What is Corporation Tax?

Published by Thomas Herold in Accounting, Corporate Finance, Laws & Regulations, Trading

The term 'Corporation Tax' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Corporation Tax refers to a United Kingdom jurisdiction method of taxing companies and associations domiciled in Great Britain. For any business that is a limited company, or is a foreign firm that boasts a United Kingdom office or branch, or operates as a cooperative, club, or other type of unincorporated association, they must pay such taxes on any and all profits which they accrue from engaging in business (called trading in Britain) in the U.K. This last qualifier means that even sports clubs and community-based groups will have to pay the tax on all profits in excess of one hundred British pounds sterling (if they have any).

The United Kingdom is similar in its corporate tax collecting efforts to other jurisdictions like the United States. Their taxing authorities do not send out bills. They follow a self-reporting taxation system. Businesses must first register for the corporation tax as they begin conducting business. Those associations which are not incorporated are required to write to HMRC Her Majesty’s Revenue and Customs. These companies must maintain official accounting records to prepare a company tax return. They will then figure out how much of the corporation tax they will be required to pay. Finally they pay the tax itself. If they have nothing they are required to pay to HMRC, then they must report this.

Companies in the United Kingdom receive typically nine months and a day from the conclusion of their accounting period as a deadline to pay their taxes. The returns themselves the firms must file with HMRC by the deadline that falls 12 months following the conclusion of the accounting period. Though there are exceptions, accounting periods in Great Britain are commonly the identical 12 months to the financial year which their annual accounts cover.

Not all profits will be corporation tax assessed in the U.K. Profits which companies or associations earn from investments, trading profits (i.e. doing business), or for selling assets for higher than their cost basis (called chargeable gains in the U.K.) will be tax assessed. For those firms which are headquartered within the United Kingdom, they will be required to pay the tax on corporations for their profits which they generate not only within the U.K., but also from overseas. Those firms which merely maintain a branch office in Great Britain will only pay taxes on profits earned on British soil.

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Companies which fall into a dormant status will not be required to pay the corporation tax. The definition of dormant simply means that there is no income from the firm (as with investments), nor is the firm engaging in business. Those companies that are new limited companies that have not yet begun trading are also deemed dormant. Associations which are unincorporated or clubs that owe below one hundred British pounds in such tax are also considered to be dormant. Flat management companies similarly fall under the dormant definition. The definition of trading (or doing business) includes any activities that involve selling, renting, or purchasing property, employing any individuals, advertising, or obtaining interest.

Firms that have been dormant can become active again. In scenarios where this occurs, British law requires that the owners alert HM Revenue and Customs once their dormant limited or non-trading company begins trading again. The law of the land also requires that these companies in this restarting status will have to begin amassing statutory accounts so they can once again create and file Company Tax Returns at the end of year for the company. Alerting HMRC that the business has begun to trade once more simply means that the firm should re-register for the corporation tax once again.

The term 'Corporation Tax' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.