Corporation Tax is a tax on a company's taxable income or profits. A company being any limited company whether by shares or guarantee, members clubs, trade and housing associations, co-operative groups. A corporate tax return consists of the completed Corporation Tax Return form CT600 and the annual financial accounts which support the tax calculation.
Companies are required by law to maintain records of financial transactions in a manner that enables the company to produce an accurate Corporation Tax Return. Company tax records must be kept for a minimum of six years from the end of the accounting period and longer if the accounts are submitted late or being enquired into by the Inland Revenue. Company tax records must include all original sales receipts and purchase expenses. Under Companies Act legislation registered companies must also keep accounting records.
Companies are responsible for calculating their own corporation tax liability and paying the corporation tax without prior assessment by the Inland Revenue. Companies which fail to deliver their tax return by the statutory fling date which is normally 12 months after the accounting period are liable to penalties. An accounting period normally being 12 months - can be shorter but never longer. Should a company submit the CT600 Corporation Tax return form without the accounts then it is treated as not having submitted a tax return form.
Current Company Tax Return Forms
The latest version of the CT600 form for 2007 has been available for download from the Inland Revenue website since 31 August 2007. The Corporation Tax Return Form CT600 Version 2 contains two small changes from the previous 2006 version. CT600 (short) for small companies has an additional box on Page 1 so that a company which is a member of a group other than a small group can identify itself. The same additional box is on CT600 plus a new box on page 3 of the 8-page form so that a company with ring fence profits can show the ring fence profits included in its figure of total profits. There are no changes to other forms in the CT600 series at present and all the CT600 Supplementary Pages published in 2006 remain valid and will probably remain so until at least after the 2008 Chancellor's Budget.
Corporation Tax Rates
While the main rate of Corporation Tax remained at 30% in 2006 and 2007 which will be reducing to 28% in 2008. The small company corporation tax rate applicable to companies with annual profits under ?300,000 was increased from 19% in 2006 to 20% effective on profits earned after 1 April 2007 and is set to increase further on 1 April 2008 to 21% and to 22% from 1 April 2009 as announced in the March 2007 Budget. Corporation Tax on ring fenced profits being income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf remain at 19% for small companies and 30% for larger companies. Interest is charged on late payments and at a lower rate on instalment repayments of Corporation Tax as is the practice on all late tax payments.
Accounting Periods straddling 1 April
The effective date for changes in the Corporation Tax rate applicable in recent years has been 1 April each year as opposed to the 5 April for unincorporated businesses. For companies with accounting periods that straddle the 1 April separate calculations are required for the period before 1 April and after 1 April based upon the number of days in each accounting period. As a proportion of 365 (366 in leap years such as 2008)
No Corporation Tax Due
Companies are required to advise HMCE by either submitting a company tax return or informing them by completing the HMCE form for this purpose or at the very least returning the payment slip marked "NIL due". All communications should state the corporation tax payment reference which can be found on the payment slip. This reference number is specific to each accounting period and must be quoted accurately.
Filing Corporation Tax Return Online
Most companies and their agents can file company tax returns online. The computations, financial accounts and other supporting documentation must be sent in PDF format unless approved software products is being used. Filing the corporation tax return online is faster, often more convenient and can be done 24 hours a day while the HMCE software calculates the tax liability. Using the CT Online service also allows the company's tax position to be viewed including any interest or penalties that have been charged. Company details such as telephone, fax, addresses and email addresses can be changed and agent details can be added or changed. Authorised agents can also view client company corporation tax positions and liabilities.
Inland Revenue Enquiries into Company Tax Returns
Enquiries into Company Tax returns are governed by rules and codes of practice. HMCE have at least 12 months from the statutory filing date to commence an enquiry when the company tax return has been submitted on time and longer if the return is submitted late. Companies are advised in writing when an enquiry starts and ends. If no adjustments are required HMCE advise the enquiry has finished. Any adjustments are also advised in writing and the company then has 30 days to file an amended Company Tax Return failing which HMCE will amend the return. At any time during an enquiry a company can apply to the Inland Revenue Commissioners for an enquiry to be closed. Separate codes of practice exist for local offices and specialist compliance offices.
The capital allowances section of the self assessment tax return form is the most difficult for people who are self employed and not conversant with at least a minimum knowledge of accounting and the tax system. The difficulty in this section of the tax return form is that it is an area which many start up businesses may not have come across before. It is an area which affects not just the calculation of the tax allowances and knowledge of the tax rates but also how an item becomes considered for such tax allowances.
The first step towards claiming capital allowances is to understand that not all purchases which may have been entered into the accounts are treated the same for tax purposes. 100% of the purchase price of the majority of items is deducted from income to produce a net taxable profit. Purchases of certain items where that item is not consumed by the business in a single year but may be used by the business in both the current year and future years are not expensed in the year of purchase but classified as fixed assets.
A fixed asset includes not just the original cost of the item but also the cost of alterations, improvements and extensions of the asset. The fixed asset cost does not include the repairs and maintenance of that asset which may be treated as a normal business expense and written off against income when incurred. Accounting records need to be kept of fixed asset purchases in order for the capital allowances to be calculated and included in the self assessment tax return.
Having identified certain items as fixed assets the normal accounting practise is to use a technique called depreciation to write off the cost of the asset against profits over the expected life of that asset. The scale of the write off being a management decision as all depreciation calculations are ignored for tax purposes. Depreciation is entered on the self assessment tax return and subsequently deducted in an adjustment section.
When calculating the net taxable profit of a business the tax system add back to the profit shown in the business accounts any depreciation charges the business has made in the preparation of the accounts. The tax system then deducts the capital allowances from the net profit made by the business and shown on the self assessment tax return form to arrive at the actual net taxable profit, those tax allowances being according to a fixed set of rules applicable for the tax year.
Completing the self assessment tax return form also includes calculating the capital allowances which compromise of two elements. Capital allowances being a first year allowance which can be claimed on some types of fixed asset and writing down allowance on the net asset value in subsequent years until the total value of the fixed assets has been claimed against profits earned.
The rate of first year allowance for small businesses has changed each year from 2004-05 to 2007-08 starting in 2004-05 at 40%, rising to 50% the next year and then back to 40% in 2006-07 before returning to 50% in 2007-08. The first year allowance can be claimed on most assets except vehicles were special rules are applied.
Generally first year allowances can not be claimed on vehicles except if that vehicle is deemed to be a commercial vehicle. The inland revenue website contains a list of vehicles it considers to be vans and commercial vehicles and first year allowances can be claimed. Cars and commercial vehicles not on the approved list are not subject to a first year allowance except new vehicles with low CO2 emissions below 120gm per km driven.
The writing down allowance is 25% of the net written down value for tax purposes and is the amount of capital allowance claimed on fixed assets after the first year and in the case of motor vehicles used for business purposes in the first year. Capital allowances on motor vehicles being restricted to a maximum of 3,000 pounds per vehicle and vehicles costing over 12,000 pounds being in a separate section of the tax return to those under 12,000 pounds
The capital allowance section of the self assessment tax return form also includes the term balancing charges. A balancing charge arises when an asset is sold or disposed of and is the difference between the amount received and the net written down value for tax purposes. Net written down value is the original cost less capital allowances that have already been claimed against the net taxable profit.
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