What is Corporation Tax?

Corporation Tax applies to the profits of limited companies and other organizations, such as foreign companies with a UK branch, clubs, cooperatives, and unincorporated associations. The tax applies to profits from business activities, investments, and gains from selling assets.

Corporation Tax does not come a direct bill. Business must calculate, pay and report this tax themselves.

How to Calculate Corporation Tax

The tax calculation is based on net profits, meaning: total revenue minus allowable expenses such as wages, rent, and the cost of goods sold. The current rates are:

  • 19% for profits up to £50,000.
  • 25% for profits exceeding £250,000.
  • For profits between £50,000 and £250,000, Marginal Relief applies, leading to an effective rate between 19% and 25%.

Compliance and Filing Requirements

Companies must register for Corporation Tax upon starting or restarting business operations. Thus, maintaining accurate accounting records and preparing a Company Tax Return are essential to determine the tax liability.

The deadline for tax payments is typically 9 months and 1 day after the end of your accounting period, which usually aligns with your financial year. You must file returns within 12 months after this period.

Rates and Reliefs

The Corporation Tax rate for profits is 25%, with a lower rate of 19% applicable to small profits of £50,000 or less. Additionally, entities with profits between £50,000 and £250,000 may qualify for Marginal Relief. Therefore, the thresholds for these rates adjust for shorter accounting periods and the presence of associated companies.

Businesses can also benefit from various allowances and reliefs aimed at reducing tax liabilities. These include deductions for research and development, capital allowances, and relief for losses, which can be carried forward to offset future profits.

Penalties for Non-Compliance

Failure to comply with Corporation Tax regulations can lead to severe penalties, including fines, interest charges, and even criminal prosecution. Ensuring timely and accurate compliance is crucial for avoiding these consequences.

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