Corporation Tax

Corporation tax is charged on the profits of UK-resident companies. A company is UK-resident if it is incorporated in the UK or if its central management and control is exercised in the UK.

Profits subject to CT:

• Trading income (adjusted profits less capital allowances)
• Property income (rental profits from UK and overseas property)
• Chargeable gains (gains on disposal of capital assets — companies do NOT pay CGT; their gains are included in the CT computation)
• Loan relationship income (interest received — treated as trading or non-trading income depending on the purpose of the loan)
• Miscellaneous income

Not subject to CT: Dividends received from other UK companies (and most overseas companies) are exempt from corporation tax. This prevents double taxation — the paying company has already paid CT on the profits from which dividends were paid.

An accounting period (AP) is the period for which a company prepares its CT computation and pays tax. An AP cannot exceed 12 months.

A period of account (PoA) is the period for which the company prepares its financial statements. A PoA can be any length (commonly 12 months, but may be shorter or longer).

Long period of account (>12 months):

If the PoA exceeds 12 months, it must be split into two accounting periods:

• The first 12 months = first AP
• The remaining period (up to 12 months) = second AP

How to split profits for a long PoA:

Format of the CT computation:

Key differences from the income tax computation:

• No personal allowance — companies have no equivalent
• Dividends received from UK companies are exempt — not included in total profits
• Chargeable gains are included within the CT computation (not subject to a separate CGT)
• Qualifying charitable donations (gift aid payments) are deducted from total profits as a single deduction (not given as a tax reducer or extension of the basic rate band as for individuals)
• A single rate of tax applies to all types of income (no separate rates for different income types)

The adjustment of trading profits for companies follows the same principles as for sole traders (add back disallowable expenditure, deduct non-trading income), with some company-specific differences:

• Directors' remuneration: Salary, bonuses, pension contributions, and employer's NIC for directors are allowable deductions for the company (they are employment costs)
• Interest paid: For companies, interest is dealt with under the loan relationships rules, not as a trading deduction. Trade loan relationship debits (interest on loans used for trade purposes) are allowable in the trading income calculation. Non-trade interest is a separate deduction.
• Dividends paid: NOT deductible — dividends are a distribution of after-tax profits, not a business expense
• Capital allowances: Same rules as for individuals (AIA, WDA main 18%, special rate 6%, FYA for zero-emission cars, SBA 3%) with company-specific additions: full expensing — 100% FYA on qualifying new main rate plant and machinery acquired by companies (permanent from April 2023). 50% FYA on qualifying new special rate assets.

Companies do not pay CGT — their chargeable gains are included in the CT computation and taxed at the CT rate.

Key differences from individual CGT:

Indexation allowance:

Increases the allowable cost by the rise in the Retail Prices Index (RPI) from the month of acquisition to December 2017 (the index is frozen — no further indexation applies after this date regardless of when the asset is sold).

Indexation allowance = Allowable cost × Indexation factor

Indexation factor = (RPI at Dec 2017 − RPI at acquisition) ÷ RPI at acquisition

The indexation allowance cannot create or increase a loss — it can only reduce a gain to nil.

Qualifying charitable donations (QCDs) are payments made by a company to a charity under the gift aid scheme. They are deducted from total profits to arrive at taxable total profits.

Key points:

• Deducted as a lump sum from total profits — not as a trading expense
• Paid gross (the company pays the full amount to the charity — no tax is deducted)
• Cannot create a loss — QCDs can only be deducted to the extent that total profits are available
• Excess QCDs (where total profits are insufficient) are wasted — they cannot be carried forward or back (with limited exceptions for group relief)

From 1 April 2023:

Marginal relief formula:

Marginal relief = Standard fraction × (Upper limit − TTP) × (TTP ÷ Total profits)

The standard fraction is 3/200.

The (TTP ÷ Total profits) fraction is only needed when the company has non-taxable franked investment income (dividends from UK companies) — in most exam questions, TTP = Total profits and the fraction is 1.

Tax = TTP × 25% − Marginal relief.

Note: The effective marginal rate on profits between £50,000 and £250,000 is 26.5% — higher than the main rate of 25%. This is because the marginal relief is being withdrawn as profits increase through this band.

The £50,000 and £250,000 limits for the small profits rate and marginal relief are divided equally between associated companies.

Definition: Two companies are associated if one controls the other, or both are under the common control of the same person or persons. Control means holding more than 50% of the ordinary share capital, voting rights, or rights to income/assets on winding up.

Effect:

Adjusted limits = Standard limits ÷ Number of associated companies (including the company itself)

Example: A company has 2 associated companies (3 total including itself):

• Lower limit: £50,000 ÷ 3 = £16,667
• Upper limit: £250,000 ÷ 3 = £83,333

If the company's TTP exceeds £83,333, it pays the full 25% main rate. If TTP is ≤ £16,667, it pays 19%. Between these limits, marginal relief applies.

Dormant companies (no active trade, no income) are excluded from the associated company count.

Filing the CT return (CT600):

• Must be filed within 12 months of the end of the accounting period
• Filed online (mandatory)
• iXBRL-tagged accounts must be submitted with the return

Payment of corporation tax:

*These limits are divided by the number of associated companies (plus one for the company itself).

Interest: Interest is charged by HMRC on late-paid CT from the due date. Interest is also paid by HMRC on overpaid CT.

Penalties: Late filing penalty: £100 if up to 3 months late; £200 if more than 3 months late; 10% of unpaid tax if more than 6 months late; 20% if more than 12 months late.

When a company incurs a trading loss, it has several options for relief:

1. Carry forward (s.45 CTA 2010):

• The loss is carried forward and set against future trading profits from the same trade
• No time limit — losses can be carried forward indefinitely
• For losses arising on or after 1 April 2017, carried-forward losses can also be set against total profits (not just trading profits), but subject to a restriction: only 50% of profits above a £5 million deductions allowance can be relieved (this restriction applies to large companies with significant brought-forward losses)

2. Current year set-off (s.37 CTA 2010):

• The loss can be set against total profits of the same accounting period
• The set-off is against ALL total profits — trading income, property income, interest, chargeable gains
• This is an all-or-nothing claim — the loss must be set off against total profits in full (cannot restrict the claim to preserve QCDs or other deductions)

3. Carry back (s.37(3)(b) CTA 2010):

• If a current year claim is made under s.37, the company can also claim to carry back any remaining loss to the preceding 12 months
• Set against total profits of the prior period
• The carry-back claim can only be made if a current year claim has first been made

4. Group relief (s.130-140 CTA 2010):

• A company that is a member of a 75% group (75% direct or indirect ownership) can surrender its current year trading loss to another group company
• The claimant company sets the loss against its own total profits of the corresponding accounting period
• Group relief is for current year losses only (not brought-forward losses)

Planning consideration: The order of loss relief is a choice — the company should choose the option that gives the earliest and highest-rate relief. Current year and carry-back claims give immediate relief; carry-forward defers relief to future periods. If the CT rate was 19% in the prior year but 25% currently, carry-forward may be preferable (higher rate of relief).