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: ''Throughout this article, the term "pound" and the £ symbol refer to the Pound sterling.'' Corporation tax in the United Kingdom is a
corporate tax A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at ...
levied in on the profits made by UK-resident
companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...
and on the profits of entities registered overseas with
permanent establishment A permanent establishment (PE) is a fixed place of business that generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax s ...
s in the UK. Until 1 April 1965, companies were taxed at the same income tax rates as individual taxpayers, with an additional
profits tax In Hong Kong, profits tax is an income tax chargeable to business carried on in Hong Kong. Applying the International taxation#Taxation systems, territorial taxation concept, only profits sourced in Hong Kong are taxable in general. Capital ga ...
levied on companies.
Finance Act 1965 The Finance Act 1965 is an Act of the Parliament of the United Kingdom which introduced two major new UK taxes. Corporation tax created a separate system for taxing the income of corporations, where previously they had paid income tax in the same ...
replaced this structure for companies and associations with a single corporate tax, which took its basic structure and rules from the income tax system. Since 1997, the UK's
Tax Law Rewrite Project The Tax Law Rewrite Project of HM Revenue and Customs was a major effort to re-write the entire tax legislation of the United Kingdom in a format which is both more consistent and more understandable. It aimed to remove archaic language and imp ...
Tax Law Rewrite
,
Her Majesty's Revenue and Customs , patch = , patchcaption = , logo = HM Revenue & Customs.svg , logocaption = , badge = , badgecaption = , flag = , flagcaption = , image_size = , co ...
(HMRC). Retrieved 17 April 2007
has been modernising the UK's tax legislation, starting with income tax, while the legislation imposing corporation tax has itself been amended, the rules governing income tax and corporation tax have thus diverged. Corporation tax was governed by the Income and Corporation Taxes Act 1988 (as amended) prior to the rewrite project.
ncome and Corporation Taxes Act 1988 (c. 1), Office of Public Sector Information, responsible for the operation of Her Majesty's Stationery Office (HMSO),
Originally introduced as a classical tax system, in which companies were subject to tax on their profits and companies' shareholders were also liable to income tax on the dividends that they received, the first major amendment to corporation tax saw it move to a
dividend imputation Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the ...
system in 1973, under which an individual receiving a dividend became entitled to an income tax credit representing the corporation tax already paid by the company paying the dividend. The classical system was reintroduced in 1999, with the abolition of
advance corporation tax In the United Kingdom, the advance corporation tax (ACT) was part of a partial dividend imputation system introduced in 1973 under which companies were required to withhold tax on dividends before they were distributed to shareholders. The scheme w ...
and of repayable dividend tax credits. Another change saw the single main rate of tax split into three. Tax competition between jurisdictions reduced the main corporate tax rate from 28% in 2008–2010 to a flat rate of 19% as of April 2021. The UK government faced problems with its corporate tax structure, including
European Court of Justice The European Court of Justice (ECJ, french: Cour de Justice européenne), formally just the Court of Justice, is the supreme court of the European Union in matters of European Union law. As a part of the Court of Justice of the European Uni ...
judgements that aspects of it are incompatible with EU treaties. Tax avoidance schemes marketed by the financial sector have also proven an irritant, and been countered by complicated anti-avoidance legislation. The complexity of the corporation tax system is a recognised issue. The Labour government, supported by the Opposition parties, carried through wide-scale reform from the Tax Law Rewrite project, resulting in the
Corporation Tax Act 2010 The Corporation Tax Act 2010 (c.4) is an Act of the Parliament of the United Kingdom that received Royal Assent on 3 March 2010. It was first presented (first reading) in the House of Commons on 19 November 2009 and received its third reading o ...
. The tax has slowly been integrating
generally accepted accounting practice Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
, with the corporation tax system in various specific areas based directly on the accounting treatment. Total net corporation tax receipts were a record high of £56 billion in 2016–17.


History

Until 1965, companies were subject to income tax on their profitsCorporate Tax (PDF)
/ref> at the same rates as was levied on individual taxpayers. A
dividend imputation Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution. In comparison to the ...
system existed, whereby the income tax paid by a company was offset against the income tax liability of a shareholder who received dividends from the company. The standard rate of income tax in 1949 was 50%. If the company paid a £100 dividend, the recipient would be treated as if he had earned £200 and had paid £100 in income tax on it – the tax paid by the company fully covered the tax due from the individual on the dividend paid. If, however, the individual was subject to tax at a higher rate (known as "surtax"), he (not the company) would be liable to pay the additional tax. In addition to income tax, companies were also subject to a profits tax, which was deducted from company profits when determining the income tax liability. It was a differential tax, with a higher tax rate on dividends (profits distributed to shareholders) than on profits retained within the company. By penalising the distribution of profits, it was hoped companies would retain profits for investment, which was considered a priority after the Second World War. The tax did not have the desired effect, so the distributed profits tax was increased by 20%
50 years ago
", ''Newark Advertiser''. Retrieved 8 March 2015
by the post-war Labour government to encourage companies to retain more of their profits. At the time of
Hugh Gaitskell Hugh Todd Naylor Gaitskell (9 April 1906 – 18 January 1963) was a British politician who served as Leader of the Labour Party and Leader of the Opposition from 1955 until his death in 1963. An economics lecturer and wartime civil servant, ...
's 1951 budget, the profits tax was 50% for distributed profits and 10% for undistributed profits. A series of reductions in the profits tax were brought in from 1951 onwards by the new Conservative government. The tax rates fell to 22.5% on distributed profits and 2.5% on undistributed profits by 1957, but the profits tax was no longer income tax-deductible.
Derick Heathcoat-Amory Derick Heathcoat-Amory, 1st Viscount Amory, , ( ; 26 December 1899 – 20 January 1981) was a British Conservative politician and member of the House of Lords. He served as Chancellor of the Exchequer between 1958 and 1960, and later as Chanc ...
's Budget of March 1958 replaced the differential profits tax with a single profits tax measure, applicable to both retained and distributed profits. This gradual decrease, and final abolition, of taxes on capital distributions reflected ideological differences between the Conservative and Labour parties: the Conservative approach was to distribute profits to capital holders for investment elsewhere, while Labour sought to force companies to retain profits for reinvestment in the company in the hope this would benefit the company's workforce.


Finance Act 1965

Finance Act 1965 replaced the system of income tax and profits tax from 1 April 1965 with the Corporation Tax, which re-introduced aspects of the old system. Corporation Tax was charged at a uniform rate on all profits, but additional tax was then payable if profits were distributed as a dividend to shareholders. In effect, dividends suffered double taxation. This method of corporation tax is known as the classical system and is similar to that used in the United States. The effect of the tax was to revert to the distribution tax in operation from 1949 to 1959: dividend payments were subject to higher tax than profits retained within the company. Finance Act 1965 also introduced a
capital gains tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property. Not all countries impose a c ...
, at a rate of 30%, charged on the gains arising on the disposal of capital assets by individuals. While companies were exempted from capital gains tax, they were liable to corporation tax on their "chargeable gains", which were calculated in substantially the same way as capital gains for individuals. The tax applied to company shares as well as other assets. Before 1965, capital gains were not taxed, and it was advantageous for taxpayers to argue that a receipt was non-taxable "capital" rather than taxable "revenue".


Advance Corporation Tax

The basic structure of the tax, where company profits were taxed as profits, and dividend payments were then taxed as income, remained unchanged until 1973, when a partial imputation system was introduced for dividend payments. Unlike the previous imputation system, the tax credit to the shareholder was less than the corporation tax paid (corporation tax was higher than the standard rate of income tax, but the imputation, or set-off, was only of standard rate tax). When companies made distributions, they also paid the advance corporation tax (known as ACT), which could be set off against the main corporation tax charge, subject to certain limits (the full amount of ACT paid could not be recovered if significantly large amounts of profits were distributed).Company Taxation Manual CTM20105 – ACT: set-off against CT on profits: introduction
HMRC. Retrieved 13 April 2007
Individuals and companies who received a dividend from a UK company received a tax credit representing the ACT paid.Company Taxation Manual CTM16120 – Distributions: impact on CT: franked investment income: general
HMRC. Retrieved 12 April 2007
Individuals could set off the tax credit against their income tax liability.
HMRC. Retrieved 12 April 2007
On introduction, ACT was set at 30% of the gross dividend (the actual amount paid plus the tax credit). If a company made a £70 dividend payment to an individual, the company would pay £30 of advance corporation tax. The shareholder would receive the £70 cash payment, plus a tax credit of £30; thus, the individual would be deemed to have earned £100, and to have already paid tax of £30 on it. The ACT paid by the company would be deductible against its final "mainstream" corporation tax bill. To the extent that the individual's tax on the dividend was less than the tax credit – for example, if his income was too low to pay tax (below £595 in 1973–1974Income Tax Personal Allowances and Reliefs 1973–74 to 1989–90 (PDF)
, HMRC. Retrieved 9 April 2007
) – he would be able to reclaim some or all of the £30 tax paid by the company. The set-off was only partial, since the company would pay 52% tax (small companies had lower rates, but still higher than the ACT rate), and thus the £70 received by the individual actually represented pre-tax profits of £145.83. Accordingly, only part of the double taxation was relieved. ACT was not payable on dividends from one UK company to another (unless the payor company elected to pay it).
HMRC. Retrieved 12 April 2007
Also, the recipient company was not taxed on that dividend receipt, except for dealers in shares and
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
companies in respect of some of their profits. As the payor company would have suffered tax on the payments it made, the company that received the dividend also received a credit that it could use to reduce the amount of ACT it itself paid, or, in certain cases, apply to have the tax credit repaid to them. The level of ACT was linked to the basic rate of income tax between 1973 and 1993. The March 1993 Budget of
Norman Lamont Norman Stewart Hughson Lamont, Baron Lamont of Lerwick, (born 8 May 1942) is a British politician and former Conservative MP for Kingston-upon-Thames. He served as Chancellor of the Exchequer from 1990 until 1993. He was created a life peer in ...
cut the ACT rate and tax credit to 22.5% from April 1993, and 20% from April 1994. These changes were accompanied with a cut of income tax on dividends to 20%, while the basic rate of income tax remained at 25%. Persons liable for tax were lightly affected by the change, because income tax liability was still balanced by the tax credit received, although higher rate tax payers paid an additional 25% tax on the amount of the dividend actually received (net), as against 20% before the change. The change had bigger effects on pensions and non-taxpayers. A pension fund receiving a £1.2 m dividend income prior to the change would have been able to reclaim £400,000 in tax, giving a total income of £1.6 m. After the change, only £300,000 was reclaimable, reducing income to £1.5 m, a fall of 6.25%.
Gordon Brown James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony B ...
's summer Budget of 1997Budget 1997
, HM Treasury. Retrieved 25 April 2007
ended the ability of pension funds and other tax-exempt companies to reclaim tax credits with immediate effect, and for individuals from April 1999. This tax change has been blamed for the poor state of British pension provision, while usually ignoring the more significant effect of the dot-com crash of 2000 onwards when the FTSE-100 lost half its value to fall from 6930 at the beginning of 2000 to just 3490 by March 2003. Despite this, critics such as Member of Parliament Frank Field described it as a "hammer blow" and the ''
Sunday Times ''The Sunday Times'' is a British newspaper whose circulation makes it the largest in Britain's quality press market category. It was founded in 1821 as ''The New Observer''. It is published by Times Newspapers Ltd, a subsidiary of News UK, whi ...
'' described it as a swindle, with the hypothetical £1.5 m income described above falling to £1.2 m, a fall in income of 20%, because no tax would be reclaimable.


Abolition of Advance Corporation Tax

From 6 April 1999 ACT was abolished, and the tax credit on dividends was reduced to 10%. There was a matching reduction in the basic income tax rate on dividends to 10%, while a new higher-rate of 32.5% was introduced which led to an overall effective 25% tax rate for higher rate taxpayers on dividends (after setting this "notional" tax credit against the tax liability).While non-taxpayers were no longer able to claim this amount from the treasury (as opposed to taxpayers who could deduct it from their tax bill), the 20% ACT (which would have previously been deducted from the dividend before payment) was no longer levied. ACT that had been incurred prior to 1999 could still be set off against a company's tax liability, provided it would have been able to set it off under the old imputation system.Company Taxation Manual CTM18250 – Shadow ACT: outline of the scheme
HMRC. Retrieved 17 April 2007
In order to keep the stream of payments associated with advance corporation tax payment, 'large' companies (comprising the majority of corporation tax receipts) were subjected to a quarterly instalments scheme for tax payment.


Rates


Main and Small Companies' Rates

On its introduction in 1965, corporation tax was charged at 40%, rising to 45% in the 1969
Budget A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environment ...
. The rate then fell to 42.5% in the second Budget of 1970 and 40% in 1971. In 1973, alongside the introduction of
advance corporation tax In the United Kingdom, the advance corporation tax (ACT) was part of a partial dividend imputation system introduced in 1973 under which companies were required to withhold tax on dividends before they were distributed to shareholders. The scheme w ...
(ACT), Conservative chancellor
Anthony Barber Anthony Perrinott Lysberg Barber, Baron Barber, (4 July 1920 – 16 December 2005) was a British Conservative politician who served as Chancellor of the Exchequer from 1970 to 1974. After serving in both the Territorial Army and the Royal ...
created a main rate of 52%, together with a smaller companies' rate of 42%.Rates of Corporation Tax (PDF)
, HMRC. Retrieved 13 April 2007
This apparent increase was negated by the fact that under the ACT scheme, dividends were no longer subject to income tax. The 1979 Conservative Budget of Geoffrey Howe cut the small companies' rate to 40%, followed by a further cut in the 1982 Budget to 38%. The Budgets of 1983–1988 saw sharp cuts in both main and small companies' rates, falling to 35% and 25% respectively. Budgets between 1988 and 2001 brought further falls to a 30% main rate and 19% small companies' rates. From April 1983 to March 1997 the small companies' rate was pegged to the basic rate of income tax. During the 1980s there was briefly a higher rate of tax imposed for capital profits.


Starting Rate and Non-Corporate Distribution Rate

Chancellor
Gordon Brown James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 to 2010. He previously served as Chancellor of the Exchequer in Tony B ...
's 1999 BudgetBudget 1999
, HM Treasury. Retrieved 19 April 2007
introduced a 10% starting rate for profits from £0 to £10,000, effective from April 2000.IR19: Help for Small Companies
, HM Treasury. Retrieved 9 April 2007
Marginal relief applied meaning companies with profits of between £10,000 and £50,000 paid a rate between the starting rate and the small companies' rate (19% in 2000). The 2002 BudgetBudget 2002
, HM Treasury. Retrieved 19 April 2007
cut the starting rate to zero, with marginal relief applying in the same way.Budget 2002 (PDF)
s1.20, The Stationery Office. Retrieved 9 April 2007
This caused a significant increase in the number of companies being incorporated, as businesses that had operated as self-employed, paying income tax on profits from just over £5,000, were attracted to the corporation tax rate of 0% on income up to £10,000. Previously self-employed individuals could now distribute profits as dividend payments rather than salaries. For companies with profits under £50,000 the corporation tax rate varied between 0% and 19%. Because dividend payments come with a basic rate tax credit, provided the recipient did not earn more than the basic rate allowance, no further tax would be paid. The number of new companies being formed in 2002–2003 reached 325,900, an increase of 45% on 2001–2002.Companies in 2002–2003 (PDF)
(Table B1), Department of Trade and Industry, July 2003, . Retrieved 9 May 2007
The fact that individuals operating in this manner could potentially pay no tax at all was felt by the government to be unfair tax avoidance, and the 2004 BudgetBudget 2004
, HM Treasury. Retrieved 19 April 2007
introduced a Non-Corporate Distribution Rate.
, HMRC. Retrieved 18 April 2007
This ensured that where a company paid below the small companies' rate (19% in 2004), dividend payments made to non-corporates (for example, individuals, trusts and personal representatives of deceased persons) would be subject to additional corporation tax, bringing the corporation tax paid up to 19%. For example, a company making £10,000 profit, and making a £6,000 dividend distribution to an individual and £4,000 to another company would pay 19% corporation tax on the £6,000. Although this measure substantially reduced the number of small businesses incorporating, the Chancellor in the 2006 BudgetBudget 2006
, HM Treasury. Retrieved 19 April 2007
said tax avoidance by small businesses through incorporation was still a major issue, and scrapped the starting rate entirely.


Historic tax revenues

The following graph shows UK corporation tax revenue from 1999 to 2017:


Taxable profits and accounting profits

The starting point for computing taxable profits is profits before tax (except for a
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
company). The rules for calculating corporation tax generally ran in parallel with income tax until 1993, when the first statutory rule to move profit reporting into line with
generally accepted accounting practice Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
was introduced, although the courts were already moving towards requiring trading profits to be computed using general
accountancy Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
rules.Company Taxation Manual CTM01130 – Corporation Tax: introduction: computation of profits
HMRC. Retrieved 13 April 2007
The Finance Act 1993Finance Act 1993 (c. 34)
HMSO, Retrieved 9 May 2007
introduced rules to make tax on exchange gains and losses mimic their treatment in a company's financial statements in most instances. The Finance Act 1994Finance Act 1994
HMSO, Retrieved 9 May 2007
saw similar rules for financial instruments, and in the
Finance Act 1996 A Finance Act is the headline fiscal (budgetary) legislation enacted by the UK Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year, and in particular setting out the principal tax rates f ...
Finance Act 1996
HMSO, Retrieved 9 May 2007
the treatment of most loan relationships was also brought into line with the accounting treatment. The Finance Act 1997Finance Act 1997
HMSO, Retrieved 9 May 2007
saw something similar with rental premiums. A year later, the Finance Act 1998Finance Act 1998
HMSO, Retrieved 9 May 2007
went even further, making it clear that taxable trading profits (apart from those accruing to a Lloyd's corporate nameCompany Taxation Manual CTM40750 – Particular bodies: Lloyd's underwriting agents
HMRC. Retrieved 13 April 2007
or to a
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
company) and profits from a rental business are equal to profits calculated under
generally accepted accounting practice Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
("GAAP") unless there is a specific statutory or case law rule to the contrary. This was followed up by the Finance Act 2004,Finance Act 2004
HMSO, Retrieved 9 May 2007
which provided that where a company with investment business could make deductions for management expenses, they were calculated by reference to figures in the financial statements.Company Taxation Manual CTM08005 – Corporation Tax: management expenses: introduction
HMRC. Retrieved 13 April 2007


International Financial Reporting Standards

From 2005, all European Union listed companies have to prepare their financial statements using the " International Financial Reporting Standards" ("IFRS"), as modified by the EU.International accounting standards (IAS)
www.europa.eu. Retrieved 13 April 2007
Other UK companies may choose to adopt IFRS. Corporation tax law is changing so that, in the future, IFRS accounting profits are largely respected. The exception is for certain financial instruments and certain other measures to prevent tax
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...
between companies applying IFRS and companies applying UK GAAP.


Avoidance

Tax avoidance is defined by the UK government as "bending the rules of the tax system to gain a tax advantage that Parliament never intended". Unlike most other countries, most UK tax professionals are accountants rather than lawyers by training. Until 2013, the UK had no general anti-avoidance rule ("GAAR") for corporation tax. However, it inherited an anti-avoidance rule from income tax relating to transactions in securities,Company Taxation Manual CTM36805 – Particular topics: transactions in securities: tax advantage from: introduction
HMRC. Retrieved 19 April 2007
and since then has had various "mini-GAARs" added to it. The best known "mini-GAAR" prevents a deduction for interest paid when the loan to which it relates is made for an "unallowable purpose".
, HMRC. Retrieved 19 April 2007
In 2013, the government introduced a General Anti-Avoidance Rule to manage the risk of tax avoidance. Finance Act 2004 introduced disclosure rules requiring promoters of certain tax avoidance schemes that are financing- or employment-related to disclose the scheme. Taxpayers who use these schemes must also disclose their use when they submit their tax returns.
HMRC. Retrieved 13 April 2007
This is the first provision of its kind in the UK, and Finance Act 2005
HMSO, Retrieved 9 May 2007
has shown a number of tax avoidance schemes being blocked earlier than would have been expected prior to the disclosure rules.


Need for greater revenues

In the early twenty-first century the government sought to raise more revenues from corporation tax. In 2002 it introduced a separate 10% supplementary charge on profits from oil and gas extraction businesses, and Finance Act 2005 contained measures to accelerate when oil and gas extraction business have to pay tax. Instead of paying their tax in four equal instalments in the seventh, tenth, thirteenth and sixteenth month after the accounting period starts, they will be required to consolidate their third and fourth payments and pay them in the thirteenth month, creating a
cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
advantage for the government. Finance (No. 2) Act 2005Finance (No.2) Act 2005
HMSO, Retrieved 9 May 2007
continued measures specifically relating to
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
companies. When originally announced (as Finance (No.3) Bill 2005) Legal & General told the Stock Exchange that £300 m had been wiped off its value, and Aviva (Norwich Union) announced that the tax changes would cost its policy holders £150 m.


Method of charge

Powers to collect corporation tax must be passed annually by parliament, otherwise there is no authority to collect it. The charge for the
financial year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...
(beginning 1 April each year) is imposed by successive finance acts. The tax is charged in respect of the company's accounting period, which is normally the 12-month period for which the company prepares its accounts.Company Taxation Manual CTM01105 – Corporation Tax: introduction: basis of charge to CT
HMRC. Retrieved 14 April 2007
Corporation tax is administered by
HM Revenue & Customs , patch = , patchcaption = , logo = HM Revenue & Customs.svg , logocaption = , badge = , badgecaption = , flag = , flagcaption = , image_size = , co ...
(HMRC).


Assessment

Corporation tax is levied on the net profits of a company. Except for certain
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
companies,Company Taxation Manual CTM40325 – Particular bodies: friendly societies: exemption for life or endowment business
HMRC. Retrieved 14 April 2007
it is borne by the company as a direct tax. Up until 1999 no corporation tax was due unless HMRC raised an assessment on a company. Companies were, however, obliged to report certain details to HMRC so that the right amount could be assessed. This changed for accounting periods ending on or after 1 July 1999, when self-assessment was introduced. Self-assessment means that companies are required to assess themselves ''and take full responsibility for that assessment''. If the self-assessment is wrong through negligence or recklessness, the company can be liable to penalties.Company Taxation Manual CTM93260 – CTSA: the filing obligation: unsatisfactory return
HMRC. Retrieved 14 April 2007
The self-assessment tax return needs to be delivered to HMRC 12 months after the end of the period of account in which the accounting period falls
HMRC. Retrieved 14 April 2007
(although the tax must be paid before this date). If a company fails to submit a return by then, it is liable to penalties. HMRC may then issue a determination of the tax payable,
HMRC. Retrieved 15 April 2007
which cannot be appealed – however, in practice they wait until a further six months have elapsed. Also, the most common claims and elections that may be made by a company have to be part of its tax return, with a time limit of two years after the end of the accounting period.
HMRC. Retrieved 15 April 2007
This means that a company submitting its return more than one year late suffers not only from the late filing penalties, but also from the inability to make these claims and elections. From 2004 there has been a requirement for new companies to notify HM Revenue & Customs of their
formation Formation may refer to: Linguistics * Back-formation, the process of creating a new lexeme by removing or affixes * Word formation, the creation of a new word by adding affixes Mathematics and science * Cave formation or speleothem, a secondar ...
, although HMRC receives notifications of new company registrations from
Companies House Companies House is the executive agency of the company registrars of the United Kingdom, falling under the remit of the Department for Business, Energy and Industrial Strategy. All forms of companies (as permitted by the Companies Act) are in ...
. Companies will then receive an annual notice CT603, approximately 1–2 months after the end of the company's financial period, notifying it to complete an annual return. This must also include the company's annual accounts, and possibly other documents, such as
auditor An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting and a ...
s' reports, that are required for certain companies.Company Taxation Manual CTM93090 – CTSA: the filing obligation: delivery of return: content
HMRC. Retrieved 15 April 2007


Schedular system

In the United Kingdom the ''source rule'' applies. This means that something is taxed only if there is a specific provision bringing it within the charge to tax. Accordingly, profits are only charged to corporation tax if they fall within one of the following, and are not otherwise exempted by an explicit provision of the Taxes Acts: Notes: #In practice companies do not get taxed under Schedule F. Most companies are exempted from Schedule F and there is a provision for those companies which are taxed on UK dividends (i.e. dealers in shares ( stock)) that removes the charge from Schedule F to Schedule D. #A Controlled Foreign Company ("CFC") is a company controlled by a UK resident that is not itself UK resident and is subject to a lower rate of tax in the territory in which it is resident. Under certain circumstances, UK resident companies that control a CFC pay corporation tax on what the UK tax profits of that CFC would have been. However, because of a wide range of exemptions,International Manual INTM201070 – Controlled Foreign Companies: legislation – introduction and outline
, HMRC. Retrieved 16 April 2007
very few companies suffer a CFC charge. #Schedules B, C and E used to, but no longer, exist. #Authorised unit trusts and OEICs are not liable to tax on their chargeable gains.
HMRC. Retrieved 16 April 2007
Schedule D is itself divided into a number of cases: Notes: #Cases II and IV only apply to income tax and not corporation tax. Strictly speaking, Corporation Tax Act 2010 replaces the historic terminology "Schedule A", "Schedule D Case I" etc. with more descriptive terms but this does not affect the substantive application of the schedular system so that, for example, different rules apply for utilising tax losses depending upon the nature of the income under which the losses arises.


Relief for expenses

Most direct expenses are deductible when calculating taxable income and chargeable gains. Notable exceptions include any costs of entertaining clients. Companies with investment business may deduct certain indirect expenses known as "expenses of management" when calculating their taxable profits. A similar relief is available for expenses of a
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
company taxed on the
I minus E basis In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, a ...
which relate to the company's basic life assurance and general annuity business. Donations made to charities are also normally deducted in calculating taxable income if made under Gift Aid.Corporate Taxation Manual CTM09060 – Corporation Tax: charges on income: Gift Aid
HMRC. Retrieved 16 April 2007


Rates and payment

The 2007 BudgetBudget 2007
, HM Treasury. Retrieved 19 April 2007
announced a main rate cut from 30% to 28%, effective from April 2008. At the same time, the small companies' rate was increased from 19% to 20% from April 2007, 21% in April 2008, to stop "individuals artificially incorporating as small companies to avoid paying their due share of tax, a practice if left unaddressed would cost the rest of the taxpaying population billions of pounds".Chancellor of the Exchequer's Budget Statement
, 21 March 2007, H M Treasury. Retrieved 19 April 2007
The rate of corporation tax is determined by the financial year,
HMRC. Retrieved 16 April 2007
which runs from 1 April to the following 31 March. Financial year FY17 started on 1 April 2017 and ends on 31 March 2018. Where a company's accounting period straddles a financial year in which the corporation tax rate has changed, the company's profits for that period are split. For example, a company paying small companies' rate with its accounting period running from 1 January to 31 December, and making £100,000 of profit in 2007, would be deemed to have made 90/365*£100,000 = £24,657.53 in FY06 (there are 90 days between 1 January and 31 March), and 275/365*£100,000=£75,34.47 in FY07, and would pay 19% on the FY06 portion, and 20% on the FY07 portion. From 1 April 2010 HM Revenue & Customs updated their terminology and the former Small Companies' Rate is now called Small Profits Rate. Notes: #The bands shown on the right hand side are divided by one plus the number of associates (usually the only associates a company has are fellow group companies, but the term is more widely defined)Company Taxation Manual CTM03560 – Corporation Tax: small companies: company with associated companies
HMRC. Retrieved 16 April 2007
#The reduced rates do not apply to close investment holding companies (companies controlled by fewer than 5 people (plus associates) or by their directors/managers, whose main activity is the holding of investments).
HMRC. Retrieved 16 April 2007
Nor do they apply to companies in liquidation after the first 12 months. #Authorised
unit trust A unit trust is a form of collective investment constituted under a trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on ...
s and open-ended investment companies are taxed at the basic rate of income tax which is 20% as of 2010 #
Life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...
companies are taxed using the above rates on shareholder profits and 20% on policy holder profitsLife Assurance Manual
, HMRC. Retrieved 16 April 2007
#Companies active in the oil and gas extraction industry in the UK or on the
UK Continental Shelf The UK Continental Shelf (UKCS) is the region of waters surrounding the United Kingdom, in which the country has mineral rights. The UK continental shelf includes parts of the North Sea, the North Atlantic, the Irish Sea and the English Channel; th ...
are subject to an additional 10% charge on their profits from those activitiesOil Taxation Manual OT00190 – The Taxation of the UK Oil Industry: An Overview
HMRC. Retrieved 16 April 2007
Most companies are required to pay tax nine months and a day after the end of an accounting period.
HMRC. Retrieved 16 April 2007
Larger companies are required to pay quarterly instalments, in the seventh, tenth, thirteenth and sixteenth months after a full accounting period starts.
HMRC. Retrieved 16 April 2007
These times are modified where an accounting period lasts for less than twelve months.
HMRC. Retrieved 19 April 2007
From 2005 onwards, for tax payable on oil and gas extraction profits, the third and fourth quarterly instalments are merged, including the supplementary 10% charge. In the financial year 2004–2005, approximately 39,000 companies paid corporation tax at the main rate. These 4.7% of active companies are responsible for 75% of all corporation tax receipts. Around 224,000 companies paid the small companies rate, with 34,000 benefiting from marginal relief. 264,000 were in the starting rate, with 269,000 benefiting from the lower band of marginal relief.Corporation tax: Number, income, allowances, tax liability and deductions – Financial years 1997–98 to 2004–05 (PDF)
, HMRC. Retrieved 19 April 2007
The total revenue was £41.9bnHM Revenue and Customs annual receipts (PDF)
, HMRC. Retrieved 19 April 2007
from 831,885 companies. Only 23480 companies had a liability in excess of £100,000.Corporation tax payable after set-offs by year of liability (PDF)
, HMRC. Retrieved 19 April 2007


HM Revenue and Customs powers of enquiry

HMRC has one year from the normal filing date, which is itself one year after the end of the period of account, to open an enquiry into the return. This period is extended if the return is filed late. The enquiry continues until all issues that HMRC wish to enquire about a return are dealt with. However, a company can appeal to the Commissioners of Income Tax to close an enquiry if they feel there is undue delay.Company Taxation Manual CTM90150 – CTSA: introduction: key features
HMRC. Retrieved 15 April 2007
If either side disputes the amount of tax that is payable, they may appeal to either the General or Special Commissioners of Income Tax.
which is now known as the First Tier Tax Tribunal, HMRC. Retrieved 15 April 2007
Appeals on points of law may be made to the High Court (
Court of Session The Court of Session is the supreme civil court of Scotland and constitutes part of the College of Justice; the supreme criminal court of Scotland is the High Court of Justiciary. The Court of Session sits in Parliament House in Edinburgh ...
in Scotland), then the
Court of Appeal A court of appeals, also called a court of appeal, appellate court, appeal court, court of second instance or second instance court, is any court of law that is empowered to hear an appeal of a trial court or other lower tribunal. In much of ...
, and finally, with leave, to the House of Lords. However, decisions of fact are binding and can only be appealed if no reasonable Commissioner could have made that decision.Tax Appeals: A guide to appealing against decisions of the Inland Revenue on tax and other matters (PDF)
, Department for Constitutional Affairs. Retrieved 15 April 2007
Once an enquiry is closed, or the time for opening an enquiry has passed, HMRC can only re-open a prior year if they become aware of an issue which they could not reasonably have known about at the time, or in instances of fraud or negligence. In fraud or negligence cases, they can re-open cases from up to 20 years ago.
HMRC. Retrieved 15 April 2007
After an HMRC enquiry closes, or after final determination of an issue by the courts, the taxpayer has 30 days to amend their return, and make additional claims and elections, if appropriate, before the assessment becomes final and conclusive. If there is no enquiry, the assessment becomes final and conclusive once the period in which the Revenue may open an enquiry passes.


Relief from double taxation

There is a risk of
double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). Double liability may be mitigated i ...
whenever a company receives income that has already been taxed. This could be dividend income, which will have been paid out of the post-tax profits of another company and which may have suffered
withholding tax Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the government by the payer of the income rather than by the recipient of the incom ...
. Or it could be because the company itself has suffered foreign tax, perhaps because it conducts part of its trade through an overseas
permanent establishment A permanent establishment (PE) is a fixed place of business that generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax s ...
, or because it receives other types of foreign income. Double taxation is avoided for UK dividends by exempting them from tax for most companies: only dealers in shares suffer tax on them.Company Taxation Manual CTM02060 – Corporation Tax: computation of income: dividends and other distributions received
HMRC. Retrieved 16 April 2007
Where double taxation arises because of overseas tax suffered, relief is available either in the form of expense or credit relief.
HMRC. Retrieved 16 April 2006
Expense relief allows the overseas tax to be treated as a deductible expense in the tax computation. Credit relief is given as a deduction from the UK tax liability, but is restricted to the amount of UK tax suffered on the foreign income. There is a system of onshore pooling, so that overseas tax suffered in high tax territories may be set off against taxable income arising from low tax territories. From 1 July 2009, new rules were introduced to exempt most non-UK dividends from corporation tax so these double taxation rules in respect of non-UK dividends will be of less common application in practice after that date.


Loss relief

Detailed and separate rules apply to how all the different types of losses may be set off within the computations of a company.
, HMRC. Retrieved 16 April 2007
A detailed explanation of these can be found in: '' United Kingdom corporation tax loss relief''.


Group relief

The UK does not permit tax consolidation, where companies in a group are treated as though they are a single entity for tax purposes. One of the main benefits of tax consolidation is that tax losses in one entity in a group are automatically relievable against the tax profits of another. Instead, the UK permits a form of loss relief called "group relief".Company Taxation Manual CTM80105 – Groups: group relief: outline
HMRC. Retrieved 16 April 2007
Where a company has losses arising in an accounting period (other than capital losses, or losses arising under Case V or VI of Schedule D) in excess of its other taxable profits for the period, it may surrender these losses to a group member with sufficient taxable profits in the same accounting period.
HMRC. Retrieved 16 April 2007
The company receiving the losses may offset them against their own taxable profits. Exceptions include that a company in the oil and gas extraction industry may not accept group relief against the profits arising on its oil and gas extraction business, and a life assurance company may only accept group relief against its profits chargeable to tax at the standard shareholder rate applicable to that company. Separate rules apply for dual resident companies. Full group relief is permitted between companies subject to UK corporation tax that are in the same 75% group, where companies have a common ultimate parent, and at least 75% of the shares in each company (other than the ultimate parent) are owned by other companies in the group. The companies making up a 75% group do not all need to be UK-resident or subject to UK corporation tax relief. An open-ended investment company cannot form part of a group.Company Taxation Manual CTM80155 – Groups: group relief: qualifying tests
Retrieved 16 April 2007
Consortium relief is permitted where a company subject to UK corporation tax is owned by a
consortium A consortium (plural: consortia) is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources fo ...
of companies that each own at least 5% of the shares and together own at least 75% of the shares. A consortium company can only surrender or accept losses in proportion to how much of that company is owned by each consortium group.Company Taxation Manual CTM80530 – Consortia: group relief: meaning of consortium members and consortium company
HMRC. Retrieved 16 April 2007


Interaction with European law

Although there are no European Union directives dealing with direct taxes, UK laws must comply with European legislation. In particular, legislation should not be discriminatory under the EC treaty. A number of cases where UK tax laws are believed to be discriminatory have been brought to the
European Court of Justice The European Court of Justice (ECJ, french: Cour de Justice européenne), formally just the Court of Justice, is the supreme court of the European Union in matters of European Union law. As a part of the Court of Justice of the European Uni ...
, usually with respect to freedom of establishment and freedom of movement of capital. Key cases which have been decided include: *''Hoechst''''Metallgesellschaft Ltd and Others, Hoechst AG, Hoechst UK Ltd and Commissioners of Inland Revenue, H.M. Attorney General''
ECJ Cases C-397/98 and 410/98 (Joined cases), European Court of Justice, 2001. Retrieved 9 May 2007
– where the Court found that the way the partial imputation system operated prior to its abolition in 1999 was discriminatory; *''Lankhorst-Hohorst''''Lankhorst-Hohorst and Finanzamt Steinfurt''
EJC case C-324/00, European Court of Justice, 2002. Retrieved 9 May 2007
– a German case which implied that the UK's transfer pricing and thin capitalisation legislation may have been contrary to EU legislation (the 2004 Finance Act made changes to counter this threat); *''Marks and Spencer''''Marks and Spencer plc v David Halsey (Her Majesty’s Inspector of Taxes'')
005 ''005'' is a 1981 arcade game by Sega. They advertised it as the first of their RasterScan Convert-a-Game series, designed so that it could be changed into another game in minutes "at a substantial savings". It is one of the first examples of a ...
EUECJ C-446/03, European Court of Justice. Retrieved 9 May 2007
– where it was claimed that UK parents should be able to relieve the losses of overseas subsidiaries against the tax profits of their UK subgroup (On 7 April 2005, the Advocate-General gave an opinion supporting the claim of a UK parent to offset losses of its EU subsidiaries, where no effective loss relief was available in the EU Member States the subsidiaries were resident in). However, in the final judgment, a compromise agreement was reached in which the national interest to prevent excessive loss of tax was held to outweigh in most circumstances the restriction on the freedom of movement of capital. Accordingly, although no specific new legislation has been introduced, relief for overseas losses will only be available where they may not be utilised in the overseas jurisdiction; *''Cadbury Schweppes''''Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue''
EJC Case C-196/04, European Court of Justice. Retrieved 9 May 2007
– where it was ruled that CFC rules are only acceptable if they relate to wholly artificial arrangements intended to escape the UK tax normally payable. Also, the case of ''ICI v Colmer''''ICI v Colmer''
999 999 or triple nine most often refers to: * 999 (emergency telephone number), a telephone number for the emergency services in several countries * 999 (number), an integer * AD 999, a year * 999 BC, a year Books * ''999'' (anthology) or ''999 ...
BTC 440
led to the UK amending its definition of a group, for group relief purposes. Previously, the definition required that all companies and intermediate parent companies in a group to be UK resident. There are also a number of other cases making their way, slowly, up to the European Court. In particular: *A group litigation order arguing that dividends received from overseas companies should be exempt from tax in the same way as dividends received from UK companies are exempted from tax;Hoechst Group Litigation Order (PDF)
HMRC. Retrieved 16 April 2007
*Claims that the UK CFC legislation is contrary to EU law (notably Vodafone).


Recent developments


Corporation tax reform

There have been a number of proposals for corporation tax reform, although only a few have been enacted. In March 2001, the government published a technical note ''A Review of Small Business Taxation'', which considered simplification of corporation tax for small companies through the closer alignment of their profits for tax purposes with those reported in their accounts.A Review of Small Business Taxation (PDF)
, HMRC. Retrieved 17 April 2007
In July of that year, the government also published a consultation document, ''Large Business Taxation: the Government's strategy and corporate tax reforms''. It set out the strategy for modernising corporate taxes and proposals for relief for capital gains on substantial shareholdings held by companies. In August 2002, ''Reform of corporation tax – A consultation document'' was published, outlining initial proposals for the abolition of the Schedular system.Reform of corporation tax – A consultation document (PDF)
, HMRC, 2002. Retrieved 17 April 2007
This was followed up in August 2003 by ''Corporation tax reform – A consultation document'', which further discussed the possible abolition of the Schedular system, and also whether the capital allowances (tax depreciation) system should be abolished.Corporation tax reform – A consultation document (PDF)
, HMRC, 2003. Retrieved 17 April 2007
It also made proposals that were ultimately enacted in Finance Act 2004. (The first two of these listed below were in response to threats to the UK tax base arising from recent
European Court of Justice The European Court of Justice (ECJ, french: Cour de Justice européenne), formally just the Court of Justice, is the supreme court of the European Union in matters of European Union law. As a part of the Court of Justice of the European Uni ...
judgments.) The changes were to: *Introduction of transfer pricing rules for UK-to-UK transactions. Transfer pricing rules require certain transactions to be deemed to have taken place at arm's length prices for tax purposes where they did not in fact take place as such. *Merging thin capitalisation rules with the
transfer pricing In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort ...
rules.
Thin capitalisation A company is said to be thinly capitalised when the level of its debt is much greater than its equity capital, i.e. its gearing, or leverage, is very high. An entity's debt-to-equity funding is sometimes expressed as a ratio. For example, a gearing ...
rules limit the amount a company can claim as a tax deduction on interest when it receives loans at non-commercial rates (from connected parties, for example). *Extension of the deduction for management expenses to all companies with an investment business. Previously a company had to be wholly or mainly engaged in an investment business to qualify. In December 2004, ''Corporation tax reform – a technical note'' was published. It outlined the government's decision to abolish the schedular system, replacing the numerous schedules and cases with two pools: a trading and letting pool; and an "everything else" pool. The Government had decided that capital allowances would remain, though there would be some reforms, mostly affecting the leasing industry.Corporation tax reform – a technical note (PDF)
, HMRC, 2004. Retrieved 17 April 2007


Other enactments

Other main reforms enacted, include: *Relief from tax on chargeable gains on disposals of substantial shareholdings in trading companies and groups (enacted by Finance Act 2002).Finance Act 2002
HMSO,
*Introduction of UK to UK transfer pricing rules, coupled with the merging of the thin capitalisation rules with the transfer pricing rules (enacted by Finance Act 2004). *Extension of management expenses rules so that companies do not need to be investment companies to receive them, coupled with a specific rule preventing capital items being deductible as management expenses (enacted by Finance Act 2004).


See also

*
Taxation in the United Kingdom Taxation in the United Kingdom may involve payments to at least three different levels of government: central government (HM Revenue & Customs), devolved governments and local government. Central government revenues come primarily from income ...
*
Corporate tax A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at ...
*
UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...
*
Corporation tax in the Republic of Ireland Ireland's Corporate Tax System is a central component of Ireland's economy. In 2016–17, foreign firms paid 80% of Irish corporate tax, employed 25% of the Irish labour force (paid 50% of Irish salary tax), and created 57% of Irish OECD non- ...


References

* * * * *Finance Acts (1965–),
HMSO The Office of Public Sector Information (OPSI) is the body responsible for the operation of His Majesty's Stationery Office (HMSO) and of other public information services of the United Kingdom. The OPSI is part of the National Archives of the Un ...
. From 1998 onwards, consolidation took place, into the Income and Corporation Taxes Act 1988, the Taxation of Chargeable Gains Act and the Capital Allowances Act 2001. * * * * * * * *


Bibliography

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *


External links

* {{Clear Corporate taxation in the United Kingdom Taxation in the United Kingdom