Corporation Tax – The Basics

Corporation tax is charged on the profits of a company and of unincorporated bodies that are not partnerships, for example members’ clubs.

SOURCES OF INCOME
Corporation tax is charged on the worldwide profits of UK-resident companies. The term “profits” includes all sources of income and capital gains. It also includes dividends received by the company (UK and overseas), however most dividends to the company would not be taxable.

NON-RESIDENT COMPANIES
For non-resident companies carrying on a trade in the UK through a ‘permanent establishment’ tax is charged on the income arising from the permanent establishment and on capital gains on the disposal of assets in the UK used for the purposes of the trade or otherwise for the permanent establishment. There is double taxation relief available where the profits are taxed twice.

BASIS OF CHARGE
Corporation tax is charged for accounting periods. These are usually of one year, apart from in the year that the company starts and ceases, and if there is a change of accounting date. If this spans a change in rate, the period must be apportioned between the periods for each rate. The tax is charged on the adjusted profit. This is the figure shown in the accounts as net profit before tax and dividends. To this various adjustments are made to bring the figure into line with tax law. The accounts must have been prepared in accordance with generally accepted accounting principles. This includes complying with all accounting standards, and producing a true and fair view.

The most common changes needed to bring the net profit to the adjusted profit include:

  • Depreciation is added back and capital allowances deducted
  • Disallowed items are added back
  • Stock taken for personal use is treated as a sale at normal price

Disallowed items include:

  • Items for personal use rather than business use
  • Entertainment of clients (but not of staff)
  • Payments of fines and penalties
  • Capital expenditure (though capital allowances may be claimed)
  • Dividends paid to shareholders

TAX RATE
From 1st April 2015, the main rate of corporation tax is 20% for all companies. The rate will fall to 19% for the years starting 1st April 2017 through to 2019, and then to 18% for the year starting 1st April 2020.

ADMINISTRATION
Companies are required to submit a tax return each year within 12 months of the end of the accounting period. This has to be done electronically using iXBRL tagging. Payment is due 9 months and one day from the end of the accounting period for small companies.

 

Source: Indicator FL Memo, hmrc.gov.uk