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Liability to corporation tax (CT)
Companies that are resident in the UK are subject to CT on their profits (income plus gains) arising in an accounting period. An accounting period cannot be more than 12 months. Company accounts prepared for a period of more than 12 months are apportioned between the first 12 months and the remainder. Non-resident companies may be subject to CT where they trade in the UK through a permanent establishment.
- A company incorporated in the UK is treated as UK resident.
- A non-UK incorporated company is treated as resident in the UK if its central management and control is exercised in the UK.
Taxable profits The amounts of income and capital gains are basically determined by the tax rules that apply to individuals. Companies are subject to many special rules and qualify for some special tax reliefs. For example:
- Small and medium size companies can deduct 150%, and large companies 125%, of qualifying revenue expenditure on research and development.
- The corporate venturing scheme gives companies tax relief of 20% on the cost of subscribing for shares in a qualifying unquoted company under similar conditions to the enterprise investment scheme.
- Tax relief is given on the cost of intangible assets acquired at the rate of depreciation in the accounts or 4% a year, whichever is the greater.
Capital gains by companies
A company's capital gains are subject to CT at the normal rates. Companies continue to receive indexation relief on gains and do not receive taper relief. Capital gains may be offset by capital losses of the same accounting period or capital losses brought forward from previous periods. Roll-over relief is available. Qualifying disposals of substantial holdings (at least 10%) are exempt. Companies are subject to different identification rules from individuals for disposals of shares and securities.
Rates of tax
The rate of CT is fixed for the financial year ending each 31 March. Where an accounting period straddles this date, the profits are apportioned accordingly.
- The main rate of CT is 30%. This is charged on the whole of profits where they exceed £1,500,000, and in all cases for close investment-holding companies.
- The small companies rate of 19% is charged on the first £300,000 of profits where profits are between £50,000 and £1,500,000.
- Profits between the lower and upper profit thresholds (£300,000-£1,500,000), are in effect charged at a marginal rate of tax of 32.75%.
- A company with taxable profits up to £50,000 is charged at 0% on the first £10,000 and an effective marginal rate of 23.75% on the next £40,000.
- Where a company has associated companies, all the rate thresholds are divided by the number of associated companies plus one. For example, a company with three associated companies is taxed at 19% on profits between £12,500 (£50,000 divided by four) and £75,000 (£300,000 divided by four). Associated companies are broadly companies under common control.
| Corporation tax rates |
|
| Corporation tax year |
2002 |
2001 |
2000 |
| Financial year |
to 31.3.03 |
to 31.3.02 |
to 31.3.01 |
| Full rate |
30% |
30% |
30% |
| Small companies rate |
19% |
20% |
20% |
| Small companies rate |
19% |
20% |
20% |
| |
Small companies limit |
£300,000 |
£300,000 |
£300,000 |
| |
Effective marginal rate |
32.75% |
32.5% |
32.5% |
| |
Upper marginal limit |
£1,500,000 |
£1,500,000 |
£1,500,000 |
| Starting rate |
0% |
10% |
10% |
| |
Starting rate limit |
£10,000 |
£10,000 |
£10,000 |
| |
Effective marginal rate |
23.75% |
22.5% |
22.5% |
| |
Upper marginal limit |
£50,000 |
£50,000 |
£50,000 |
|
Company losses
A company's trading losses can normally be set against:
- Income and gains of the same accounting period.
- Income and gains of the previous year.
- Trading profits from the same trade in future years.
Losses of the final 12 months of a trade can be carried back three years. Losses are set against more recent periods before earlier periods.
Groups of companies
Profits and losses are calculated separately for each company. However, group relief generally allows trading losses, losses on property letting, management expenses and certain other deductions to be surrendered by one company and set against the profits of other companies in the same group.
In general, 'group' means that 75% of the ordinary share capital of one company is owned by another company; or several companies may share the same parent owning at least 75% of the share capital.
Dividends, distributions and advance corporation tax (ACT)
Companies do not have to pay tax at the time they pay a dividend. Corporation tax is paid at the normal time on the company's taxable profits without any deduction for dividends paid.
- A shareholder receives the dividend with an accompanying tax credit equal to 10% of the dividend plus tax credit. The tax credit is equivalent to the basic rate of income tax on dividends (see Income Tax: Investment income).
- Companies pay no tax on dividends received.
- Companies that paid dividends before 6 April 1999 had to pay advance corporation tax (ACT) of one-quarter of the dividend. The ACT could be set against a company's CT liability within certain limits. Any ACT unrelieved at 5 April 1999 may be carried forward and set against CT, up to a maximum of 20% of the company's taxable profits after deducting 'shadow ACT'. Shadow ACT is equal to one-quarter of any dividends paid in the period, ie the ACT that would have been paid if the dividend had been paid before 6 April 1999.
Self-assessment
Companies have to self-assess their corporation tax liabilities for accounting periods ending after 30 June 1999.
- The corporation tax return includes a self-assessment of the company's tax liabilities for the accounting period, including any tax on loans to shareholders and tax arising under anti-avoidance rules.
- Full statutory accounts and corporation tax computations have to be sent with the return.
- Unless the Inland Revenue makes enquiries into the return, the company's assessment is usually regarded as finalised 12 months after the filing date for the return.
- Inland Revenue enquiries into the return are subject to rules similar to those that apply to income tax.
- Companies are subject to similar rules as those applying to individuals for amending returns and making claims for tax reliefs.
- Companies normally have to file their return within 12 months of the end of the accounting period.
- If a return is filed late, the company is automatically charged a fixed penalty of between £100 and £1,000, depending on how late the return is and whether lateness is habitual. An additional tax-linked penalty is charged if the return is filed more than six months late. The penalty is based on the amount of tax unpaid at the six-month point and increases if the delay continues.
- Interest is charged on CT that is paid late. Unlike interest on IT, interest on CT is tax deductible and interest on repayments is taxable.
- Large companies have to make quarterly payments of CT in the 7th, 10th, 13th and 16th month following the start of the accounting period. Large companies are those with profits of over £1.5 million, reduced where there are associated companies. In the first period in which a company becomes large, it only has to make quarterly payments if its profits are more than £10 million.
- Quarterly payments have been phased in over four years starting with accounting periods ending after 30 June 1999. For accounting periods ending between 1 July 2001 and 30 June 2002, 88% of the estimated CT is payable by instalments, with the rest due nine months after the accounting date. All the tax is payable in instalments for accounting periods ending after 30 June 2002.
- Each instalment is based on the company's latest estimated CT liability.
- Groups can pay instalments on a group-wide basis without specifying individual companies' liabilities.
- Companies that are not large have to pay their CT nine months after the end of the accounting period.
Copyright © 2005 The GKP
Partnership
Tel: +44
(0) 208 998 3456 Fax: +44
(0) 208 998 1612
EALING
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