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Date of publication: January 2012

Corporation Tax is charged on the profits of companies and branches trading within the UK, and on the overseas branches of UK resident companies.

The main rate of corporation tax is 26% for larger companies, set to fall by 1% per year until the year commencing 2014, by which point it will be 23%. The corporation tax small profit rate is 20%.

The small profit rate applies to companies with taxable profit under £300k. The main rate applies to companies whose taxable profit is over £1.5m. In between these levels tax is levied at an incremental rate. The thresholds are divided by the number of separate trading companies worldwide within the same control.

Calculation of profits:

Deductions are allowed for most revenue expenditure which is included in the company accounts under UK GAAP or International Accounting Standards.

Some expenditure is specifically excluded, such as the costs of business entertaining and depreciation of tangible assets.

Capital expenditure is also excluded, although this may qualify for a deduction under the capital allowances regime. Costs associated with capital expenditure, such as legal fees for purchasing a building, will also be excluded.

Capital gains:

Assets subject to capital gains tax (normally land and buildings and goodwill or intellectual property) are dealt with separately from trading profits and losses.

The proceeds of a sale, less the original purchase cost and an allowance for inflation, are taxable as a capital gain. The capital gain is added to trading profits and the total determines the applicable tax rate. Different rules apply for the relief of losses (see below).

Non Trading Profits

Similarly other non trading items such as interest, intangible fixed assets, etc have their own rules and mechanisms for relief.

Use of losses:

Trading losses can be offset against profits to obtain tax relief in a number of ways:

• Offset in same year – losses can be offset against other income and gains for the company in the same period.
• Carry forward - losses can be carried forward indefinitely against profits from the same trade. The same trade rule is an important one which is closely policed by the authorities.
• Carry back - losses from one accounting period can be carried back against profits of the previous accounting period and a refund of overpaid tax can be obtained.
• Terminal losses - the losses in the final accounting period of a business can be carried back against profits of the preceding three years.
• Group relief - losses can be passed around a group of companies where there is at least 75% ownership, such that the losses of one company can be relieved against the profits of another.

Capital losses are more restricted in their use, they can only be offset against capital gains and only in the current or later years (there is no carry back). However, gains and losses can be transferred around a group so taxed as the most beneficial rate.

Capital losses cannot be transferred within a group like trading losses, but it is possible to make a “deemed transfer” of the chargeable asset between group companies without a gain or loss arising on that transfer. The asset can then be sold by a company within the group which has existing losses to offset.

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 companies not paying at the main rate.

Companies paying corporation tax at the main rate have to make their payments in four quarterly instalments, commencing in the 7th month of the year to which the charge relates.

Certain types of entity are not able to utilise the small profit rates.