IT Contractor Tax Limited Company Accounts Accounting

When you start up as a limited company contractor, then you will have to assess your business each year for corporation tax.

This is a tax on your company's profits. You have to work out your own tax liability, pay that tax, and ensure you deliver all required information to Her Majesty's Revenue & Customs (HMRC) on time.

Of course you won't have to physically do it yourself; getting this right is one of the main reasons you need a specialist contractor accountant.

As with all tax affairs, if you get it wrong or send required information late, you will be penalised - sometimes with a fine.

Use this guide to know the basics of what you need to do and why.

Register your new business

When you set up your limited company, you have a legal obligation to tell HMRC that your company exists and is liable for tax. This is also the time to tell them who your accountant is. Often you will need to fill in a form to authorise your accountant to act on your behalf. You can find out more about registering your company for corporation tax.

Self-assess your business

Once a year you will get a notice from HMRC to file a company tax return. Even though your accountant will be doing the calculations, it is ultimately your responsibility to ensure it is filed correctly and on time.

Your accountant will fill in your company's corporation tax return (CT600).

From the start of the 2011 tax year (1st April), all corporation returns must be filed online (for all accounting periods ending 31st March 2010 onwards).

Accounting periods

Your business is self-assessed over accounting periods. For most businesses these are 12 months long and match the dates you have your accounts drawn up.

It is possible to set accounting periods for less than 12 months, although not longer.

Your Corporation Tax payment is due 9 months and one day after the company's "normal due date", which is usually the last day of your annual accounting period.

Company tax return information needed

Each tax return must contain your company name, registration number, the registered office and tax reference number. You will find this on the notice to deliver a company tax return.

Corporation Tax rates for contractors

There are two rates of corporation tax according to the level of profits you make. In the 2011/12 tax year, you pay 20% on profits of up to £300,000. This is known as small profits rate and will apply to almost all IT contractor companies.

The main rate is 26% on profits of £1.5 million and above.

Companies that make profits between £300,000 and £1.5 million pay marginal relief on the level of profits between the two rates.

Keeping records

You need to keep all of your records for at least six years, and some would argue it's sensible to keep them longer than that. This includes all receipts and invoices, plus the record of all sales and purchases made.

HMRC says it is acceptable to keep records in legible alternative such as an optical imaging system, where documents are scanned into a computer.

Deadlines and penalties

You can send your company tax return in any time after the end of your accounting period (your year end). You have to do it by the statutory filing date. This is usually the later of 12 months after the end of your accounting period, or three months after you get a notice to deliver a company tax return.

If you (or your accountant) submit the tax return late your company will be charged a penalty. There may also be a penalty if the tax return is incorrect.

If you do owe any corporation tax, this is due nine months and one day after your normal due date. This is the last day of your accounting period. If that was 31st December, your tax payment will be due on 1st October.

There may be a penalty and interest charges if you pay it late.

Remember to get professional advice from a qualified person (your accountant) before taking any action. Don't rely purely on information contained in this article.