Corporation Tax is a tax charged on the taxable profits of a limited company. It applies to trading profits, investment income and chargeable gains (profits from the sale of assets).

Unlike Income Tax, which is assessed on individuals, Corporation Tax is a liability of the company itself. The company is responsible for calculating it, filing the return and paying the amount due, all within the required deadlines.

Corporation Tax is charged for each accounting period, which is usually the company’s financial year. The rate charged depends on the level of profit, and the rates have changed significantly in recent years. Directors should not assume rates remain constant, checking the current position with an accountant at the start of each year is prudent.

The starting point is the company’s accounting profit, the net profit figure in the accounts. From this, a series of adjustments are made to arrive at taxable profit:

• Depreciation is added back. Accounting depreciation is not a deductible expense for tax. Instead, capital allowances are deducted, these are the tax equivalent of depreciation but calculated under different rules.
• Disallowable expenses are added back. These include entertaining clients, most fines and penalties, and certain provisions that are not permitted for tax.
• Other reliefs and adjustments are applied, such as Research and Development relief, losses brought forward from earlier years, and group relief where applicable.

The result is the taxable profit, to which the Corporation Tax rate is applied.

For the current tax year, the main rate is 25% on profits above £250,000. A small profits rate of 19% applies to profits up to £50,000. Between these thresholds, marginal relief applies, resulting in an effective marginal rate of approximately 26.5%. These thresholds are reduced proportionately where a company has associated companies.

The Corporation Tax computation is your accountant’s technical workpiece. Understanding its logic, even if not its detail, helps you make better decisions about expenditure, investment and profit extraction during the year.

The payment deadline for Corporation Tax is nine months and one day after the end of the accounting period. So for a company with a 31 March year end, the Corporation Tax is due by 1 January the following year.

The Corporation Tax return (CT600) must be filed with HMRC within twelve months of the accounting period end.

For larger companies with profits above £1.5 million, quarterly instalment payments are required. This threshold is divided by the number of associated companies.

One common source of cash flow problems is treating Corporation Tax as something to deal with when the accounts are prepared, which may be many months after the year end. By then the payment deadline may already have passed, or is imminent. The better approach is to set aside a provision for Corporation Tax throughout the year, based on estimated profits.

Late payment of Corporation Tax attracts interest from HMRC at rates that significantly exceed savings account rates. There is no financial benefit in paying late.

An expense is deductible for Corporation Tax if it is incurred wholly and exclusively for the purposes of the business. The main categories of allowable expenses include:

• Staff costs. Salaries, employer NICs, employer pension contributions and benefits provided to employees.
• Premises costs. Rent, rates, utilities, repairs and maintenance of business premises.
• Business travel costs, including mileage at HMRC-approved rates, rail and air fares, and hotel costs for genuine business trips.
• Professional fees. Accountancy, legal and other professional fees incurred for business purposes.
• Marketing and advertising. Website costs, advertising, trade exhibitions and promotional materials.
• Office costs. Stationery, postage, telephone, broadband and general office supplies.
• Software subscriptions and IT costs used for business purposes.
• Staff training and development costs directly related to the business.

Expenses that are not deductible include entertaining clients and suppliers, most fines and penalties, and any expenditure with a non-business element that cannot be separately identified and excluded.

Capital expenditure, the purchase of assets such as equipment, vehicles and computers, is not deducted as an expense. Instead, capital allowances are claimed against the cost of these assets over time.

Capital allowances are the tax system’s equivalent of depreciation. They allow a business to deduct a portion of the cost of qualifying capital assets from its taxable profit each year.

The main pools and rates are:

• Main pool (18% per year on a reducing balance basis). Covers most plant and machinery, including general equipment, computers and fixtures.
• Special rate pool (6% per year). Covers integral features of buildings (electrical systems, heating, air conditioning) and long-life assets.
• Single asset pools. Used for assets with a private use element, or for assets approaching disposal.

In addition to the annual writing-down allowances, the Annual Investment Allowance (AIA) provides 100% relief on most capital expenditure up to a generous annual limit in the year of purchase, meaning the full cost is deducted in year one rather than spread over many years.

Capital allowances interact with Corporation Tax in a way that accounting depreciation does not. Understanding the timing of capital expenditure, and whether it falls before or after the year end, can affect the tax position for that year materially.

The Annual Investment Allowance (AIA) gives businesses 100% tax relief on qualifying capital expenditure in the year it is incurred, up to a specified annual limit.

The current AIA limit is £1,000,000 per year. This means a business can invest up to £1 million in qualifying plant and machinery and deduct the full cost against its taxable profits in that year, generating immediate Corporation Tax relief rather than waiting for annual writing-down allowances to provide relief over many years.

The AIA applies to most plant and machinery, equipment, tools, commercial vehicles, computers and fixtures in business premises. It does not apply to cars (which have their own capital allowance rules based on CO2 emissions) or to assets acquired in the final period before the business ceases.

For a business planning a significant capital investment, the timing relative to the year end matters. An asset purchased just before the year end generates AIA relief in the current year. The same asset purchased just after the year end delays the relief by a full year. For investments approaching the year end, it is worth discussing timing with your accountant.

Research and Development (R&D) tax relief is a government incentive that allows companies to claim enhanced tax relief on expenditure incurred in developing new products, processes or services, or making appreciable improvements to existing ones.

The relief applies more broadly than many directors assume. R&D does not require a laboratory or a technology company. It applies to any genuine attempt to resolve scientific or technological uncertainty, which can include developing bespoke software, creating new manufacturing processes or engineering novel solutions to specific problems.

From April 2024, the R&D relief regime was reformed and simplified into a single scheme for most companies, with enhanced rates for R&D-intensive businesses. The relief reduces the company’s Corporation Tax liability or, where the company is loss-making, can generate a payable credit from HMRC.

R&D relief is one of the most frequently unclaimed reliefs available to UK companies. If your business involves any element of innovation, investigation or problem-solving that goes beyond routine development work, it is worth asking your accountant whether a claim is possible.

The R&D claim process requires careful documentation of the qualifying activities and expenditure. It is not something to attempt without professional support, but the financial benefit can be material.

If you are unable to pay Corporation Tax by the due date, the most important thing is to contact HMRC proactively before the deadline, not after.

HMRC operates a Business Payment Support Service (BPSS) which allows businesses experiencing genuine financial difficulty to request a Time to Pay (TTP) arrangement. Under a TTP arrangement, the tax can be paid in instalments over an agreed period, typically up to twelve months.

To obtain a TTP arrangement you will need to demonstrate:

• That the tax is genuinely owed.
• That you are unable to pay in full by the due date.
• That you can maintain future compliance while repaying the arrears.
• A realistic repayment proposal.

Interest continues to accrue on the outstanding balance during a TTP arrangement, but penalties for late payment can be avoided if the arrangement is agreed in advance.

Ignoring Corporation Tax liabilities does not make them go away. HMRC will pursue the debt through escalating enforcement action, including debt collection agencies, county court judgements and, ultimately, winding-up petitions. Early contact with HMRC is always preferable to silence.