Corporation Tax is the most important tax liability applying to limited companies. Corporation tax is a tariff imposed on a company and its profits, taxed on the amount left over after business expenses have been deducted. This includes your salary if you are the director of your limited company. Profitable amounts from investments, profits on trading and capital gains are all subject to corporation tax.
The chance to manage your own liability for tax is one of the biggest influencing factors for a contractor to choose working through a limited company. Yet, at the same time, it can be largely intimidating as a responsibility. In almost all scenarios, a contractor shouldn’t have to work out their own liability for taxes, as most pay accountants’ fee’s to take this responsibility off their hands. It is still advisable to get a grasp and understanding, however, in order to help you manage your limited company in the most efficient manner possible, rather than to the benefit of Mr Taxman.
The complexity of the rules surrounding Corporation Tax is mainly derived from the sheer number of situations, scenarios and circumstances that are required to be covered. Three areas are typically covered when a contractor is working through a limited company; (1) PAYE (pay as your earn) and National Insurance (NI), (2) tax payable on dividends and (3) corporation tax. But take note in the form of a warning; it is only permitted to benefit from superior tax regulations (applying to your limited company) if your contract or employee contracts fall outside the IR35 legislation.
Complying with Corporation Tax
The first port of call in complying with Corporation Tax is registering your company with Her Majesties Revenue and Customs and must be completed within the first three months that you start work, trading or contracting. The quickest and easiest way to do this is to fill in the set governmental forms, which can be found on the HMRC website. However, you should have this form sent to you once HMRC have communicated and been notified by Companies House that you have registered a company for trading. However, it is recommended that you fill in the required forms as early as possible, not to wait on the government sending the correct form in time.
The tax itself is actually calculated on an annual basis, known as a ‘Corporation Tax Accounting Period’. This is usually the same time as your limited company’s financial year (5th of April to 6th of April the following year). Her Majesties Revenue and Customs will notify of the accounting period, paired with sending the deadlines for submissions and payment of the taxes due.
Take note of the fact that the deadline for payment of your corporation tax bill is actually earlier than other taxes and the submission of the associated company tax return. That is if turnover is less than £1.5 million. The guidelines state that there are twelve months from the end of your accounting period in which to file your return…but only nine months to actually pay any taxation amounts due.