Corporate Tax: Overview, Deductions, How It Works

Register for Corporation Tax when you do business or restart a dormant one. You must keep accounting records and prepare a tax return. If you don’t pay Corporation Tax or report it late, you could face penalties or interest charges.

Keep accounting records and prepare a Corporation Tax return. You must file a Corporation Tax return every three months. If you fail to submit a return within six weeks of the end of each quarter, you’ll owe a penalty charge.

Pay Corporation Tax or report if there is no money to pay by your deadline. If you haven’t paid by the due date, you’ll owe a fine.

Overview

The UK government has introduced a new set of rules regarding dormant companies and organizations. These changes are designed to help businesses avoid paying taxes while still being able to access public funds.

What do I mean by “dormant”?

A dormant company or organization is one that has been inactive since it was established. This includes companies that have ceased trading, those that have gone into administration, and those that have been liquidated.

How many companies are there in the UK?

There are over 10 million registered companies in the UK. Of these, around 3 million are dormant.

Why is this important?

HM Revenue & Customs (HMRC) estimates that around £1 billion per annum is lost due to dormant companies and organizations. This represents approximately 2% of total corporation tax revenue.

What is active for purposes of Corporation Tax

For Corporation Tax purposes, an Entity must be carrying out a Business Activity. This includes Activities such as Buying & Selling Goods, Providing Services, Earning Interest, Managing Investments, Receiving Other Incomes, etc.

An Entity is deemed to be carrying out a Business activity if it Purpose is to Earn Profits or a Surplus.

A Business Activity is Carried On Through the Provision of Services, Including Those Which Involve the Production of Tangible Personal Property.

Inform HMRC that your company or organization is currently operational.

To avoid paying corporation tax next April, it’s vital that you register your company or organization with HM Revenue & Customs (HMRC). This is because a registered company or organization is considered to be carrying out activities within the UK. As a consequence, it is subject to tax.

If you fail to do this, you could face a penalty fee of £10,000 per person, per year. However, there are ways around this. For example, if you are a sole trader, you don’t need to register – although you still need to pay tax. But if you are self employed, you do need to register. And if you are part of a limited company, you also need to register.

You can find out whether you need to register here.

In addition, if you are a member of a group of companies, you also need to tell HMRC about any change to the structure of the company.

This includes things like adding new directors, changing the name of the company, merging with another company, or splitting into different parts.

Finally, if you are an unincorporated association, club or society that carries out activities within the UK, you also need to notify HMRC about any changes.

The deadline for registering your company or organization with us is 31 January 2020.

What is not active for purposes of Corporation Tax

The following activities are generally not considered to be active for corporation tax purposes:

1. Activities carried out solely for the purpose of meeting the requirements of law;

2. Activities carried out solely to meet the requirements of the accountancy profession;

3. Activities carried out solely in connection with the provision of legal advice or assistance;

4. Activities carried out solely as part of the administration of a charity or religious institution;

5. Activities carried out solely because they are required by contract or agreement;

If your business or organization has not yet begun trading

The UK government’s tax authority, Her Majesty’s Revenue & Customs (HMRC), does not consider pretrading activities and pre‑trading expenditure to be trading. This means you do not need to register for VAT unless you start trading. However, you still need to keep records of these expenses. You cannot claim back any VAT paid on these items. If you are unsure whether you need to register for VAT, contact us today.

When your company or organization has ceased trading after having previously traded

HM Revenue & Customs (HMRC) says that if you’ve been trading for less than one year, your company could be deemed to be dormant. If your company has been trading for less than two years, it could be deemed to be inactive. And if your business has been trading for longer than those timescales, but no activity has taken place for over two years, then it could be considered to be dormant – even though it might still exist.

The government agency has published a list of “exceptions” to these rules. These include cases where companies cease trading because of an insolvency event; businesses that have ceased trading due to being wound up; and situations where the company has gone into administration. But there are some caveats. For instance, if you’re winding down a business, you won’t be able to claim tax relief on losses incurred during the process.

If your company is deemed to be dormant, it’ll lose access to certain benefits such as employee pension schemes and free healthcare. You also won’t be able to apply for VAT registration. However, HMRC does say that you can continue to pay corporation tax.

What is the meaning of dormant for Corporation Tax?

A dormant company is a company whose shares are not traded on a stock exchange. This means that it is no longer trading and cannot pay corporation tax. However, there are some exceptions to this rule. For example, if you are a sole trader, you do not need to register yourself as a limited company. You can still trade without registering yourself as a limited company because you are not a separate legal entity.

If you are registered as a limited company, you need to keep records of your financial transactions. If you fail to do this, HMRC could impose penalties. These include fines and interest charges.

You might think that being a dormant company is a good thing because it avoids having to pay corporation tax. But actually, it is not. Being a dormant company means that you are not trading, not liable to pay corporation tax, or outside of the scope of corporation tax rules. So, you are effectively avoiding corporation tax even though you are not trading.

This means that you are probably losing money while you are a dormant company. And, if you become a dormant company for long enough, you could end up owing thousands of pounds in unpaid taxes.

When will HMRC consider clubs and unincorporated organizations to be inactive?

HM Revenue & Customs (HMRC) will review how it treats private limited companies (PLCs), including sports clubs and charities, in its annual tax return process. This follows a consultation earlier this year where HMRC received feedback that some PLCs are being incorrectly classified as dormant. As such, there could be implications for those businesses that are wrongly deemed as dormant.

The deadline for submitting information to HMRC regarding the classification of a company as either active or dormant is 31 March 2019. If your club or charity is classed as dormant, you’ll receive a letter inviting you to provide further information. You’ll then have another six months to submit evidence that demonstrates why your organization shouldn’t be considered dormant.

If your organization isn’t publicly traded, it won’t be subject to the same scrutiny as a publicly listed one. However, if your organization is privately held, it will still be reviewed during the annual tax return process.

Frequently Asked Questions

How much is company tax in the United Kingdom?

The corporation tax rate in the UK is 19%, which applies to all businesses regardless of size. This figure is determined based on the amount of profit generated by a business over a 12 month period.

In the Budget 2021, the Government announced future changes to the Corporation Tax Rate. From April 2023, the rate will increase to 25% for companies earning more than £250,000 per annum. For those companies with profits of up to £50,000 per annum, the rate will decrease from 19% to 19%.

From April 2023, if you’re a small business owner, you could face a tax bill of around £1,300 per employee.

How to register for corporation tax and responsibility

When starting up through a limited liability partnership, you’ll need to pay capital gains tax. This is because it is treated differently to regular income. If you’re registered for VAT, you won’t need to pay this either.

You can do this through HM Revenue & Customs on the Gov.ukwebsite. Details you’ll be asked to fill in include:

Company name

Registration number

Your business start date (the start date on your company’s accounting period)

The registration fee is £5 per person.