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If you are operating through a limited company, then you will need to pay corporation tax on your taxable profits. Only limited company contractors are required to pay corporation tax, for more information about tax as a limited company, you may find our guide to your first tax year as a limited company director useful.
Profits which are subject to corporation tax include income that has come from trading, investments and capital gains, which are known as ‘chargeable gains’ when you are referring to corporation tax. Dividend payments are not subject to corporation tax as they are taxed separately, so although you will need to keep records of any dividends paid, they won’t come into your corporation tax calculation.
Every UK-based business has to pay corporation tax on their profits, even if the money was earned overseas. If your company is based elsewhere, but trades in the UK through a ‘permanent establishment’, you will only have to pay corporation tax on taxable profits that have been earned in the UK.
If your company is required to pay corporation tax then it is your responsibility to inform HM Revenue and Customs (HMRC) that you will be liable to make payments. You will also need to pay the correct amount of corporation tax on time and complete and file a company tax return. Each of these tasks have different deadlines, your corporation tax payment is usually due nine months after the end of your corporation tax accounting period, and you would need to file by 12 months after the end of your corporate tax accounting period.
To find out more about the taxes you are required to pay as a limited company contractor, speak to your accountant or visit our limited company taxes page.
Your corporation tax bill will reflect the taxable profits for the relevant period, but the corporation tax accounting period is unlike most others in that it is subject to variation and can change from one year to the next. Usually, your corporation tax accounting period will be your company’s 12 month financial year, which will be the dates covered by your company’s annual report and the accounts that you submit to Companies House. You may have heard these called ‘audited accounts’ or ‘statutory accounts’.
There are certain situations under which your corporation tax accounting period will not match your business’s financial year. This could happen if you are newly formed, and the first time you prepare your accounts they cover more than a year, or if your company has stopped trading temporarily and then starts again, in which case your corporation tax accounting period may not match your financial year.
Whilst your corporation tax accounting period can be shorter than twelve months, it cannot be longer, so if your financial year ends up being longer than twelve months, you will have to submit two company tax returns as you will have two corporation tax accounting periods. You may only need to file one set of accounts with Companies House, but your first company tax return will need to cover the first twelve months of your financial year and the second will cover the remaining time.
Many people find that they have to submit two company tax returns in their first year of trading as the ‘accounting reference date’ given to them by Companies House is usually the last day of the month in which they set up their company. This will only be a problem for the first year, and thereafter a single company tax return should suffice unless you change the dates of your financial year for other reasons.
HMRC will usually apply automatic penalties to companies which deliver their tax return late i.e more than twelve months after the end of their corporation tax accounting period. If you are subject to unforeseen circumstances which make it impossible to complete your tax return, you should inform HMRC as soon as possible in order to avoid incurring any fines. However, it is worth noting that extensions to deadlines are only granted in exceptional circumstances.
If you would like more information on corporation tax, or to find out more about contracting, in general, please contact a member of our new business team by calling 01253 362062.