If you are going to set up in business as a limited company contractor, your company will have to pay Corporation Tax on any profits it makes.
Your company will need to assess its Corporation Tax liability on an annual basis and pay any tax owed to HMRC.
You could be penalised if you submit your Corporation Tax return late, or if it contains errors.
Unsurprisingly, the vast majority of contractors entrust their company tax affairs to specialist contractor accountants.
Use this guide to know the basics of what you need to do and why.
Register your new business
When you form a new company, you must inform HMRC that the company has been set up, and will be liable to pay Corporation Tax on its profits. You must inform HMRC within 3 months of commencing your business activities for Corporation Tax purposes.
In most cases, you will also appoint an accountant to take care of your tax affairs, and you will also need to ‘authorise your agent’ to act on your behalf.
Your accountant will be able to take care of the registration process on your behalf, as well as other matters such as registering your company for VAT and setting up a payroll.
You can find out more about registering your company for corporation tax.
Self-assess your business
Each year, your company should receive 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 also submit your company’s corporation tax return (CT600).
How do accounting periods work?
All limited companies are self-assessed over pre-defined periods, typically 12 months in length unless your accountant has made changes to your reference dates.
Your accountant can change an accounting period to one of less than 12 months, but not longer.
Your company must make pay any Corporation Tax liabilities within 9 months and one day following its ‘normal due date’, which will typically be the final day of your annual accounting period.
Company tax return details
All company tax returns will contain the name of your company and company registration number, the registered office address and tax reference number.
Corporation Tax rates for contractors
Companies of all sizes pay the same rate of Corporation Tax – which is currently 19% (from 1st April 2020).
There used to be two rates of Corporation Tax – the main rate, and a ‘small profits rate’ for companies with profits of £300,000 or less. Profits between £300,000 and £1.5m were subject to a complex system of ‘marginal relief’.
The two Corporation Tax rates were equalised in 2016.
Keeping accurate records
All companies must keep all their financial and tax records for at least 6 years – this includes all invoices, expenses, receipts, etc.
HMRC states that you can scan these documents as a ‘legible alternative’ to keeping paper copies.
With more and more contractors using online accounting systems, most records can now be stored safely in the cloud.
Deadlines and Corporation Tax penalties
Your company must submit its annual tax return by the statutory filing date deadline, which is usually 12 months following the end of your accounting period.
If your CT return is delivered late or contains inaccuracies, you could be charged a penalty. Even if your accountant is at fault, the buck stops with the company’s directors, so make sure you understand the figures.
As mentioned earlier, you must also pay any tax liabilities within 9 months and one day of your accounting period end date.
Remember to get professional advice from a qualified person (your accountant) before taking any action. Don’t rely purely on the information contained in this article.