Company tax returns and corporations tax guide

Company tax returns and corporation tax play critical roles in the financial operations of businesses.

Some limited companies and certain organisations may be required to file company tax returns with HM Revenue and Customs (HMRC) to report their taxable profits and calculate their corporation tax liability. The tax imposed on the profits is called corporation tax. It serves as a direct tax on corporate profit and ensures that companies contribute to public finances and fund essential government programs and services.

For UK businesses, complying with company tax returns and corporation Tax obligations is essential not only for legal compliance but also for financial planning and management. Accurate reporting and calculation of corporation tax liability are a must to avoid penalties and fines while maximising tax efficiency through legitimate deductions and allowances. Meeting tax obligations also helps maintain transparency and credibility, promote trust among stakeholders, and contribute to the overall stability and sustainability of the UK business environment.

In this article, we take an in-depth look at company tax returns and corporation tax to better understand their importance and role.

Understanding the Basics: A Corporation Tax Guide

Corporation Tax is a tax imposed on the profits of limited companies and certain other organisations, including clubs, associations and unincorporated associations.

It’s a direct tax levied on the profits generated by these entities rather than on individuals. The current corporation tax rate in the UK is set at 25% and is applied to taxable profits generated by companies. Unlike Value Added Tax (VAT), which is an indirect tax charged on the sale of goods and services, corporation tax is based on the profits earned by businesses after deducting allowable expenses and reliefs. Corporation tax also differs from personal income tax because it’s not levied on the income of individuals but rather on the profits of companies. Understanding the basics of corporation tax is important for businesses because compliance with corporation tax regulations is a legal requirement and failure to meet obligations can result in penalties and fines. Businesses must accurately calculate and report their taxable profits to HMRC within the specified deadlines to ensure compliance with corporation tax regulations.

Key Deadlines and Requirements for Company Tax Returns

To remain compliant with HMRC regulations, companies must stick to specific deadlines and requirements for filing their tax returns. The key deadline for submitting company tax returns is usually 12 months after the end of the company’s accounting period. However, it’s important to note that the deadline may vary depending on individual circumstances, such as whether the company is newly incorporated or if its accounting period is shorter or longer than 12 months.

In addition to the company tax return, companies are required to provide various documentation, including financial statements, profit and loss accounts, balance sheets and details of any taxable profits or losses. They also need to ensure that all relevant tax reliefs, allowances and deductions are accurately reported. By maintaining detailed and organised financial records at all times and working closely with accountants, companies can meet these requirements with ease. If company tax returns are not submitted on time or accurately, penalties and fines are issued.

How to Calculate Corporation Tax

There are several steps involved in calculating corporation tax in order to determine the taxable profits of a company.

The company must first prepare their financial statements, including profit and loss accounts and balance sheets, in accordance with accounting standards. From these financial statements, taxable profits are derived by making adjustments for tax purposes, such as adding back non-deductible expenses and deductions for capital allowances. Then, once the taxable profits are determined, the company can apply the prevailing corporation tax rate to calculate the corporation tax liability. A company may be eligible for tax reliefs, allowances and deductions, which can reduce their corporation tax liability. Accurately calculating taxable profits and applying the relevant tax rates and allowances is important to ensure compliance with HMRC regulations. Companies often seek assistance from professional tax advisors to help navigate the calculation process and optimise their tax position while remaining compliant with tax laws.

Common Deductions and Allowances

Through deductions and allowances, it’s possible for businesses to reduce their Corporation Tax liability.

Common deductions include allowable business expenses, such as costs incurred for running the business, purchasing goods or services directly related to business activities and wages paid to employees. Businesses may also claim deductions for capital allowances on qualifying assets, such as machinery, equipment and vehicles used in the business.

Some businesses may be eligible for tax reliefs and allowances, such as Research and Development (R&D) tax relief, which allows them to deduct a percentage of their R&D expenditure from their taxable profits. Annual Investment Allowance (AIA) also provides tax relief on qualifying capital expenditure on plant and machinery. Other allowances, such as the Patent Box regime, allow businesses to apply a reduced corporation tax rate to profits generated from patented inventions.

These deductions and allowances can help businesses significantly reduce their Corporation Tax liability. This is why it is beneficial to keep up to date with available tax incentives and to reach out to tax professionals who know how to maximise tax positions.

Company Tax Returns Guide: A Step-by-Step Process

Our step-by-step guide to ensure accurate reporting and compliance.

1. Gather all relevant financial records – Collect financial statements, profit and loss accounts, balance sheets and any other documentation needed for the tax return.
2. Review and reconcile financial records – Verify the accuracy of financial records and reconcile them with bank statements and other supporting documents to identify any discrepancies.
3. Calculate taxable profits – Determine the company’s taxable profits by making adjustments for tax purposes, such as adding back non-deductible expenses and deductions for capital allowances.
4. Apply relevant tax rates and allowances – Apply the prevailing corporation tax rate to the taxable profits to calculate the corporation tax liability. Consider any available tax reliefs, allowances, and deductions to reduce the tax liability.
5. Complete the company tax Return form – Fill out the company tax return form online using HMRC’s online filing service or offline using commercial accounting software. Provide accurate and complete information, including details of taxable profits, allowances and deductions.
6. Submit the company tax return – File the completed company tax return form with HMRC by the deadline, which is usually 12 months after the end of the company’s accounting period. Ensure timely submission to avoid penalties and fines.
7. Pay any corporation tax owed – Pay the corporation tax owed to HMRC by the deadline specified on the company tax return form. Payments can be made electronically or by cheque, depending on the preferred method.
8. Keep records – Retain copies of all documentation submitted with the company tax return and keep detailed records of the filing process for future reference and compliance purposes.

Avoiding Common Mistakes in Corporation Tax Filing

To ensure accuracy and avoid penalties when filing corporation tax, businesses must be proactive in not making common mistakes. All numbers should be double checked for accuracy to prevent under or overestimating tax liability. Setting reminders and marking the calendar can help ensure timely submission.

Familiarising yourself with all deductible expenses maximises claims and reduces taxable profit while reporting all sources of income, including investments and interest, is essential to avoid penalties. Using correct tax codes for business activities ensures proper tax calculation, and maintaining comprehensive financial records for at least six years provides evidence in case HMRC requests. Keeping personal and business finances separate simplifies tax filing and avoids confusion, while researching and applying for all applicable tax reliefs and credits lowers the tax bill. Reviewing tax returns for completeness and responding promptly to HMRC correspondence are also crucial steps in avoiding penalties and scrutiny.

Planning and Strategies for Corporation Tax Efficiency

Here are eight ways to legally minimise corporation tax liability:

1. Be sure to claim all allowable expenses under HMRC guidelines to reduce taxable profit.
2. Utilise capital allowances on business assets such as equipment, machinery, and vehicles to further reduce tax liabilities.
3. Investigate eligibility for Research and Development (R&D) tax credits if your company is engaged in innovative activities.
4. Maximise pension contributions to lower taxable profits, as these contributions are typically tax-deductible.
5. Carry forward losses to offset future profits and explore Creative Industry Tax Reliefs if applicable to your business activities.
6. If the company earns income from patented inventions, make use of the Patent Box Regime to lower Corporation Tax rate.
7. Assess the tax efficiency of your business structure and strategically plan dividend payments to shareholders to optimise tax liabilities.
8. Seek professional advice from tax advisors or accountants to ensure your business stays informed about current tax-saving strategies and compliance requirements.

How QAccounting Can Help with Your Corporation Tax Needs

At QAccounting, we understand that staying on top of company finances and accounts can be challenging at times. Our team of dedicated tax professionals can help streamline the financial management of your limited company by offering corporation tax returns as part of a monthly accounting service. This includes preparing the annual financial statements of the company and generating the corporation tax computations and associated CT600 corporation tax returns. Once you have reviewed and approved, we then HMRC on your behalf, giving you one less thing to worry about.