APRIL 2022 UPDATE: This article has been updated to reflect the 22/23 corporation tax rates and credit interest rates.
What is Corporation Tax and who pays it?
Corporation Tax is a tax paid by all UK limited companies and it is based on the annual profits that a company generates. Sole traders and partnerships do not pay Corporation Tax and instead they are required to complete a tax return and apply income tax to their earnings. Currently, the Corporation Tax rate is set at 19% for the 2022/23 tax year.
UK based companies and foreign companies are treated differently when it comes to tax. While a UK based company pays Corporation Tax on its UK and worldwide profits, a foreign company only needs to pay tax on the profits made from its UK operations.
No Corporation Tax is due if a company makes a loss or isn’t trading, however, accounting records still need to be kept for the purpose of preparing annual accounts.
What are the benefits of paying Corporation Tax early?
If you pay your Corporation Tax early, HMRC will pay you what is known as ‘credit interest’ from the date you make payment to the payment deadline. The current rate of interest for 2022/23 is 0.5%, and the earliest HMRC will pay interest from is six months and 13 days after the start of your accounting period.
Note, that the amount of Corporation Tax you pay will need to be an estimate as the company year is still in progress. Additionally, the credit interest gained from HMRC is taxable and needs to be included in your company accounts.
The time between your company year end and the deadline to submit your Corporation Tax payment is substantial at just over nine months. However, if you are even one day late with your payment, you will be subject to penalties from HMRC, which is why it’s always better to complete the task early.
Disadvantages of paying Corporation Tax early
The only real disadvantage to paying your Corporation Tax early is the loss of cash flow. As a result, you may then have more limited funds to invest back into your business, or equally you could access higher returns on the capital elsewhere in that time. There aren’t huge financial gains to be made from making payment early, but it will offer reassurance that your accounts and tax affairs are in order and that you won’t be risking a late penalty.
Dealing with Corporation Tax mistakes
If there is a discrepancy in a company’s Corporation Tax, it is best to contact HMRC as soon as possible so that they have more time to investigate the problem, and to avoid any potential late payment penalties.
Support with your Corporation Tax
If you think that your small business could benefit from some expert advice on the subject of Corporation Tax, get in touch with the Kingston Burrowes team, who will be happy to help.
