Corporation tax - Payment and collection of tax

Learning Outcomes

This article explains corporation tax payment and collection in the UK, including:

• how corporation tax applies to UK-resident companies and permanent establishments, and how accounting periods are determined;
• the computation of taxable profits from statutory accounts, distinguishing income profits, chargeable gains, and allowable reliefs such as capital allowances;
• the application of corporation tax rates, including the main rate, small profits rate, marginal relief, and associated company adjustments;
• the self-assessment process, from calculating the liability to submitting form CT600 with iXBRL-tagged accounts and computations;
• statutory deadlines for payment and filing, including the standard nine-month-plus-one-day payment deadline and the 12‑month filing deadline;
• when quarterly instalment payments apply to large and very large companies, and how instalment dates are scheduled;
• the consequences of late payment and late filing, including interest, fixed penalties, tax-related penalties, and repeated failure escalations;
• HMRC’s powers to enquire into returns, raise discovery assessments, and operate group payment arrangements for corporate groups;
• the role of anti-avoidance provisions, particularly the General Anti-Abuse Rule (GAAR), and the distinction between avoidance and evasion.

SQE1 Syllabus

For SQE1, you are required to understand the practical aspects of corporation tax as it applies to companies in England and Wales, with a focus on the following syllabus points:

• The calculation of corporation tax, including income profits, chargeable gains, and allowable reliefs.
• The process and deadlines for payment and filing of corporation tax returns.
• The consequences of late payment or late filing.
• The operation of anti-avoidance rules, including the General Anti-Abuse Rule (GAAR).
• The distinction between tax avoidance and tax evasion, and the legal implications for companies.
• Current corporation tax rates (main rate, small profits rate) and marginal relief bands, including associated company adjustments.
• When quarterly instalment payments apply to large and very large companies.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the standard deadline for a company to pay its corporation tax after the end of its accounting period?
2. Which company form is subject to corporation tax in the UK: a partnership, a sole trader, or a limited company?
3. What is the General Anti-Abuse Rule (GAAR) and how does it affect corporation tax planning?
4. What are the consequences for a company that files its corporation tax return late?
5. How are capital gains treated for corporation tax purposes?

Introduction

Corporation tax is a direct tax charged on the profits of companies and certain other organisations in the UK. It is administered by HM Revenue & Customs (HMRC) and governed primarily by the Corporation Tax Act 2010, the Corporation Tax Act 2009 and Finance Acts. Understanding how corporation tax is calculated, paid, and collected is essential for SQE1, as it underpins many aspects of business law and practice.

Companies Liable to Corporation Tax

Corporation tax applies to UK-resident companies and certain non-UK companies with a permanent establishment in the UK. This includes limited companies, public limited companies, and some unincorporated associations. Sole traders and partnerships are not subject to corporation tax; instead, they pay income tax and capital gains tax.

Key Term: corporation tax
A tax charged on the taxable profits of companies and certain other bodies, calculated and collected by HMRC.

Key Term: permanent establishment
A fixed place of business through which the business of a non-UK company is wholly or partly carried on (e.g., branch, office, factory), creating UK corporation tax exposure on UK-source profits.

Calculation of Corporation Tax

Corporation tax is charged on a company’s total taxable profits for each accounting period. The calculation involves several steps and uses the company’s statutory accounts as a starting point, adjusted for tax purposes.

Income Profits

A company’s income profits are calculated by subtracting allowable business expenses from its trading income and other sources of income (such as rental or investment income). Depreciation in the accounts is replaced by capital allowances.

Key Term: income profits
Profits from a company’s trading and other income sources, after deducting allowable expenses.

Chargeable Gains

Companies are also taxed on capital gains, known as chargeable gains, which arise from the disposal of assets such as property, shares, or equipment. The gain is the difference between the net sale proceeds and the original cost (plus certain allowable costs and indexation where relevant for pre-2018 corporate assets).

Key Term: chargeable gain
The profit made by a company on the disposal of a capital asset, subject to corporation tax.

Reliefs and Deductions

Companies can reduce their taxable profits by claiming reliefs, such as trading loss relief and capital allowances (tax relief for qualifying capital expenditure on plant and machinery). Capital allowances (including the Annual Investment Allowance and Writing Down Allowances) replace depreciation for tax purposes and are deducted from trading profits.

Key Term: capital allowance
A deduction companies can claim for the depreciation of certain assets, reducing taxable profits.

Trading losses can be set against total profits of the same accounting period; subject to conditions, carried back to the previous 12 months; carried forward against future profits of the same trade; and (on cessation) terminal losses may be carried back against earlier years’ profits of the trade.

Total Taxable Profits and Tax Rate

The company’s taxable profits are the sum of its income profits and chargeable gains, minus any reliefs and deductions. The applicable corporation tax rate depends on the level of profits and the number of associated companies.

From 1 April 2023, the main corporation tax rate is 25% for companies with profits above the upper limit. A small profits rate of 19% applies to companies with profits at or below the lower limit. Marginal relief applies to profits between the lower and upper limits, tapering the effective rate between 19% and 25%. The lower and upper limits are adjusted if the company has associated companies and are time-apportioned for shorter accounting periods.

Key Term: small profits rate
A 19% corporation tax rate applying to companies with profits at or below the lower limit, subject to associated company adjustments.

Key Term: marginal relief
A taper that reduces the effective rate on profits between the lower and upper limits, phasing the rate from 19% up to 25%.

Key Term: associated company
A company is associated with another if one has control of the other or both are under the control of the same person(s). The number of associated companies reduces the lower and upper profit limits for rate and marginal relief calculations.

Worked Example 1.1

A company has trading profits of £120,000, a chargeable gain of £30,000, and claims capital allowances of £10,000. What are its taxable profits and how much corporation tax is due if the rate is 25%?

Answer:
Taxable profits = £120,000 + £30,000 – £10,000 = £140,000. Corporation tax due = £140,000 × 25% = £35,000.

Worked Example 1.2

A company’s accounting period ends on 31 December 2023. By what date must it pay its corporation tax and file its return?

Answer:
Payment is due by 1 October 2024 (nine months and one day after 31 December 2023). The return must be filed by 31 December 2024.

Rates, bands and apportionment

Where an accounting period straddles a rate change (typically on 1 April), profits are time-apportioned to apply the correct rates for each part of the period. Lower and upper limits for small profits and marginal relief are split between associated companies and apportioned for shorter periods.

Worked Example 1.3

A company makes a trading loss of £40,000 in the current year. What reliefs are available for this loss?

Answer:
The company can offset the loss against total profits of the same accounting period, carry it back to the previous year (subject to limits), or carry it forward to offset against future profits of the same trade. On cessation, terminal losses from the last 12 months may be carried back against earlier years’ trade profits.

Worked Example 1.4

A company files its corporation tax return three months late. What penalty will it face?

Answer:
The company will receive an automatic £100 penalty for late filing. If the return is more than three months late, a further £100 penalty applies. Additional tax-related penalties (typically 10% of unpaid tax) can apply if the return is over six and twelve months late.

Worked Example 1.5

A standalone company has taxable profits of £60,000 for the year to 31 March 2025. There are no associated companies. What rate applies?

Answer:
Profits exceed the lower limit (£50,000) but are below the upper limit (£250,000). Marginal relief applies, tapering the effective rate between 19% and 25%, so the company does not pay the full 25% main rate.

Payment and Filing of Corporation Tax

Companies are responsible for self-assessing their corporation tax liability and paying the correct amount by the due date. HMRC issues a “notice to deliver” a return; companies file online using form CT600 with iXBRL-tagged accounts and computations.

Key Term: accounting period
The period (usually 12 months) for which a company calculates and reports its taxable profits.

Key Term: corporation tax return
The form (CT600) submitted to HMRC by a company, detailing its taxable profits and tax due.

Payment Deadlines

Most companies must pay their corporation tax within nine months and one day after the end of their accounting period. Large and very large companies must pay in quarterly instalments.

• Large companies generally are those with augmented profits over the large company threshold (historically £1.5 million, adjusted for associated companies and length of the accounting period). Their instalments are typically due in months 7, 10, 13 and 16 after the start of the period.
• Very large companies (with significantly higher augmented profits, adjusted for associated companies) pay earlier, with instalments due starting in month 3, then months 6, 9 and 12.

Whether a company is “large” or “very large” is determined by statutory thresholds adjusted for associated companies and time-apportionment. Certain new entrants and companies with lower profits may be excluded from instalments in their first period.

Key Term: quarterly instalment payments
A regime requiring large and very large companies to pay corporation tax in four instalments during the accounting period, according to statutory schedules.

Worked Example 1.6

A company has augmented profits above the large company threshold after adjusting for three associated companies and a 12‑month accounting period. When are instalments generally due?

Answer:
For a large company, four instalments typically fall due in months 7, 10, 13 and 16 after the start of the accounting period. For a very large company, instalments are due earlier—in months 3, 6, 9 and 12. Precise due dates are set by statute and HMRC guidance.

Filing Requirements

Companies must file a corporation tax return (form CT600) with HMRC within twelve months of the end of the accounting period. The return must be submitted online and include company accounts and supporting computations in iXBRL format. HMRC may open an enquiry into a return within the statutory window (usually 12 months from the filing date). Companies can amend their return within 12 months of the statutory filing date.

Penalties for Late Payment or Filing

If a company fails to pay its corporation tax on time, HMRC will charge interest on the overdue amount. Late filing of the tax return results in automatic penalties, which increase the longer the return is outstanding. For repeated late filing within three years, fixed penalties increase.

• Fixed penalties: £100 for missing the filing deadline; a further £100 if still outstanding three months later.
• Tax-related penalties: typically 10% of unpaid tax if the return is more than six months late and another 10% if more than twelve months late.
• Interest: HMRC charges late payment interest from the normal due date; credit interest may apply to early payments.

Companies that cannot pay on time should contact HMRC to agree a Time to Pay arrangement where appropriate.

Worked Example 1.7

A company with tax due of £50,000 files 7 months late and has not paid. What penalties can arise?

Answer:
Fixed penalties of £100 plus a further £100 (at three months late) apply. A tax-related penalty of 10% of the unpaid tax (i.e., £5,000) is charged after six months late. Interest accrues on the unpaid tax from the normal due date.

Collection of Corporation Tax

HMRC collects corporation tax through the self-assessment system. Companies must calculate their own liability, pay the tax due, and file the return. HMRC may enquire into a return and can amend the assessment if errors are found. Discovery assessments may be raised where insufficient tax has been assessed and the loss of tax is due to carelessness or deliberate behaviour.

Group companies may choose a group payment arrangement, enabling a nominated company to make combined payments on behalf of the group, simplifying cash management and interest calculations.

Anti-Avoidance and the General Anti-Abuse Rule (GAAR)

The UK tax system distinguishes between lawful tax planning (tax avoidance) and illegal tax evasion. However, aggressive avoidance schemes are targeted by anti-avoidance rules, both general and specific.

Key Term: General Anti-Abuse Rule (GAAR)
A statutory rule allowing HMRC to counteract tax advantages from arrangements deemed abusive or artificial, applicable across several taxes including corporation tax.

The GAAR enables HMRC to challenge and counteract tax benefits from arrangements that are considered abusive, even if they comply with the letter of the law. An “abusive” arrangement fails the double reasonableness test: it cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. The GAAR Advisory Panel may be consulted and issue opinions on whether arrangements are abusive.

Companies must ensure that their tax planning is not only legal but also does not fall foul of GAAR. Targeted anti-avoidance rules (TAARs), transfer pricing, diverted profits tax, and controlled foreign company rules also apply in specific situations.

Key Term: tax avoidance
Arranging affairs to reduce tax liability within the law, but potentially subject to anti-avoidance rules if arrangements are artificial.

Key Term: tax evasion
Illegally concealing income or profits to avoid paying tax, a criminal offence.

Exam Warning

Companies that engage in aggressive tax planning may face HMRC investigation, penalties, and reputational damage if arrangements are found to be abusive under GAAR.

Practical Aspects and Examples

Accounting to tax computation

Statutory accounts (prepared under UK GAAP or IFRS) are adjusted for tax purposes: disallowing non-deductible items (e.g., client entertaining), replacing depreciation with capital allowances, and recognising specific tax reliefs (e.g., trading loss relief). Where an accounting period straddles 1 April, rates and limits are time-apportioned.

Associated companies and rate bands

The lower and upper profit limits for the small profits rate/marginal relief are divided by the total number of associated companies and then time-apportioned. This can bring a company into marginal relief or main rate more quickly if it has multiple associated companies.

Worked Example 1.8

Company A has two associated companies (three total in the group). Company A’s taxable profits are £70,000 for a 12‑month period. How do associated companies affect the rate?

Answer:
The lower and upper limits are divided by three before comparing Company A’s profits with those bands. This increases the likelihood that Company A sits within marginal relief, rather than the small profits rate, for the period.

Trading loss relief detail

• Same-period relief: set trading losses against total profits of the same period (including chargeable gains) to reduce or eliminate corporation tax.
• Carry-back: subject to limits, carry back to the previous 12 months to recover tax paid, generating a repayment.
• Carry-forward: set against future profits of the same trade; post-2017 loss relief rules can allow more flexible use of certain carried-forward losses against total profits, subject to thresholds and restrictions.
• Terminal loss relief: on cessation, losses in the final 12 months may be carried back against profits of the same trade for up to three years (most recent year first).

Capital allowances reminder

Capital allowances provide tax relief on qualifying capital expenditure; Annual Investment Allowance (AIA) gives 100% relief up to the statutory cap for eligible plant and machinery. Structures and Buildings Allowances give relief over time for qualifying construction expenditure. Enhanced and special-rate pools apply to certain assets (e.g., fixed features).

Key Point Checklist

This article has covered the following key knowledge points:

• Corporation tax applies to UK companies and is calculated on total taxable profits, including income profits and chargeable gains.
• Capital allowances and trading loss reliefs can reduce taxable profits; terminal loss relief applies on cessation.
• The main rate is 25%; a small profits rate of 19% applies at or below the lower limit, with marginal relief tapering effective rates in the band between the lower and upper limits. Associated company rules adjust those limits.
• Companies must self-assess, pay corporation tax by the deadline, and file a corporation tax return with HMRC in iXBRL format.
• Most companies pay nine months and one day after the end of the accounting period; large and very large companies pay by quarterly instalments.
• Late payment or filing leads to interest and penalties, including fixed and tax-related penalties.
• HMRC collects corporation tax through self-assessment and may enquire into or amend returns; discovery assessments may be issued where appropriate.
• The General Anti-Abuse Rule (GAAR) allows HMRC to counteract abusive arrangements; targeted anti-avoidance rules operate alongside GAAR.
• Tax avoidance is legal but may be challenged if arrangements are artificial; tax evasion is illegal.

Key Terms and Concepts

• corporation tax
• permanent establishment
• income profits
• chargeable gain
• capital allowance
• accounting period
• corporation tax return
• small profits rate
• marginal relief
• associated company
• quarterly instalment payments
• General Anti-Abuse Rule (GAAR)
• tax avoidance
• tax evasion

Worked Example 1.9

A UK-resident company prepares IFRS accounts showing depreciation of £25,000 on plant and machinery and has £20,000 of qualifying AIA. How is the computation adjusted?

Answer:
Add back £25,000 depreciation in computing taxable profits and deduct £20,000 AIA (plus any Writing Down Allowances on the balance) to give the capital allowances relief replacing the depreciation for tax purposes.

Worked Example 1.10

A company’s accounting period runs from 1 January to 31 December 2024 and straddles the 1 April rate date. How are rates applied?

Answer:
Profits are time-apportioned: 3/12 of profits taxed at rates applying from 1 January to 31 March, and 9/12 at rates applying from 1 April to 31 December. The appropriate small profits/marginal relief/main rate rules are applied to each apportioned part as required.