This article explains how Corporation Tax is calculated if an accounting year is longer than 12 months.
If your business is a limited company, FreeAgent calculates your Corporation Tax liability based on the data you enter throughout the year. If you’re a sole trader or you have any other type of business, you don’t have to pay Corporation Tax.
You can submit your Corporation Tax return to HMRC through FreeAgent for periods ending on or after 27th October 2020 after you've finalised your company's End of Year report in FreeAgent.
Checking your accounting dates
In order for FreeAgent to calculate your company’s Corporation Tax liability accurately, your accounting dates need to be recorded correctly.
To review your accounting dates in FreeAgent, select ‘Settings’ from the drop-down menu in the top-right and choose ‘Accounting Dates’.
If your company started trading on a day after its incorporation date, you will need to enter that date in the ‘Company Trading Start Date’ field. If your company started trading on its incorporation date, you can leave this field blank.
The date that you enter in the ‘Company Trading Start Date’ field will trigger a new Corporation Tax accounting period in accordance with HMRC’s rules.
First accounting period longer than 12 months
In your first accounting period, your accounting year may run for longer than 12 months. For example, if your business was incorporated on 15th January, you might prepare the company accounts to 31st January the following year.
However, Corporation Tax periods cannot be longer than 12 months, so if your accounting year is longer than 12 months you have to submit two Corporation Tax returns to cover the full year.
There are some specific rules around the dates these returns run to and from, but usually it’s the first 12 months of the accounting year plus another return for the remaining days. In the above example, that would be one return covering 15th January in the first year to 14th January the following year, and a second return from 15th to 31st January of that same following year.
The next accounting period will run from 1st February in the second year to 31st January the following year and will be 12-monthly thereafter, unless it is changed with Companies House.
If you enter a company trading start date, this will trigger a new Corporation Tax accounting period. In the above example, if you had entered a trading start date of 1st February, the Corporation Tax return periods would be 15th to 31st January in the first year and 1st February in the first year to 31st January in the following year.
Profit apportionment for two periods
When calculating taxable profits for two Corporation Tax periods, you have to apportion (divide) the profit earned over the full accounting period by the number of days in each Corporation Tax period. Please note that the number of days in each Corporation Tax period will depend on whether the year in question is a leap year or not.
Using the above example, in a non-leap year, there are 382 days between 15th January and 31st January the following year. In the first period (15th January in the first year to 14th January the following year) there are 365 days and in the second period (15th to 31st January in the second year) there are 17 days.
This means that the first Corporation Tax return should get 365 days divided by 382 days worth of profit and the second return should get 17 days divided by 382 days worth of profit. That’s about 96% (rounded) worth of profit on the first return and 4% worth of profit on the second return. Therefore, if the profit was £10,000, £9,600 would be apportioned on the first return and £400 on the second.
Please note that capital allowances aren’t apportioned the same way as taxable profits. They are recognised on the date that the asset was purchased. For more information, please see this article.