New contractor guide to Corporation Tax
Corporation Tax is a levy on taxable profits which is applicable to active Limited Companies incorporated in the UK. If you’re a contractor who has recently set up as a Limited Company it’s helpful to be aware of how this tax works and how it applies to your own company. As a director of your company – under the companies Act 2006 – you are ultimately responsible for ensuring that your company is fully compliant with HMRC regulations. This means that your company must pay the correct amount of Corporation Tax and file an accurate Company Tax Return. Failure to do so can, at the least, result in undesirable fines and penalties.
In many cases a contractor accountant is appointed to help with this which makes this area much easier. A contractor accountant will be able to assist with preparing and filing your Company Tax Return as well as offering expert advice on how to make legitimate tax savings through your company.
Registering for Corporation Tax
HMRC will send you a newly formed Limited Company form – Corporation Tax: Information for New Companies – within a few days of your company being registered at Companies House. Even if you don’t receive this, you must register for Corporation Tax with HMRC within three months of beginning to contract through your company; otherwise a substantial penalty could apply. Registering can be done by post using the form HMRC sends you or online at HMRC’s website. This can be done by you personally or by your contractor accountants on your behalf.
How Corporation Tax is calculated
Your Corporation Tax bill is calculated as a set percentage of the net profit of your business. The net profit is calculated as gross profit less allowable expenses.
Gross profit in a business includes:
- Ordinary trading profit – profit from your usual contracting activities.
- Profit made from any investments.
- ‘Chargeable gains’ – profits from the sale of assets like property or shares.
Deductable expenses can include items such as:
- Communications, stationery and other general office costs.
- Allowable business travel including car and public transport expenses.
- Accountancy, legal and other professional fees.
- Wages, salaries and other staff costs (including any salary you pay yourself).
The Corporation Tax percentage chargeable varies according to the size of the net profit of the business. Currently, the main rate of Corporation Tax applicable to the majority of the bigger mainstream businesses is 23% (which will be falling to 21% in 2014). However, most contractors will qualify for the small profits rate of 20%, which applies to qualifying companies with profits of up to £300,000.
How to file and pay for Corporation Tax
Corporation Tax, unlike other forms of tax, can only be paid electronically and the payment must be made before the Company Tax Return is filed. Also, HMRC specifies that the supporting tax calculations and accounts which form part of the Company Tax Return must also be filed. This means its vital that all your contractor accounting and records are in good order to ensure all relevant information is readily available for you or your contractor accountants to work with.
The payment deadline date for your Corporation Tax depends on the size of your taxable profit. For contractors who have profits of up to £300,000 (or if higher, less than £1.5million) payment must be made by the ‘normal due date’. This is 9 months and one day after the end of the company’s Corporation Tax accounting period.
The filing deadline date for your Company Tax Return and supporting information is within 12 months of the end of your company’s Corporation Tax accounting period. This date is known as your ‘statutory filing date’.
Getting expert help
There’s no doubt that Limited Company accountancy can become complex and getting tax calculations right is an important part of running your business successfully. This is why the majority of contractors appoint a specialist contractor accountant to take expert care of this. Contact us at Intouch Accounting to find out more about our Monthly Service package and how it can help ease the pressure of running your contractor Limited Company.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.