If your business is a limited company, and you make a taxable profit, you need to pay corporation tax to HMRC. The amount you pay and when you pay it depends on how much profit you make and when you make it.
At the end of your financial year, your auditor calculates the amount of corporation tax your company owes. After considering a copy of your accounts for the year, HMRC then agrees on the value. This means you generally pay corporation tax in arrears.
Once you know how much corporation tax you owe, to make sure your accounts are accurate, record this using journals.
As you calculate corporation tax after the net profit, record the values on your balance sheet. Then create a journal to move the value to the profit and loss nominal ledger account.
In the following example, we owe HMRC corporation tax of £5000.
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? |
| Corporation Tax | Corporation tax | 5000 | Leave clear | |
| Corporation Tax Liability | Corporation tax | 5000 | Leave clear |
You’ve now recorded the amount of Corporation tax you owe as a liability and in the Equity section of the balance sheet. To clear your liability, when you pay the Corporation tax to HMRC, record a payment to the Corporation Tax Liability nominal ledger account.