Your company pays Corporation Tax on taxable profits for each Corporation Tax accounting period. This is normally 12 months long and usually matches your company's financial year-end. At this point a company tax return is submitted to HMRC.
If your company is based in the UK you pay Corporation Tax, (currently charged at 20% to 31 March 2016 and 2017, but reducing to 19% for the following three years. By 31st March 2021 the corporation tax rate will be set at 17%). on all your taxable profits. Company profits are made up of income generated less expenses incurred. By considering the nature of payments from your company and accounting for all allowable Business Expenses you can reduce the amount of profit subject to Corporation Tax. There are also tax advantages in the form of Capital Allowances when investing in the equipment you need for your business. You can claim Capital Allowances for what your business spends on certain assets owned and used in the business, provided certain conditions are met.
If your company makes a loss from trading in any one period you may be able to claim Loss Relief to reduce your future Corporation Tax bill and claim a refund of previously paid Corporation Tax.
A loss is created when the expenses and allowances claimed exceed the income into the company and this loss will be shown in your company accounts.
You get loss relief by offsetting the trading loss against any other gains or profits made by your company in the same accounting period. If you have made a trading loss and it can’t be used in the same year, you may be able to make an election to carry back the loss to earlier accounting periods or it will be carried forward to be set off against the profit for future periods automatically.
By carrying back a loss against profits of an earlier accounting period where you have already paid the tax that was due, a repayment from HMRC will be generated, including interest. If you owe any prior year Corporation Tax, this will be offset against any potential refund.
Paying Corporation Tax
It is your responsibility as director to make sure that you pay your company’s liability, quoting the full payment reference. If you have paid your liability quoting the wrong reference, or no reference, then HMRC will not know that you have paid and will continue to chase you for payment. You can correct this by contacting the Collector of Taxes with details of your payment and your correct payment reference and they will then reallocate your payment against your company’s liability. Interest will still be due on any underpayment.
If your company does not have funds to pay its Corporation Tax liability by the deadline (or any other liabilities as they fall due), then you need to identify when you will be able to pay.
You can prepare a schedule of repayments that shows that some tax payments are going to be delayed for only a short while, i.e. a couple of months. This can be dealt with by a call to HMRC. There will be interest and possible surcharges that cannot be avoided, but HMRC are normally sympathetic. For temporary cash flow problems there is now a dedicated phone service provided by HMRC to assist with payment plans: 0845 302 1435.
If the repayment schedule shows long delays, you will need to agree a formal repayment schedule with HMRC to avoid threatening demand notices and even debt recovery. It is important that you adhere to any agreement with HMRC, as they will seek recovery as soon as a repayment schedule fails.
Corporation Tax penalties
Interest will be charged on any late payment of your Corporation Tax liability. Penalties arise if your company’s Corporation Tax Return is not submitted by the deadline. There is an automatic penalty of at least £100 rising to £200 after three months and then to 10% of the unpaid Corporation Tax liability if the return is filed more than 18 months after the end of the accounting period, with a final penalty being applied of a further 10% of the unpaid Corporation Tax liability if the return is still not filed more than 24 months after the end of the accounting period.
Please note that if your Company Tax Return is late for three or more accounting periods in a row, the initial flat-rate penalty increases to £500 with a further £500 charged if you file your return more than three months late.