installments, all of which are still due before the deadline to file your Company Tax Return.

Also, don’t forget: from April 2011, everyone must now pay, and file, their Corporation Tax Return electronically.

Additionally, your tax computations and, with very few exceptions, the accounts that form part of your Company Tax Return, must be submitted in Inline eXtensible Business Reporting Language (iXBRL) format.
For Corporation Tax purposes, what is an accounting period?

A Corporation Tax accounting period is different from similar terms used by other HMRC tax areas – such as VAT accounting periods, or even other government agencies, such as Companies House accounting reference periods.

Your company or organization’s Corporation Tax accounting period is usually 12 months long. This accounting period usually matches your company’s 12 month financial year.

Your company’s financial year begins and ends with dates covered by your company’s annual report and accounts (financial accounts) as submitted to Companies House. These accounts are sometimes called statutory accounts or audited accounts.

But, in some instances, your Corporation Tax accounting period won’t be the same as your company’s financial year if, for example:

Your accounts cover a period of more than 12 months – such as if your newly-formed company is preparing it’s first accounts to cover a period of more than 12 months, or your existing company changes it’s financial year end

Your company has been dormant and once again starts to carry on business activity, your Corporation Tax accounting period may start on a different day from the start of your financial year.

Taxable profits for Corporation Tax, and how they are calculated

To work out how much Corporation Tax your company or organization will have to pay, you need to work out the profits you’ll have to pay tax on, known to HMRC as your ‘taxable profits for Corporation Tax’.

In order to work out your taxable profits, you need to start with your company’s pre-tax profit figure – sometimes knows as profit before tax – in your company’s financial accounts for a financial year. You then:

Add back any depreciation charges you have included in your accounts

Deduct your capital allowances – they take the place of depreciation charges

Add any other relevant income or chargeable gains

Deduct any other relevant deductions, reliefs, allowances or losses.

You then:

Apply the relevant tax rate(s) to calculate your gross Corporation Tax payable

Deduct any relevant tax credits and any Income Tax already deducted from interest income your company received – eg the tax deducted by your bank before it paid you interest.

Finally, you deduct any Corporation Tax you have already paid – eg tax paid early – to find out the amount of Corporation Tax you need to pay, or the amount of Corporation Tax you can claim back as an overpayment.
Why you can’t just pay Corporation Tax on your pre-tax profits in your accounts

Your accountant will prepare your company’s accounts using recognized accounting standards. But the profit figures calculated in this way don’t necessarily represent the appropriate amount of profit on which to pay Corporation Tax.

Also, your company’s accounts may cover a different period from your Corporation Tax accounting period.

So you need to make those various calculations and adjustments to your accounting profit before tax to work out your taxable profit for Corporation Tax. You do this by completing and filing a Company Tax Return. A Company Tax Return includes a return form (CT600) and other supporting documents.
Corporation Tax financial years & tax rates

Financial Years

For Corporation Tax, the tax year is called the ‘financial year’ or ‘fiscal year’ and runs from 1 April to 31 March. This is different from the tax year for individual taxpayers, which runs from 6 April to 5 April.

The Chancellor sets out the rates of Corporation Tax and various allowances, reliefs and credits in the Budget each year (usually in March or April) and also in the Pre-Budget the previous November/December. Normally, any changes are announced one or more financial years in advance of the year to which they will apply.

Tax Rates

Currently, there are two rates of Corporation Tax, depending on the company or organisation’s taxable profits:

The lower rate – also known as the ‘small profits’ rate (20% for 2011/12 for companies/organisations with profits not exceeding £300,000.)

The upper rate – also known as the ‘full’ or ‘main’ rate (26% for 2011/12 for companies/organisations with profits over £1,500,000.)

There is also a sliding scale between the lower and upper rates known as ‘Marginal Relief’.

This means that if your company or organisation’s profits are over the lower rate, but less than the main rate, the effective rate of Corporation Tax you pay rises gradually from the lower rate to the higher rate – depending on your taxable profit.

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