Corporation Tax is a tax on the profits of limited companies. The company (not HM Revenue and Customs) will work out how much Corporation Tax is payable on the profits.
What is the rate of Corporation Tax?
The current rate of Corporation Tax for all companies is 19% (from 1 April 2017). The Chancellor of the Exchequer has announced that Corporation Tax will fall to 18% in April 2020.
How do I work out my profits?
The profit calculated in the accounts is not necessarily the same as the profit on which Corporation Tax is calculated.
There may be some items which are not allowed for corporation tax purposes (your accountant will be able to help you with this).
In order to work out the profits on which corporation tax is payable, we will consider two steps:
Step 1: Adjust the profits from the accounts
Net Profit per Accounts
The profit before tax taken from the profit and loss account (income statement).
Add: Non-trading expenses
We add expenses which are not allowable as trading (business) expenses and have been included in the accounts. (See Which business expenses aren’t allowable? belowfor more information).
Less: Non-trading income
We deduct income which is not trading (business) income and has been included in the accounts. For example, income from property, interest received and profits from the sale of assets.
Less: Capital Allowances
We may be able to deduct capital allowances (see What are capital allowances? below for more information).
Then you have your adjusted profit.
Step 2: Calculate the total amount on which Corporation Tax will be paid
The adjusted profit is the figure we have calculated previously.
Less: Trading losses brought forward
Deduct any trading losses (unused) brought forward from a previous accounting period.
Add: Income from property
Add any income from property.
Add: Income after non-trading loan relationships
Add income from non-trading loan relationships, for most companies this will usually consist of bank and/or loan interest received.
Add: Chargeable Gains
Add chargeable gains. The most common examples are profits on the sale of shares, land and buildings and business assets.
Less: Charges on Incom
Companies can claim tax relief from qualifying charitable donations, by deducting the amount from its taxable profits, up to the extent that the taxable profits are reduced to £nil.
Profits chargeable to Corporation Tax
And finally, we have the profits chargeable to Corporation Tax. Note that any dividends received are NOT included.
Which business expenses aren’t allowable?
Expenditure must be “wholly and exclusively” incurred for trading (business) purposes.
Expenditure is deducted from income in the profit and loss account; therefore if it is not allowable it must be added back.
Below are some common examples of expenditure which is disallowable for corporation tax purposes and must be added back:
Capital expenditure and depreciation
Capital expenditure is the purpose or improvement of fixed assets. Fixed assets are large items which are not bought to resell. For example, motor vehicles, buildings, office and computer equipment.
Client entertaining is not allowable. Staff entertaining is allowable of incurred wholly and exclusively for business purposes, for example team building.
Political donations and charitable donations to national charities are not allowable. Always keep a note of charitable donations as they may be allowable as a charge on income (see How do I work out my profits above).
Penalties and fines
These are not allowable as they relate to breaking the law.
Legal fees relating to capital items or breaking the law are not allowable.
When do I pay Corporation Tax?
Any Corporation Tax due must be paid electronically by nine months and a day after the accounting period end.
For example – a company with a year-end 31 December 2018 must pay any Corporation Tax due by 1 October 2019.