Corporation tax is paid by limited companies on their profits.

Corporation tax is not payable by the self-employed but does apply to the following organisations, even if they are not limited companies:

• members' clubs, societies and associations
• trade associations
• housing associations
• groups of individuals carrying on a business but not as a partnership, eg co-operatives

This guide will explain more about the tax and how it is calculated.

Corporation tax: what you need to do

If your company is liable to pay corporation tax on your profits, there are several things you must do:

• Tell HM Revenue & Customs (HMRC) that your company exists and that it is liable for tax. To do this you can complete form CT41G at the HMRC website (PDF) or contact your local HMRC office. Find your local office on the HMRC website.
• File a self-assessment Company Tax Return for your company, on which you calculate your own corporation tax liability and pay it without prior assessment by HMRC.
• Keep records of all company expenditure and income in order to work out your tax liability accurately.

If you don't let HMRC know that you are liable for corporation tax, file your Company Tax Return incorrectly, or pay your corporation tax late, you may incur a financial penalty. To avoid penalties and interest charges you should know your:

• statutory filing date - the date by which your company tax return must be received by HMRC
• normal due date - the date by which you must pay your corporation tax

Calculating corporation tax

If your company is liable for corporation tax, you must work out how much is owed and supply that information to HM Revenue & Customs (HMRC) on a self-assessment Company Tax Return form (CT600).

In order to calculate how much is owed, you need to know how much taxable profit you made in the accounting period covered by your Company Tax Return. See our guide on how to complete your Company Tax Return which explains accounting periods in more detail. Read the guide to corporation tax self assessment on the HMRC website.

Chargeable gains

Chargeable gains are the profit you make when you sell or otherwise dispose of any asset owned and used by the business, not being items which are bought and sold as part of the normal trade.

Companies are not generally liable to capital gains tax. Instead they are liable to corporation tax on their net chargeable gains.

Capital allowances

When calculating the profit chargeable to corporation tax you can claim capital allowances for certain items of equipment and apparatus purchased for use in the business. To find out more, see our guide on capital allowances: the basics.

There are three rates of corporation tax. They are:

• the starting rate
• the small companies' rate
• the main rate

For companies that have profits that fall between the three corporation tax rates, marginal relief is available to ease the transition from one rate to the next. Marginal relief is also explained in our guide on corporation tax rates and types of allowances. These rates have remained unchanged from the tax year 2004/05.

The government announced in the Pre-Budget Report 2005 that the 0 per cent starting rate will be abolished from April 2006. The starting rate will be replaced with a single small companies' rate of 19 per cent.

Use the Marginal Relief Rate Calculator on the HMRC website.

Keeping records for corporation tax

To calculate your liability for corporation tax, you are legally obliged to keep "sufficient" records of your outgoings and income to make a complete and correct Company Tax Return.

Sufficient records include:

• details of all receipts and expenses incurred in the course of your company's activities
• details of all sales and purchases made in the course of trade, if your company has a trade that involves dealing in goods
• all other supporting documents

The precise records your company needs to keep will depend on the type and size of your business, but the records must be adequate to enable you to send in a correct Company Tax Return.

For tax purposes, HM Revenue & Customs (HMRC) requires any organisation treated as a company to keep its records for at least six years from the end of your accounting period.

In certain circumstances, such as a late tax return or an HMRC enquiry, your company may need to keep records longer than the six-year period.

If your company does not keep records, HMRC can charge a penalty of up to £3,000.

See our guide on how to set up a basic record keeping system. For more information on keeping records read the guide to corporation tax self assessment at the HMRC website.

Corporation tax: deadlines and penalties

Your company is responsible for calculating how much corporation tax it owes and for paying corporation tax on time. Failure to do so can incur a financial penalty.

A company can send in its company tax return at any time after the end of its accounting period but must do so no later than the statutory filing date. This is the later of:

• 12 months after the end of your company's accounting period
• three months after your company receives a "notice to deliver a company tax return form CT600" from HM Revenue & Customs (HMRC)

If your company fails to send its Company Tax Return on time, it will be charged penalties, depending on how late it is. If the return is regularly late, the penalties increase. HMRC may also charge a tax-related penalty if the tax return is incorrect or if your company fails to tell HMRC of its liability for corporation tax. Read about penalty charges for late submission of Company Tax Returns on the HMRC website.

Payment of the corporation tax itself is due exactly nine months and one day after what is called your normal due date. For most companies, the normal due date is the last day of the accounting period. So if a company's tax return covers the accounting period 1 January 2004 to 31 December 2004, then the corporation tax should be paid no later than 1 September 2005.

If corporation tax is paid late, interest will be charged and a penalty for late payment may be charged. Read about rates of interest chargeable for late payment of corporation tax on the HMRC website.

You can get regular reminders of important tax dates with our Tax deadline email alerts.