Corporation Tax

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.

If your company profits sit between £50,000 and £250,000, marginal relief can soften the jump from 19% to 25% Corporation Tax.

The Corporation Tax main rate applies to companies with taxable profits above £250,000 and is currently set at 25%. Companies with profits of up to £50,000 are subject to the Small Profits Rate, which remains at 19%.

For companies with profits falling between £50,000 and £250,000, marginal relief applies. This creates a gradual increase in the effective rate of Corporation Tax between the small profits and main rates, rather than a sudden jump. The lower and upper profit limits are proportionately reduced where an accounting period is shorter than 12 months or where a company has associated companies.

The effect of marginal relief is that the effective Corporation Tax rate increases steadily from 19% once profits exceed £50,000, reaching the full 25% rate when profits exceed £250,000.

In practice, Corporation Tax is calculated by applying the main rate of 25% to total taxable profits and then deducting the marginal relief due. The marginal relief standard fraction is 3/200. HMRC provides an online marginal relief calculator to help companies determine the correct amount of Corporation Tax payable based on their profit level and circumstances.

If your business works in film, TV, games or the arts, Creative Industry Tax Reliefs could reduce your Corporation Tax bill and may even generate a payable tax credit.

Creative Industry Tax Reliefs (CITR) are a range of UK Corporation Tax reliefs designed to support companies operating in the creative sector. The reliefs allow qualifying companies to increase the amount of allowable expenditure when calculating their taxable profits, thereby reducing the Corporation Tax they are required to pay. Where a company is loss-making, it may be possible to surrender those losses in exchange for a payable tax credit.

CITR covers a wide variety of creative activities. Reliefs are available for film, animation, high-end television, children’s television and video game production, as well as for theatre, orchestra performances, and museums and galleries exhibitions. More recently, the Audio-Visual Expenditure Credit and the Video Games Expenditure Credit have been introduced, offering an alternative credit-based system for eligible productions.

To qualify for CITR, films, television programmes and video games must meet specific cultural criteria. This is usually achieved by passing a formal ‘cultural test’, which assesses various factors such as content, setting and the nationality of key personnel. Alternatively, a production may qualify through an internationally agreed co-production treaty. Meeting these requirements allows the production to be certified as a British film, British programme or British video game.

Certification is administered by the British Film Institute (BFI) on behalf of the Department for Culture, Media and Sport. The BFI can issue an interim certificate while production is ongoing, followed by a final certificate once the project has been completed. This certification is a key requirement for claiming the relevant tax reliefs.

Corporation Tax relief may be available where your company or organisation makes a trading loss. The loss may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same accounting period.

Where the amount of a trading loss exceeds the profits of the same accounting period, the company may claim to carry back the excess against the profits of preceding accounting periods. The preceding accounting periods are those falling wholly or partly within the preceding period.

Losses may only be carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period.

Any claim for trading losses forms part of the Company Tax Return. The trading profit or loss for Corporation Tax purposes is worked out by making the usual tax adjustments to the figure of profit or loss shown in the company’s or organisation’s financial accounts.

If a company ceases to carry on a trade, the preceding period is three years preceding the accounting period in which the loss is incurred. Accounting periods must be taken in order, most recent first.

For companies with taxable profits of up to £1.5 million the payment of any Corporation Tax is due 9 months and 1 day after the end of your accounting period. The accounting period is usually the financial year of your business but can be different especially in the first year of business.

This deadline means that companies with the popular year end date of 31 December 2019 should have paid any liabilities for that year at the beginning on or before 1 October 2020. Interest is charged from the day after the tax should have been paid until payment has been made. 

HMRC have not extended the date for Corporation Tax Payments and payment remains due 9 months and 1 day after your accounting year end. However, you can apply to HMRC to pay on an instalment basis or defer payment if your finances have been badly affected by coronavirus. If you have missed your payment date, we would recommend contacting HMRC as soon as possible. We can assist you with this process if required. 

There are special rules for companies with taxable profits over £1.5m. These companies are defined as ‘large’ for Corporation Tax purposes and are required to pay tax due in instalments. 

Corporation Tax and related payments must be made electronically. You cannot pay Corporation Tax by post.

A wide variety of grants or subsidies are available to businesses and can be received in addition to the ordinary business income. It is important to identify these and to establish whether they are capital or revenue in nature so that they are dealt with correctly for tax purposes.

Amounts received towards revenue expenditure, such as staff costs, are normally trading receipts and should be included as income or netted off against the relevant expense. Funding which meets capital expenditure is normally treated as a capital receipt. Grants that may be capital in nature include those paid to acquire capital assets, machinery or to facilitate the cessation of a trade or part of a trade.

Some grants may not be for a specific purpose. These are termed undifferentiated receipts. An undifferentiated receipt should be regarded as revenue; however, there is an exception for specific grants paid by Highlands and Islands Enterprise.