Corporation Tax is the tax charged on the profits made by a corporate entity (a limited company).
Accounting profit is calculated by deducting expenses from income. Taxable income is then calculated by adjusting the accounting profit for transactions that are not deductible for tax purposes (e.g. depreciation of assets and business entertaining) and capital allowances for certain asset purchases. The resulting figure is subject to Corporation Tax at the prevailing rates.
Corporation Tax rates apply from 1st April to 31st March each year – if there is more than one rate applicable in a company accounting period then the taxable income must be apportioned into each, according to the number of days from the accounting period fall into each year, and two rates applied.
ABC Ltd has an accounting period running from 1st July 2016 to 30th June 2017 and has a taxable income of £10,000. The rate of Corporation Tax for 1st April 2016 to 31st March 2017 is 20% and from 1st April 2017 to 31st March 2018 is 19%.
The accounting period has 365 days; 274 days falling between 1st July 2016 and 31st March 2017; and 91 days falling between 1st April 2017 and 30th June 2017.
Therefore £7,506 (274/365 of the profit) is taxed at 20% and £2,494 (91/365 of the profit) is taxed at 19%. The Corporation Tax charge for the accounting period is therefore £1,975.06 – the effective rate of Corporation Tax is therefore 19.75%.
If there is an outstanding directors loan owed to the company at its balance sheet date, this must be declared to HMRC and a surcharge applied of 32.5% of the loan. If the loan is repaid (either in full or in part) within 9 months of this date, then relief will be given on the amount repaid. This means that if a directors loan is outstanding at the year end, which is repaid within 9 months, then no surcharge will be payable.
If the director’s loan surcharge is payable and the loan is repaid after the 9 month window has expired, the company will be able to claim relief on the next return but will only be due for repayment 9 months after the end of the period in which it was repaid. Clearly directors loans, and the resulting surcharge are both reclaimable by the company but have an adverse affect on cashflow whilst outstanding.
The directors of a limited company are responsible for informing HMRC that the company is liable to Corporation Tax via form CT41G, paying the tax on time and filing the Company Tax Return (form CT600) with supporting documents (statutory accounts) before the deadline.
Payment of Corporation Tax is due 9 months after the end of each CT600 period, whilst the CT600 must be filed within 12 months of the CT600 period (i.e. 3 months later than the payment deadline).
The maximum amount of time that a CT600 can last is 365 days (366 when spanning a leap year). If the accounting period is longer than 365 days, the company must file 2 CT600s – one for the first 365 days and another for the balance. Accounting periods are usually 12 months in length, but can be a few days longer in the first year (the default year end will be the anniversary of the last day in the month of formation); the maximum of accounting period for a limited company is 18 months.
Alchemy Accountancy can assist in complying with all filing requirements including registration for Corporation Tax, preparation of statutory accounts and CT600 forms.