Corporation Tax

A company does not have to be formally closed to become dormant for Corporation Tax. A company is usually considered dormant if it has stopped trading and has no other income, such as investment income.

A new limited company that has not yet started trading can also be dormant for Corporation Tax. Other examples include certain flat management companies and unincorporated associations or clubs owing less than £100 in Corporation Tax.

It is important to understand what counts as trading. For this purpose, activities can include buying or selling, renting property, advertising, employing someone or receiving interest. A company therefore needs to consider its activities carefully before assuming that it is dormant.

If a company has stopped trading and has no other income, it can tell HMRC that it is dormant for Corporation Tax. If HMRC has already issued a notice to deliver a Company Tax Return, the company must still file a return showing that it is dormant for the relevant period.

Once HMRC has been told that a limited company is dormant, it generally does not have to pay Corporation Tax or file further Company Tax Returns unless HMRC issues another notice.

Being dormant for Corporation Tax does not remove the company's Companies House obligations. A limited company must still file its annual accounts and confirmation statement.

If the company is VAT registered and does not intend to trade again, it must deregister for VAT within 30 days of becoming dormant. If it plans to restart trading, it must continue submitting nil VAT returns.

Dormant status should therefore be reviewed carefully, particularly when a company stops trading but continues to have financial activity.

The rate of Corporation Tax payable depends mainly on the level of a company’s taxable profits. The main rate is 25% and applies where profits exceed £250,000. Companies with profits of £50,000 or less generally pay Corporation Tax at the small profits rate of 19%. But note, these two thresholds will reduce if a company has associated companies.

The position is more complicated for companies with profits between these two thresholds. Where profits are between £50,000 and £250,000, Corporation Tax is charged at the 25% main rate, but marginal relief reduces the overall amount of tax payable. Accordingly, the effective rate increases gradually as profits rise, rather than jumping immediately from 19% to 25%.

This means that a company whose profits are just above £50,000 will not suddenly pay 25% Corporation Tax on all its profits but if there are profits are close to £250,000 they will pay tax at almost the 25% rate. In this way, the marginal relief results in a smoother transition between the two rates. 

Corporation Tax is initially calculated at the main rate of 25%, with marginal relief then deducted to arrive at the final liability. The relief is calculated using a standard fraction of 3/200.

Companies should check which rate applies when preparing their Corporation Tax calculation, particularly where profits are close to either threshold.

The thresholds can be affected by the number of associated companies, so a company should not assume that its profit figure alone determines the applicable rate. It is important to ensure that the correct amount of Corporation Tax is paid.
 

Companies and other organisations that are liable for Corporation Tax must ensure they register with HMRC at the correct time. Failing to register when required could result in missed filing obligations and potential penalties.

Most limited companies can register for Corporation Tax when they are first incorporated at Companies House. If Corporation Tax was not set up during incorporation, the company will need to add Corporation Tax services in its business tax account.

A company usually needs to register for Corporation Tax when it becomes active for Corporation Tax purposes. This can include starting a trade or professional activity, providing services, buying and selling goods for profit, earning interest, managing investments or receiving any other income.

Companies that are within the charge to Corporation Tax must tell HMRC within three months of the start of their Corporation Tax accounting period that they are active.

It is important to remember that a newly incorporated company may not immediately have Corporation Tax obligations if it is dormant. A dormant company does not generally pay Corporation Tax, although it must still meet any Companies House filing requirements.

If your company makes a trading loss, it may be able to claim relief to reduce its Corporation Tax liability. Trading losses can often be used in different ways, depending on your company’s circumstances.

A company may be able to use a trading loss against profits from the same accounting period, carry it back to reduce profits from an earlier period, or carry it forward to offset against future profits from the same trade.

When calculating a trading loss, adjustments may be needed to the company’s accounting profit or loss, including the impact of capital allowances and certain other tax adjustments. The amount of relief available will depend on the company’s individual circumstances.

If a loss is carried forward, it can usually be used against future profits. However, there are a number of restrictions that can apply to the amount of carried-forward losses that can be offset in certain circumstances.

A company may also be able to carry a trading loss back to claim a repayment of Corporation Tax previously paid. This can provide valuable cash flow support by resulting in a tax repayment.

Claiming available loss relief can help reduce the impact of a trading loss and ensure your company does not pay more Corporation Tax than necessary.

The term permanent establishment (PE) is an important tax concept for businesses that operate across international borders. In simple terms, it determines whether a business has created a sufficient presence in another country for its profits to be taxed there. The concept is used by HMRC to determine if a non-UK resident company has created a taxable business presence in the UK.

A permanent establishment is usually a fixed place of business in a country other than where the business is based. Typical examples include an office, branch, factory or workshop. The location must be at a distinct geographical place with a degree of permanence. As a general guide, a place of business used for more than six months is more likely to be treated as permanent, although this is not a strict rule and longer periods may apply to certain activities, such as construction projects.

The rules are not based solely on how long a business operates overseas. A business that uses the same building or location may create a permanent establishment even if it works from different rooms within that building. Equally, temporary interruptions in business activities do not necessarily mean that a permanent establishment has ended.

Whether an overseas presence qualifies as a PE in the UK depends on four statutory tests, which take account of the relevant tax treaty or domestic tax rules in the jurisdiction concerned. For the purposes of the Multinational Top-up Tax (MTT) rules, a PE is treated as a separate entity from the main business.

Creating a permanent establishment can trigger overseas tax registration, reporting and tax payment obligations. If your business is expanding abroad, opening an overseas office or undertaking long-term work in another country, it is important to consider the permanent establishment rules before you start, as unexpected tax liabilities can arise even when your overseas presence appears relatively limited.

Research and Development (R&D) tax relief is designed to support companies that invest in innovation and seek to make advances in science or technology. The scheme offers businesses the ability to invest in new technologies and scientific development in exchange for generous tax reliefs. However, not every project will qualify, and businesses should carefully consider whether their activities meet HMRC’s requirements before making a claim.

Only companies’ chargeable to UK Corporation Tax can qualify for R&D relief. In addition, the company must be undertaking a project that aims to achieve an advance in a field of science or technology. 

For tax purposes, the requirements that must be met for R&D to qualify for relief include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes in a new way. R&D activities can qualify for tax relief even if the project in question failed and both profitable and loss-making companies can benefit from making a claim. 

The advance must go beyond simply improving processes or products for the business itself and should contribute to overall knowledge or capability in the relevant field. Since April 2023, mathematical advances can also qualify as scientific advances for R&D tax purposes.

Businesses should keep clear records of the uncertainties faced, the work undertaken to resolve them, and the successes and failures encountered during the project. Once eligibility has been established, the next step is to identify the qualifying expenditure that can be included in an R&D relief claim. 

Many businesses take out “key person” insurance policies to protect against the financial impact of losing an important employee, director or other individual who is central to the success of the business. These policies may provide cover for death, critical illness, sickness, accident or injury.

Whether tax relief is available for the insurance premiums depends on the nature and purpose of the policy. HMRC guidance confirms that premiums will generally be allowable as a business expense where the sole purpose of the policy is to protect the business against a loss of the individual’s services (not a capital loss). 

For life cover, relief is normally only available for term insurance policies that provide pure risk cover with no investment element. The policy term should also not extend beyond the individual’s expected usefulness to the business.

Policies with an investment or capital element, such as whole life or endowment policies, are generally treated as capital expenditure and tax relief for premiums is usually not deductible. Similar restrictions can apply where key person policies are linked to long-term loan finance.

Where premiums qualify for tax relief, any insurance proceeds received are generally taxable as trading income. Conversely, where premiums are not deductible, receipts are often not taxed, although the treatment depends on the specific circumstances.

Separate rules may also apply where employers insure against liabilities to compensate employees or where benefits are paid directly to employees under sickness or life insurance arrangements.

Those responsible for the accounts and tax compliance of private limited companies must ensure they are fully aware of the relevant obligations and statutory deadlines.

Following the end of each financial year, a private limited company is required to prepare full annual accounts and submit a Company Tax Return. The deadline for filing the first set of accounts must be filed with Companies House within 21 months of the date of incorporation. Thereafter, annual accounts must be filed within 9 months of the end of each financial year.

Corporation Tax is payable 9 months and 1 day after the end of the relevant accounting period. As a result, the tax liability will typically fall due before the filing deadline for the Company Tax Return.

In most cases, the Company Tax Return must be submitted within 12 months of the end of the accounting period. Filing is required to be completed online in iXBRL format, using either HMRC’s own software or approved third-party software.

The Corporation Tax accounting period will generally correspond with the 12-month company financial year covered by the annual accounts.

Penalties may be imposed by both Companies House and HMRC for late filing or non-compliance, and it is therefore essential that all deadlines are carefully monitored and adhered to.

The rate of Corporation Tax payable depends on the level of a company’s taxable profits. The main rate is 25% and applies where profits exceed £250,000. At the other end of the scale, companies with profits of £50,000 or less benefit from the Small Profits Rate, which remains at 19%.

For businesses with profits between these thresholds, marginal relief applies. Rather than facing a sharp increase in tax, companies experience a gradual rise in the effective rate as profits move from £50,000 towards £250,000. This ensures a smoother transition between the lower and higher rates.

It is important to note that the £50,000 and £250,000 thresholds are not always fixed. They are reduced where a company has associated companies or where the accounting period is shorter than 12 months, which can bring more businesses into the marginal relief band.

In practice, Corporation Tax is initially calculated at the main rate of 25%, with marginal relief then deducted to arrive at the final liability. The relief is calculated using a standard fraction of 3/200.

The marginal rates help smaller companies to pay less Corporation Tax based on their profit level and circumstances. 

After the end of its financial year, a private limited company must prepare full annual accounts and submit a company tax return. In most cases, the tax return must be filed within 12 months of the end of the accounting period it covers, and filing must be completed online.

There are penalties for the late submission of company tax returns. The filing penalties will increase for company tax returns where the filing date falls on or after 1 April 2026.

The penalties are designed to encourage companies to file their Corporation Tax returns by the required deadline. Fixed penalties for late filing were originally set in 1998 and have remained unchanged since then. Over time, inflation has significantly reduced the real value of these penalties and therefore their deterrent effect. In real terms, the penalties are now worth roughly half of what they were when first introduced.

The increase in company late filing penalties has seen the doubling of fixed penalties. Since 1 April 2026, a return that is filed late will attract a penalty of £200 instead of £100. If the return is more than three months late, the penalty is now £400, compared with the previous £200. Higher penalties will continue to apply where a company repeatedly files late returns. Where there are three successive failures to file on time, the penalty will be £1,000, and where the return is more than three months late after three consecutive failures, the penalty will be £2,000.

Ensuring that company tax returns are submitted on time will help companies avoid unnecessary penalties and additional compliance costs.