Corporation tax is a tax that is levied on business profits and other types of income, including any chargeable gains accruing in commercial enterprises. Corporation tax is a British or Irish term – in the United States and Canada people say ‘corporate tax’, while in Australia the term is ‘company tax’.
This type of tax is charged on a business’ profits for the ‘financial year’, which in the UK runs from 1st April to 31st March.
Corporation tax is relatively young in the United Kingdom. Before 1965, businesses were subject to income tax on their profits, just like individual people, and at the same rates.
The British Government says you have to pay corporation tax on profits from doing business as:
– a limited company (ltd. or plc.)
– any foreign company that has a UK office or branch
– a club, co-operative, membership organization, or other unincorporated association such as a sports club or community group.
You don’t get a corporation tax bill
Entities liable for corporation tax do not receive a bill from the Government. There are specific things that need to be done to calculate, pay and report tax:
– Registration: when the business or entity starts, you should register for corporation tax. A dominant business that is restarted must also register. Unincorporated associations have to write to HMRC (Her Majesty’s Revenue and Customs).
Limited companies, public limited companies (PLCs), clubs, and cooperatives are liable for corporation tax.
– Accounts: maintain accounting records and prepare a corporate tax return to calculate how much tax to pay.
– Pay on time: make sure the tax is paid by your deadline, which is typically nine months and one day after the end of your ‘accounting period’. If you have nothing to pay, report this by the deadline.
– File Tax Return: make sure it is filed before your deadline, which is usually twelve months after the end of your accounting period.
Remember that the deadline for paying the tax comes before the deadline for filing the tax return.
Firms pay corporation tax on profits
Taxable profits for corporation tax include all the money an association or company makes from:
– trading profits, i.e. doing business
– the sale of assets, if they are sold for more than they were bought for, i.e. chargeable gains
UK-based companies pay tax on all their profits made in the UK and abroad.
Companies based outside the UK are only taxed on the profits they make from their business activities in Britain – if they have an office or branch in the UK.
Who would have thought in the 1960s that the United States, the then flagship of the free market system, would become the highest taxing country in the corporate world fifty years later? (Source: KPMG)
Limited companies are separate entities
When you register as a limited company, you as a company director are subject to PAYE (pay as you earn) tax as well as national insurance. You will also have to fill a personal self-assessment tax return.
Your company is another entity – it is viewed separately for taxation purposes. It is liable for tax on its surpluses or taxable profits.
The Financial Times Lexicon says the following regarding corporation tax:
“Companies are subject to corporation tax, which is levied on business profits and other forms of income, as well as on chargeable gains accruing to companies.”
“Corporation tax is charged on the profits of a ‘financial year’ which runs from 1 April. The profits of a company are calculated by reference to its accounting periods and are then, where necessary, apportioned on a time basis between the financial years in which the accounting period falls.”
Video – What is corporation tax?
This UK Government video explains in easy-to-understand terms exactly what corporation tax is and what you need to do in order to get registered and adhere to all the rules and regulation.