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Introduction to Corporation tax

Introduction to Corporation tax

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Contents

What is Corporation Tax?

Corporation Tax is a tax on the taxable profits of limited companies and some organisations. These organisations include clubs, societies, associations, co-operatives, charities and other unincorporated bodies. Corporation tax isn't paid by sole traders (see Tax for sole traders) or partnerships (see Tax for partnerships). Taxable profits include:

  • trading profits, investment profits (except dividend income, which is taxed differently); and
  • capital gains, called 'chargeable gains', for Corporation Tax purposes.

If your company or organisation is based in the UK, you'll have to pay Corporation Tax on all its worldwide taxable profits.

If your company isn't based in the UK, but operates in the UK through a permanent office or branch, you'll only have to pay Corporation Tax on taxable profits from its UK activities.

What is an accounting period for Corporation Tax?

Your company must pay Corporation Tax on taxable profits for each Corporation Tax accounting period.

Your company's Corporation Tax accounting period is normally 12 months long, and normally matches your company's 12-month financial year. Your company's financial year begins and ends with the dates covered by its annual report and accounts filed at Companies House (called 'statutory accounts' or 'audited accounts').

Sometimes, however, your company's Corporation Tax accounting period might not match its financial year. This can happen if your accounts cover a period of more than 12 months, for example, if you're preparing the first accounts of your newly formed company, or if you change your company's financial year.

In this case, although you'd only need to file one set of accounts at Companies House, you'd need to file 2 Company Tax Returns – one for the first 12 months and one for the rest of the period covered in your accounts. This is because a Corporation Tax accounting period can't be longer than 12 months.

For example, if a company has its accounts prepared for 15 months from 1 January 2012 to 31 March 2013, the Corporation Tax accounting periods will be:

  • 1 January 2012 - 31 December 2012 (12 months)
  • 1 January 2013 - 31 March 2013 (3 months)

You'll need to file a Company Tax Return for each of these periods.

The Corporation Tax financial year (also called the 'fiscal year') runs from 1 April to 31 March and is therefore different from the tax year for individuals. The Corporation Tax financial year is named by the year in which it starts, so the Corporation Tax financial year 2015 runs from 1 April 2015 to 31 March 2016. Corporation Tax rates, allowances and reliefs may be changed by the government each financial year.

If your company's Corporation Tax accounting period doesn't coincide with the Corporation Tax financial year (1 April to 31 March), you'll need to divide its taxable profits between the 2 applicable financial years.

For example, if your company's Corporation Tax accounting period runs from 1 July 2014 to 30 June 2015:

  • The first 9 months (274 days) of your Corporation Tax accounting period (from 1 July 2014 to 31 March 2015) fall into the Corporation Tax financial year 2014 (1 April 2014 – 31 March 2015). Your company will pay tax on 274/365ths of its taxable profit at the rates for financial year 2014.
  • The remaining 3 months (91 days) fall into the financial year 2015. Your company will pay tax on 91/365ths of its taxable profit at the rates for financial year 2015.

Are there any general reliefs from Corporation tax

If your company gives money, equipment or items it makes or sells to charity, or seconds employees to charities it may be eligible for tax relief. See Gov.uk for more information.

There are also other reliefs which might be claimed such as Research and Development Relief and reliefs for creative industries. See Gov.uk for more information.