Paying Corporation Tax: A Complete Guide to The Process

Filing your company tax return and paying corporation tax on time is a crucial responsibility as a company director. However, there may be situations where you find yourself unable to meet the deadline. In this article, we will explore the implications of late filing and the penalties that may arise as a result.

What is Corporation Tax

Corporation Tax is a tax levied on the profits of companies and organizations operating in the United Kingdom. It is one of the key taxes that businesses are required to pay. The tax is based on the profits generated by a company during its accounting period, after deducting allowable expenses and reliefs.

Aspects of Business that Incur Corporation Tax:

1. Trading Profits: The primary source of corporation tax is the trading profits of a company. These profits include income from selling goods, providing services, or any other trading activities conducted by the limited company.
2. Investment Income: If a company earns income from investments, such as interest, dividends, rental income, or gains from the sale of assets, it is also subject to corporation tax on these earnings.
3. Chargeable Gains: If a company sells or disposes of assets, such as property or shares, and makes a profit (chargeable gain), this gain is typically subject to corporation tax.

Current Tax Bands:

The rate of corporation tax that a company pays depends on its level of profits. The UK government has implemented a staged reduction in the corporation tax rates over the past few years. As of the latest information available (up to September 2021), the current tax bands for corporation tax are as follows:

1. Small Profits Rate: Companies with annual profits up to £50,000 are eligible for the small profits rate. The small profits rate is currently 19%. Companies with profits between £50,000 and £250,000 will pay a tapered rate of between 19% and 25%.
2. Main Rate: The main rate applies to companies with profits exceeding the threshold for the small profits rate. Currently, the main rate of corporation tax is 19%.

It’s worth mentioning that tax rates and thresholds may be subject to change over time. It is advisable to refer to the latest guidelines provided by HM Revenue and Customs (HMRC) or consult with a tax professional to obtain the most up-to-date and accurate information relevant to your specific circumstances.

When do I pay Corporation Tax

As a company director, it is important to understand the deadlines and obligations regarding the payment of Corporation Tax. The timing of your Corporation Tax payment depends on several factors, including your company’s accounting period and the rules set by HM Revenue and Customs (HMRC).

Here are the key points to consider:

1. Accounting Period: Your accounting period is the period of time for which you prepare your company’s financial statements. The length of the accounting period can vary but is typically 12 months. The payment deadline for Corporation Tax is usually nine months and one day after the end of your accounting period.
2. Corporation Tax Return: Before making a payment, you need to file a Corporation Tax return, which provides details of your company’s income, profits, and allowable deductions. The Corporation Tax return must be submitted online to HMRC. It is important to note that the deadline for filing the Corporation Tax return is earlier than the payment deadline. Currently, the filing deadline is 12 months after the end of your accounting period.
3. Corporation Tax Payment Deadlines: As mentioned earlier, the general payment deadline for paying Corporation Tax is nine months and one day after the end of your accounting period. For example, if your accounting period ends on December 31st, the payment deadline would be the following September 1st. However, for companies that are required to make instalment payments, the deadlines for those instalments will be spread throughout the accounting period.

It is important to keep track of these deadlines and ensure that you make your Corporation Tax payments on time. Late payment or non-payment of Corporation Tax can result in penalties and interest charges imposed by HMRC.

Do HMRC impose a penalty for filing company tax return late

When it comes to filing your Company Tax Return, it is crucial to adhere to the deadlines set by HM Revenue and Customs (HMRC). Failing to file your return on time can result in penalties imposed by HMRC. The penalties for late filing are as follows:

1. 1 day late: If you fail to file your Company Tax Return by the deadline, HMRC will impose an initial penalty of £100.
2. 3 months late: If your tax return remains outstanding after a period of 3 months, an additional penalty of £100 will be charged.
3. 6 months late: If your tax return remains outstanding for 6 months, HMRC will estimate your Corporation Tax bill and add a penalty of 10% of the unpaid tax on top of the previous penalties.
4. 12 months late: If your tax return remains outstanding for 12 months, another penalty of 10% of any unpaid tax will be added to the existing penalties.

It is important to note that if your tax return is late for three consecutive times, the initial penalties of £100 are increased to £500 each.

If your tax return is more than 6 months late, HMRC will send you a notification known as a “tax determination” specifying the amount of Corporation Tax they believe you must pay. It is important to understand that you cannot appeal against this determination.

Regardless of whether you receive a tax determination or not, you are still obligated to pay the Corporation Tax due and file your tax return. HMRC will recalculate the interest and penalties based on the revised timeline and provide you with the updated amounts.

To avoid incurring penalties for late filing, it is essential to keep track of the filing deadlines and ensure that your Company Tax Return is submitted on time. If you anticipate difficulties in meeting the deadlines, it is advisable to contact HMRC as early as possible to discuss your situation and explore the available options.

For detailed information on penalties and deadlines related to filing corporate taxes, you can refer to the UK Government website or consult with a tax professional to ensure compliance with HMRC regulations.

Will HMRC issue a Winding up Petition if I do not pay Corporation Tax

Failure to pay Corporation Tax on time can have serious consequences, and one potential action that HM Revenue and Customs (HMRC) may take is issuing a Winding up Petition against your company. A Winding up Petition is a legal process that can ultimately lead to the liquidation of your company. Here’s what you need to know:

1. Winding up Petition: If you consistently fail to pay your Corporation Tax and HMRC believes that your company is unable to meet its tax obligations, they may initiate the process of issuing a Winding up Petition. This petition is typically filed with the court and can result in the forced closure and liquidation of your company.
2. Intent to Wind up: Before issuing a Winding up Petition, HMRC will usually send you a formal warning known as a “Notice of Intent to Wind up.” This notice serves as a final warning, giving you a specified period (usually 7 to 21 days) to settle the outstanding tax debt.
3. Winding up Order: If you fail to address the tax debt within the given timeframe, HMRC can then apply to the court for a Winding up Order. This order, if granted, will compel your company into compulsory liquidation.
4. Liquidation Process: Once a Winding up Order is granted, the company’s assets will be seized and sold to repay the outstanding tax debt. The company will be dissolved, and its operations will cease permanently.
5. Implications for Directors: If your company is liquidated due to non-payment of Corporation Tax, it can have significant personal consequences for directors. Directors may be held personally liable for the company’s debts in certain circumstances, especially if there is evidence of wrongful or fraudulent trading.

It is important to note that HMRC will generally only resort to issuing a Winding up Petition if all other attempts to recover the outstanding tax debt have been unsuccessful. However, it is in your best interest to take immediate action to address the situation and communicate with HMRC to avoid reaching this stage.

What is a Time to Pay Arrangement

A Time to Pay Arrangement is a flexible payment plan offered by HM Revenue and Customs (HMRC) to businesses that are experiencing temporary financial difficulties and are unable to pay their Corporation Tax in full by the deadline. This arrangement allows you to spread your tax payments over a longer period, making it easier to manage your cash flow. Here’s what you need to know:

A Time to Pay Arrangement can be a valuable option for businesses facing temporary financial challenges. It allows you to manage your cash flow more effectively while fulfilling your tax obligations. However, it is important to approach HMRC as soon as you become aware of the issue and demonstrate a genuine commitment to resolving the outstanding tax debt.

Conclusion

Paying corporation tax on time is crucial to maintain compliance and avoid penalties. Late payment of corporation tax can lead to significant financial consequences, including penalties and interest charges. If you are unable to meet the deadline, it’s essential to contact HMRC and explore the possibility of a Time to Pay arrangement. Seeking professional advice can also provide valuable guidance and support during these challenging situations.

References

The primary sources for this article are listed below.

https://www.gov.uk/corporation-tax-rates

https://www.gov.uk/company-tax-returns/penalties-for-late-filing

Details of our standards for producing accurate, unbiased content can be found in our editorial policy here.

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