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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.
In
particular:
- 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 after 31 March
2002 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 with no annual exemption.
- 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 where business assets are replaced.
- Qualifying
disposals of substantial holdings (at least 10%) are exempt. The
vendor and the company being sold must satisfy a trading condition and
the vendor must have owned the shares for at least 12 months.
- 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%.
- Until
31 March 2006, a company with taxable profits up to £50,000 was
charged at 0% on the first £10,000 and an effective marginal rate of
23.75% on the next £40,000. Profits equal to dividends paid in the
period to non-corporate shareholders were charged at 19%. The
remaining profits are charged at the underlying rate. This is the
average rate that would apply if all the profits were taxed at 0% on
the first £10,000 and 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.
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Corporation tax rates
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Corporation
tax year
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2006
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2005
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2004
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Financial
year
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to 31.3.07
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to 31.3.06
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to 31.3.05
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Full
rate
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30%
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30%
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30%
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Small
companies rate
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19%
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19%
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19%
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Small
companies limit
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£300,000
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£300,000
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£300,000
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Effective
marginal rate
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32.75%
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32.75%
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32.75%
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Upper
marginal limit
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£1,500,000
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£1,500,000
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£1,500,000
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Starting
rate
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n/a
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0%
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0%
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Starting
rate limit
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n/a
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£10,000
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£10,000
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Effective
marginal rate
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n/a
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23.75%
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23.75%
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Upper
marginal limit
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n/a
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£50,000
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£50,000
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Minimum
rate on dividends
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n/a
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19%
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19%
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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
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. For small companies, profits that are paid out as dividends
are charged at not less than 19%.
- 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.
Self-assessment
Companies have to
self-assess their corporation tax liabilities.
- 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
HMRC makes enquiries into the return, the company's assessment is
usually regarded as finalised 12 months after the filing date for the
return.
- HMRC
enquiries into the return are subject to rules similar to those that
apply to income tax.
- Companies
are subject to similar rules to 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.
- 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.
The Dyer Partnership, 17 Westminster Court,
Hipley Street,
Old Woking, Surrey GU22 9LG
Copyright © 2002 - 2006 The Dyer Partnership
Limited
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