Corporation Tax is a tax on the taxable profits of limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.
Taxable profits for Corporation Tax include:
If the company or organisation is based in the UK, it will have to pay Corporation Tax on all its taxable profits - wherever in the world those profits come from.
If the company isn’t based in the UK but operates in the UK - for example through an office or branch (known to HM Revenue and Customs(HMRC) as a 'permanent establishment') - it will only have to pay Corporation Tax on any taxable profits arising from its UK activities.
Limited companies and some organisations are liable for Corporation Tax.
The following limited companies and unincorporated organisations are subject to Corporation Tax requirements:
The taxable profits or surpluses of these businesses and organisations are subject to Corporation Tax requirements.
A company or organisation subject to Corporation Tax requirements is known to HMRC for Corporation Tax purposes as being ‘within the charge to Corporation Tax’, ‘chargeable to tax’ or in ‘the charge to tax’.
Businesses and organisations that are not subject to Corporation Tax requirements include:
A company pays Corporation Tax on taxable profits for each Corporation Tax accounting period.
This accounting period normally matches a company’s 12 month financial year. A company's financial year begins and ends with the dates covered by its annual report and accounts (financial accounts) as submitted to Companies House. These accounts are sometimes called statutory accounts or audited accounts. In some instances, however, a Corporation Tax accounting period for a company will not be the same as the company’s financial year.
This can happen if a company’s accounts cover a period of more than 12 months - such as if a newly-formed company is preparing its first accounts to cover a period of more than 12 months, or an existing company changes its financial year end. In this case, because a Corporation Tax accounting period cannot be longer than 12 months, two Company Tax Returns would need to be filed because even though only one set of accounts would need to be filed at Companies House, those accounts would straddle two Corporation Tax accounting periods.
For example, if a company has its accounts prepared for 15 months from 1 January 2008 to 31 March 2009, the Corporation Tax accounting periods will be:
Also, if a company’s Corporation Tax accounting period doesn’t coincide with the Corporation Tax financial year (1 April to 31 March) it will span two Corporation Tax financial years and will need to apportion its taxable profits between the two financial years on a time basis.
For example, if a company’s Corporation Tax accounting period runs from 1 July 2008 to 30 June 2009:
HMRC uses the term ‘exempt’ to refer to certain activities carried out by organisations that are otherwise subject to Corporation Tax requirements.
These include:
HMRC defines charitable purposes as carrying out the primary purpose of the charity and/or directly serving the beneficiaries of the charity.
Other activities exempt from Corporation Tax include:
If a company or organisation is subject to Corporation Tax requirements it must:
If you start a new limited company and you begin to carry on business or trade, you must tell HMRC within three months. The best way to do this is to complete and send in form CT41G (New company details) to HMRC.
HMRC sends a newly formed limited company an 'Introductory Pack' within six weeks of being told by Companies House that a new company exists. This pack contains explanatory notes and forms CT41G (New company details) and CT41G (Dormant company insert). The Introductory Pack is usually sent to the company's registered office. However, even if you don't receive a pack you must still tell HMRC your company or organisation is active, for example, carrying on business or trading. You can download forms CT41G (New company details) and CT41G (Dormant company insert) from CT41G 
.
A small club or association may not have to tell HMRC that it exists for Corporation Tax purposes.
If your new company is dormant - in other words, it's not yet active, carrying on business activity, or trading - you must still tell HMRC as soon as possible. That way, HMRC will not treat your company as active and you won't receive unnecessary correspondence. Nor will HMRC normally send your company a 'Notice to deliver a Company Tax Return'.
Use form CT41G (Dormant company insert) to give HMRC the necessary information.
If your company stops trading or is not active, you need to tell your Corporation Tax Office , as soon as possible, in writing, that your company is dormant.
HMRC will send your company a 'Notice to deliver a Company Tax Return' for the period up to the date your company became dormant.
From the date your company becomes dormant, HMRC will stop treating your company as active and you won't receive unnecessary correspondence.
If your new company was dormant and then starts to carry on business or to trade, you must tell HMRC within three months of starting business activity. You can do this using form CT41G (New company details).
If your company or organisation was active before it became dormant and is now active again, you should contact your Corporation Tax Office.
Unlike Income Tax Self Assessment or VAT, where the dates for filing returns and making payments are usually the same, the deadline for paying Corporation Tax is before the deadline for filing a Company Tax Return.
The Corporation Tax payment deadline is known to HMRC as the 'normal due date'. The actual payment deadline can vary depending on how much taxable profit the company or organisation makes.
Interest is charged on late payments.
If a company or organisation has taxable profits of up to £1.5 million, it must pay its Corporation Tax by the normal due date, which is nine months after the end of its Corporation Tax accounting period. For example, if a company's accounting period ends on 31 May, its Corporation Tax payment is due on or before 1 March the following year.
If a company or organisation has taxable profits of more than £1.5 million, it must pay its Corporation Tax by instalments.
Further information about instalment payments of Corporation Tax can be found at Instalment Payments System .
A company or organisation must file its Company Tax Return - which includes a Company Tax Return form and other supporting documentation - within 12 months of the end of its Corporation Tax accounting period. The Company Tax Return filing deadline is known to HMRC as the 'statutory filing date'.
If a company or organisation files its return late, it will be charged an automatic penalty, even if it does not owe any Corporation Tax.
Further information on Corporation Tax penalties and interest charges can be found at Penalties
From 1 April 2011, a company or organisation must pay its Corporation Tax electronically. And from then, for any accounting period ending after 31 March 2010, it must also file its Company Tax Return (including supporting documentation) online.
To work out a company’s taxable profits, it is necessary to start with the company’s pre-tax profit figure (sometimes known as 'profit before tax') in the company’s financial accounts for a financial year. It is then necessary to:
Then:
Finally, deduct any Corporation Tax already paid, for example tax paid early, to find the amount of Corporation Tax that needs to be paid, or the amount of Corporation Tax that can be claimed back as an overpayment.
A company pays Corporation Tax on capital gains arising on the disposal of chargeable assets. The computation of chargeable gains is broadly as follows:
The indexation factor is calculated by taking the movement in the Retail Prices Index (RPI) between the date of acquisition of the asset and the date of sale and/or (as applicable) between the date any enhancement expenditure was incurred and the date of sale.
Tables indicating the indexation factors to be applied can be found at Tax tables .
A company can claim to set off trading losses against its total profits:
Relief is given against total profits, including chargeable gains. A company cannot choose to restrict the claim to cover only particular items of income or gains.
Losses may be only carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period. However, it is not necessary for the trade to have been carried on for the whole of the preceding accounting period. If the trade was carried on at any time in an accounting period, then losses may be set-off against the profits of the whole of that accounting period.
A claim may be only to set-off losses against profits of a current accounting period, or it may be to set off losses against profits of the current period, and then to carry back any balance of unused losses against profits of preceding accounting periods. A company cannot claim to carry back losses without first setting them off against profits of the current period.
Losses of an earlier accounting period, where these are claimed, are relieved before losses of a later accounting period.
Example:
A company makes trading losses of £25,000 in its six month accounting period ended 30 June 2001 and £40,000 in its six month accounting period ended 31 December 2001.
The Corporation Tax profits of the preceding periods were as follows.
|
Accounting period six months to 31 December 2000 |
£20,000 |
|
Accounting period six months to 30 June 2000 |
£10,000 |
Relief for the loss of the period ended 30 June 2001 is given before relief for the loss of period ended 31 December 2001. Relief is given as follows.
Loss for the period to 30 June 2001
|
Against profits of the period to 31 December 2000 |
£20,000 |
|
Against profits of the period to 30 June 2000 |
£5,000 |
Loss for the period to 31 December 2001
This loss cannot be carried back. This is because all of the profits for accounting periods in the twelve months immediately preceding the accounting period ended 31 December 2001 (that is the twelve months to 30 June 2001) have already been covered by loss relief from the earlier period.
The company would have preferred to claim relief for the period ended 31 December 2001 first. If it had been able to do this, relief for the period ended 31 December 2001 would have been given against the profits of the period ended 31 December 2000. The loss for the period ended 30 June 2001 could then have gone against the whole of the £10,000 profits for the period ended 30 June 2000. But the legislation does not allow this.
Confusingly, the preceding accounting periods are those falling wholly or partly within the ‘preceding period’. The preceding period is usually the twelve months preceding the accounting period in which the loss is incurred.
If an accounting period straddles the beginning of the preceding period:
Profits of later accounting periods comprised in the preceding period are relieved before profits of earlier accounting periods. Accounting periods must be taken in order, most recent first.
Example 1
Company H made a trading loss of £35,000 in the accounting period 1 January 2001 to 31 December 2001. Other Corporation Tax profits of this period amounted to £20,000. The company continues to trade. The Corporation Tax profits of earlier accounting periods were as follows:
|
1 July 2000 to 31 December 2000 |
£10,000 |
|
1 July 1999 to 30 June 2000 |
£20,000 |
The trade in which the loss was incurred was carried on throughout the whole of the period from 1 July 1999 to 31 December 2001.
Company H claims relief to extend to the profits of accounting periods within the 'preceding period'. The 'preceding period' is the twelve months ending on 31 December 2000.
Relief is given as follows:
|
Against profits of the accounting period to 31 December 2001 |
£20,000 |
|
Against profits of the accounting period six months to 31 December 2000 |
£10,000 |
|
Against profits of the accounting period twelve months to 30 June 2000 |
£5,000 |
| Total amount of profits relieved | £35,000 |
|---|
Example 2
The facts are the same as in example 1 except that the trading loss for accounting period ending 31 December 2001 is £45,000
Relief is given as follows:
|
Against profits of the accounting period to 31 December 2001 |
£20,000 |
|
Against profits of the accounting period six months to 31 December 2000 |
£10,000 |
|
Against profits of the accounting period twelve months to 30 June 2000 |
£10,000 |
| Total amount of profits relieved | £40,000 |
|---|
The set off for accounting period ended 30 June 2000 is limited to the proportion (6 / 12 x £20,000 = £10,000) of the profits of the period that fall into the twelve months ending on 31 December 2000. The unused balance of the loss for accounting period ending 31 December 2001 (£5,000) is available for carry forward.
Relief for trading losses is available by carry forward of trading losses against future trading income from the same trade.
The loss available for carry-forward is the loss sustained, less any part of that amount for which relief has been allowed under the carry back provisions (see above) or surrendered as group relief (see Group Relief for further information).
Relief is given against available trading income of subsequent accounting periods in order, and without omission.
There are currently two rates of Corporation Tax, depending on the company or organisation’s taxable profits:
There is also a sliding scale between the lower and upper rates known as 'marginal rate relief'.
Information on Corporation Tax rates and fractions is contained in the table below:
| Rates for financial years starting on 1 April |
|
|
|
|
|---|---|---|---|---|
|
|
2007 |
2008 |
2009 |
2010 |
|
Small Companies Rate |
20% |
21% |
21% |
To be advised |
|
Small Companies Rate can be claimed by qualifying companies with profits at a rate not exceeding |
£300,000 |
£300,000 |
£300,000 |
To be advised |
|
Marginal Small Companies Relief Lower Limit |
£300,000 |
£300,000 |
£300,000 |
To be advised |
|
Marginal Small Companies Relief Upper Limit |
£1,500,000 |
£1,500,000 |
£1,500,000 |
To be advised |
|
Marginal Small Company Relief (MSCR) Fraction |
1/40 |
7/400 |
7/400 |
To be advised |
|
Main rate of Corporation Tax |
30% |
28% |
28% |
28% |
|
Special rate for unit trusts and open-ended investment companies |
20% |
20% |
20% |
To be advised |
If a company or organisation’s taxable profits are:
the effective rate of Corporation Tax it pays rises gradually from the lower rate to the full rate depending on its taxable profit.
Example:
A company’s accounting period runs from 1 April 2007 to 30 March 2008. Its taxable profits are £500,000. Using the information on Corporation Tax rates and fractions from the above table, here’s how to work out the Corporation Tax due.
Step 1: Calculate the Corporation Tax due at the full rate
£500,000 x 30% = £150,000.
Step 2: Deduct the taxable profits from the upper limit
£1,500,000 - £500,000 = £1,000,000
Step 3: Work out the marginal rate relief
Multiply the figure from step 2 by the ‘marginal rate fraction’: £1,000,000 x 1/40 = £25,000.
Step 4: Work out the Corporation Tax payable before final adjustments
Deduct the figure from step 3 from the figure from step 1: £150,000 - £25,000 = £125,000.
So instead of owing £150,000 Corporation Tax, the company owes £125,000.
You can use HMRC’s marginal rate relief calculator to work out your marginal rate relief.
The tax provisions relating to loans from close companies are designed to prevent participators from enjoying funds free of tax by means of loans.
The tax rules require the close company to:
The rules are contained in Income and Corporation Taxes Act 1988, section 419, and the liability is commonly referred to as section 419 tax. The liability to tax under section 419 is included in the company’s corporation tax self assessment, and is payable under the normal corporation tax provisions.
The amount of section 419 tax payable is not affected by the corporation tax position of the company. For example, a loss making company cannot set trading losses against the section 419 tax payable.
The amount of the section 419 tax is payable on the lower of the loans at the following dates:
Where that loan is subsequently repaid, in whole or part, the whole or an appropriate part of the section 419 liability is repaid on a claim within the company’s self assessment for that later accounting period.
Example:
A Ltd makes a loan of £100,000 to a participator P in its accounting period to 31 December 2007. P repays £20,000 of the loan prior to 30 September 2008. A Ltd is liable to pay section 419 tax on the remaining £80,000, or £20,000, as part of its corporation tax for its 2007 accounting period, due on 1 July 2008.
Suppose that P repaid the balance of the loan prior to 31 December 2008. The section 419 tax of £20,000 would be repaid within the corporation tax due on 1 July 2009. However, if P repays the balance of loan on 1 January 2009 the section 419 tax of £20,000 does not become repayable until 1 July 2010. There is no provision for accelerating this repayment by say making a stand alone claim in respect of the repayable section 419 tax. The timing of loan repayments can therefore have a significant cash flow effect on a company.
The loans by close company rules are subject to extensive detailed provisions.
Some points to note on some of the terms used are:
Some details about the persons to whom these rules apply are:
