Corporation Tax (Advanced)

Corporation tax rates (from 1 April 2023):

• Small profits rate: 19% — profits up to £50,000
• Main rate: 25% — profits above £250,000
• Marginal relief between £50,000 and £250,000 — effective marginal rate of 26.5% in this band

Marginal relief calculation:

Where N = augmented profits (TTP + dividends from non-51% group companies), AP = total augmented profits. But in simple cases (no dividends from outside the group), the fraction N/AP = 1.

Calculation shortcut: CT = TTP × 25% − Marginal relief. Or: blended rate applied to bands.

Upper and lower limits — divided by 51% group companies and for short AP:

• Each company in a 51% group: divide £50k and £250k limits by number of related 51% companies (subsidiaries and fellow subsidiaries)
• AP shorter than 12 months: pro-rata

Worked example: A company has TTP £120,000 for the year. Sole UK company (no group).

• TTP in marginal band (£50k − £250k)
• CT at 25%: £120,000 × 25% = £30,000
• Marginal relief: 3/200 × (£250,000 − £120,000) × 1 = 3/200 × £130,000 = £1,950
• CT payable: £30,000 − £1,950 = £28,050
• Effective rate: 23.4%

Computation structure:

Capital allowances for companies follow similar rules to sole traders but with some important differences.

Main rates:

• Main pool (plant & machinery): 18% WDA
• Special rate pool (long-life assets, integral features, thermal insulation): 6% WDA
• Structures and Buildings Allowance (SBA): 3% straight line on qualifying non-residential buildings

Annual Investment Allowance (AIA) for companies: £1m per year

• Same £1m limit as for individuals, but allocated across COMPANIES IN A GROUP (51% group members share a single £1m limit)
• 100% relief on most plant and machinery
• Allocate to special rate pool FIRST (as WDA rate lower otherwise)

Full expensing (companies only — from April 2023, now permanent):

• 100% FYA on new qualifying MAIN POOL plant and machinery
• No cap — effectively unlimited AIA-equivalent for qualifying new main pool items
• Special rate pool items: 50% FYA (the other 50% goes to the pool for normal WDA)
• Applies to COMPANIES only (not sole traders or partnerships — though they have the £1m AIA)
• Must be NEW, UNUSED plant and machinery. Second-hand does NOT qualify.
• Cannot be: cars, items for leasing (with limited exceptions), long-life assets if bought during conditions not meeting full expensing
• On disposal: balancing charge = disposal proceeds (or full-expensing received back) up to the original claim

Strategy for companies:

• For NEW main pool plant: use full expensing (no AIA cap)
• For SECOND-HAND or special rate assets: use AIA first (to special rate pool where possible)
• For expenditure over AIA: use WDA at 18% or 6%
• For long-life assets (25+ yr life): may only get SBA 3% or special rate pool 6% treatment

Worked example: Company acquired the following in accounting year to 31 March 2025:

• New machinery: £800,000 (main pool)
• Used delivery van: £50,000
• Computer equipment (new): £400,000
• Thermal insulation: £150,000 (special rate pool)

Analysis:

• Thermal insulation: allocate AIA (special rate pool) = £150,000 → 100% relief
• New machinery (£800k) and new computer equipment (£400k): both qualify for full expensing = £1,200,000 → 100% relief (no cap)
• Used delivery van (£50k): second-hand, so doesn't qualify for full expensing. Use AIA. AIA remaining = £1m − £150k = £850k. Apply £50k of AIA → 100% relief.
• Total capital allowances claimed: £1,400,000 (full expensing on £1.2m + AIA on £200k)

Structures and Buildings Allowance (SBA):

• 3% per year straight line on new non-residential buildings (constructed, purchased from developer, or brought into first use from 29 October 2018)
• Covers: offices, factories, warehouses, retail premises, hotels, care homes
• EXCLUDED: residential; plant/machinery (that goes in the pools)
• Claim over 33⅓ years
• If the building is sold: new owner continues with SBA claim (inherited)
• No balancing adjustment on sale — but the remaining SBAs are lost
• On disposal: add any SBA claimed to the cost for CGT purposes (to prevent double relief on the same expenditure)

Loan relationships are the UK's regime for taxing corporate debt — both lending and borrowing. Two types:

• TRADING loan relationships: debt connected to the company's trading activity (e.g., overdraft for working capital; loan to finance trading assets). Interest and amortisation of issue costs → deducted from trading income.
• NON-TRADING loan relationships: debt for investment or non-trading purposes (e.g., loan to buy shares; intra-group loans for investment holding). Interest and costs are NET against non-trading loan income to give a "non-trading loan relationship" surplus or deficit.

Tax treatment:

• Interest, finance fees, and fair value movements (generally) follow the ACCOUNTING TREATMENT — tax follows accruals basis, mark-to-market movements on some items
• Trading loan relationships: credits (interest received) TAXED as trading income; debits (interest paid) DEDUCTIBLE from trading profits
• Non-trading: credits taxed as non-trading income; debits offset against credits → surplus (taxable) or deficit (relievable)

Non-Trading Loan Relationship Deficit (NTLRD): If non-trading debits exceed non-trading credits, a deficit arises. Relief options:

1. Offset against CURRENT-YEAR total profits
2. Carry BACK 12 months against non-trading profits (claim required)
3. Carry FORWARD against TOTAL PROFITS of future periods (with £5m + 50% restriction — see loss relief section)
4. Group relieve (surrender) to other 75% group companies

Intangible Fixed Assets (IFAs) regime:

• Applies to intangible assets acquired or created since 1 April 2002
• Pre-April 2002 intangibles continue under older CGT-type rules (not in the IFA regime)
• Key principle: follows the ACCOUNTING TREATMENT (like loan relationships)
• Amortisation is generally allowable (important benefit — unlike depreciation for PPE which is disallowed, replaced by capital allowances)
• Gains/losses on disposal = revenue items within the IFA regime — not capital gains
• Categories: trading (connected to trade) or non-trading (non-trading IFAs have their own pool)

Restrictions on goodwill and customer-related intangibles (for acquisitions after 1 July 2020):

• Restricted relief on internally-generated goodwill acquired from 1 April 2019
• Full relief restored (from 1 April 2020 onwards) for acquisitions of:
  • Goodwill acquired with a business containing qualifying IP
  • Limited to actual qualifying IP × 6:1 (capped)
• Other goodwill/customer-related intangibles: amortisation NOT deductible. Capital loss only on disposal.

Election to use fixed 4% amortisation: Companies can elect for 4% straight line amortisation relief instead of accounting amortisation (election is irrevocable for that asset).

Chargeable gains in companies are taxed at the corporation tax rate (not separate CGT rates). Indexation allowance FROZEN at December 2017 values — no further indexation accrues from that date.

Indexation allowance:

• For assets held from before December 2017: indexation from acquisition (or March 1982) to December 2017
• Multiplier = (Dec 2017 RPI − base RPI) / base RPI, applied to cost and enhancement expenditure
• From January 2018 onwards: NO further indexation — frozen forever
• Cannot create or increase a loss

Worked example: Company sold investment property in 2024/25 for £600,000. Acquired 1995 for £150,000. Indexation multiplier 1995 → Dec 2017: 0.935.

• Indexation allowance: £150,000 × 0.935 = £140,250
• Indexed cost: £150,000 + £140,250 = £290,250
• Gain: £600,000 − £290,250 = £309,750
• Corporation tax at 25%: £77,438

Rollover relief for companies: Same basic rules as for individuals — s.152 TCGA applies to companies too. Qualifying business assets: land and buildings, fixed plant and machinery, ships and aircraft, goodwill (pre-April 2002 rules). Investment in replacement within 1 year before / 3 years after disposal.

Substantial Shareholding Exemption (SSE):

• EXEMPTION from chargeable gains on disposal of shares, where the investor is a company and the investee is a qualifying trading company/group
• Conditions:
  • At least 10% of ordinary shares of investee
  • For at least 12 continuous months in the 6 years before disposal
  • Investee is a TRADING COMPANY or holding company of a trading group immediately before disposal (and — for the qualifying period)
  • (Investor doesn't need to be trading — since 2017 simplification)
• Applies equally to chargeable gains AND CAPITAL LOSSES — SSE applies both ways. Losses are NOT allowable if SSE applies to a disposal at a loss.
• Very widely used — allows tax-free disposal of qualifying subsidiaries

Degrouping charges:

• Applies when a COMPANY LEAVES a 75% group within 6 YEARS of a tax-free intra-group transfer
• Triggers a "degrouping charge" on the previously-transferred asset — as if the TRANSFER had been at market value at the original transfer date
• Prevents companies from getting tax-free transfers and then selling the company out of the group to extract the asset tax-free
• Since 2011: the degrouping charge is now added to the SALE PROCEEDS of the shares (not a separate charge on the subsidiary). If SSE applies to the share disposal, the combined amount (including degrouping) may also be exempt.

Types of groups in UK tax:

Group relief:

• Allows CURRENT PERIOD losses (trading losses, NTLRDs, excess qualifying charitable donations) to be surrendered BETWEEN 75% group companies
• Surrender is matched against the surrenderee's profits of the corresponding accounting period
• Both companies must be UK residents (or UK PE — complex rules)
• Useful for using losses immediately in profitable group members rather than carrying forward

Group relief BROUGHT FORWARD losses (post-April 2017):

• Brought-forward LOSSES can now also be group-relieved (since April 2017)
• But subject to the "LOSS RESTRICTION" — see next section

Consortium relief:

• Allows losses to be surrendered from a consortium company to a consortium member (or vice versa), in proportion to the member's stake
• Rare in practice; useful for joint ventures

Intra-group transfers of assets (s.171 TCGA):

• Chargeable assets transferred between 75% group companies at "no gain, no loss"
• Similar rule for intangible fixed assets (no gain/no loss within a group)
• Transferee inherits the transferor's base cost (+ indexation to December 2017 if relevant)
• If the transferee leaves the group within 6 years of transfer: DEGROUPING CHARGE triggered

Corporate loss relief — overview:

Loss restriction (post-April 2017) for brought-forward losses:

• From 1 April 2017, brought-forward losses subject to a restriction
• Deductions allowance: £5 million per group per year (shared among group companies)
• Above the £5m allowance: only 50% of remaining profits can be sheltered by brought-forward losses
• Practical effect: most small businesses (profits < £5m) unaffected; large groups have effective minimum 12.5% CT rate after brought-forward loss relief is fully used
• Applies to brought-forward: trading losses, NTLRDs, property losses, non-trading IFA debits, and others

Worked example: Company has £10m profits in 2024/25. Brought-forward trading losses £12m. £5m deductions allowance.

• Losses usable without restriction: £5m
• Profits remaining: £10m − £5m = £5m
• Losses usable in restricted band: 50% × £5m = £2.5m
• Total losses used: £5m + £2.5m = £7.5m
• Losses remaining to carry forward: £12m − £7.5m = £4.5m
• Taxable profits: £10m − £7.5m = £2.5m × 25% = £625,000 CT

Capital losses — group relief equivalent: Capital losses can be "matched" between 75% group companies by making a s.171A election — effectively transferring an asset to another group company before disposal so the gain/loss arises in the company with the opposite position. This is CLAIMED not automatic, and works by having the "transfer" deemed to happen no gain/no loss under s.171.

Patent Box gives a reduced 10% effective corporation tax rate on profits derived from QUALIFYING PATENTS and similar IP. Introduced to encourage UK-based innovation.

Qualifying companies must:

• Own or exclusively license qualifying IP rights (patents granted by UK IPO, EPO, or equivalent EEA offices)
• Have developed the IP ("development condition") OR meet the "active ownership" condition
• Since 2016, "Nexus" rules — the relief is linked to actual R&D expenditure (preventing shell IP holding)

Calculating Patent Box profits:

Complex formulaic calculation. Broadly:

1. Identify income attributable to qualifying IP (royalties, notional royalties on product sales, damages for infringement, compensation)
2. Apply routine return deduction (a notional return for the routine activities not attributable to IP) → residual profit
3. Apply the Nexus fraction (R&D expenditure ratio)
4. The result is the Patent Box profit — eligible for the reduced 10% rate

How the relief works: Rather than a separate 10% tax rate, Patent Box operates by allowing an ADDITIONAL DEDUCTION in the tax computation such that the effective rate on Patent Box profits is 10%.

Deduction = Profit × (Main rate − 10%) / Main rate

For 25% main rate: deduction = Profit × 15/25 = 60% of the Patent Box profit. So only 40% of the profit is effectively taxed at 25%, giving 10% effective.

R&D Tax Relief:

Merged scheme (from April 2024) — "R&D tax relief":

The UK has CONSOLIDATED the previous SME and RDEC schemes into a single R&D regime (for accounting periods starting 1 April 2024+). But for the TC syllabus, students should understand BOTH pre-merger schemes (which may still be in scope for exam purposes during the transition):

SME R&D scheme (applicable accounting periods starting before 1 April 2024 — or for loss-makers):

• Definition of SME: < 500 employees AND (< €100m turnover OR < €86m gross assets)
• Enhanced deduction: 186% from 1 April 2023 (reduced from 230% before 2023; the enhanced uplift is 86% — so total deduction = 100% + 86% = 186%)
• Loss-making SMEs: payable CREDIT at 10% (was higher rates previously) — surrender the enhanced loss for cash
• R&D intensive SMEs (where R&D spend ≥ 30% of total expenditure, from April 2024; ≥ 40% before): higher credit rate 14.5% on surrendered loss

RDEC scheme (applicable to large companies and some SMEs):

• R&D Expenditure Credit (RDEC): 20% ABOVE-THE-LINE CREDIT on qualifying R&D expenditure (from April 2023; 13% before)
• The credit is TAXABLE as trading income (so net benefit = 20% × (1 − 25% CT) = 15% net)
• Applied "above the line" (before operating profit) — visible in accounts, popular with investors
• Used by: large companies; SMEs subcontracted work; SMEs that received subsidies/grants affecting qualifying expenditure; post-April 2024 merged scheme

Merged R&D scheme (from April 2024):

• All companies (SMEs and large) — single regime
• 20% above-the-line credit (as RDEC)
• Loss-makers: net PAYABLE credit at 16.2% effective rate after CT (small profits rate)
• Separate higher rate for "R&D intensive" SMEs (spending ≥ 30% on R&D)

Qualifying R&D expenditure:

• Staff costs (direct and externally provided)
• Subcontractor costs (65% of payment qualifies for SME scheme, 100% in some cases for RDEC)
• Consumable items (software, materials consumed in R&D)
• Software licence costs
• Clinical trial volunteer payments
• Power, water, fuel used in R&D
• Data and cloud computing costs (from April 2023)

Definition of R&D: "A project that seeks to achieve an advance in science or technology" — must involve addressing scientific or technological uncertainty. Not: routine development, market research, aesthetic design.

A close company is a UK resident company controlled by 5 or fewer participators (or any number of participator-directors). Most owner-managed companies are close.

Definitions:

• Participator: a person having a share or interest in the capital or income of the company (shareholders + creditors with rights)
• Control: ability to secure (by share ownership, voting rights, rights to distributable income) that the affairs are conducted according to one's wishes
• Associate: spouse, civil partner, relatives (including lineal ascendants/descendants, siblings), business partners, trustees of settlements of which participator is a beneficiary

Why it matters: Close companies have special tax rules designed to prevent abuse — owner-manager companies could otherwise divert income as loans (no income tax) or personal benefits.

Special rules:

1. Section 455 tax (loans to participators):

• If a close company makes a LOAN to a participator (or their associate) that is not repaid within 9 months and 1 day of the period end, the company pays a TEMPORARY TAX at 33.75% of the loan outstanding
• This rate matches the dividend higher rate — prevents "disguised" dividends via loans
• The tax is REFUNDED when the loan is repaid (9 months after the end of the period of repayment)
• Tax is paid with the CT but reclaimed later — cash flow impact only, not permanent
• The loan itself may also trigger a BIK for the participator (income tax side)

Avoidance: repaying before the "trigger date" (9 months after period end). But "bed and breakfasting" loans (repaying and redrawing within 30 days) is counter-caught — the payment is treated as not being made.

2. Loans written off or waived:

• If the company writes off the loan (or waives it): the participator has income tax to pay on the "written-off loan" amount — treated as though a distribution
• No CT deduction for the company on the write-off

3. Benefits to participators treated as distributions:

• Benefits provided to participators (e.g., free use of a company car for a shareholder who is not an employee) are treated as DISTRIBUTIONS — taxed on the participator as dividends
• Not allowable for the company
• Less common — usually employee status creates BIK treatment instead

Transfer pricing — basic principles:

• UK transfer pricing rules apply to transactions between CONNECTED PARTIES (typically group companies, but also between closely-connected parties including individuals and companies under common control)
• Arm's-length principle: prices between connected parties should be the prices that would have been agreed between unrelated parties
• HMRC can ADJUST the UK company's taxable profits if prices do not reflect arm's length
• Compensating adjustment: if one party's profit is adjusted up, the other party should be able to reduce theirs (between UK parties — preserves principle of no economic double taxation)

Exemption — small and medium-sized enterprises (SMEs):

• UK SMEs are generally EXEMPT from transfer pricing rules (though rules still apply to medium-sized entities in some circumstances)
• Definition: < 250 employees AND (turnover < €50m OR gross assets < €43m)
• SME exemption prevents burden on smaller businesses — but HMRC can disapply in some cases (e.g., transactions with non-qualifying territories)

Documentation requirements:

• Large businesses must maintain detailed documentation of transfer pricing methodology
• Master File + Local File approach aligned with OECD standards
• Penalty for failure to produce documentation; more severe if transfer pricing also incorrect

Transfer pricing methods (OECD-aligned):

• Comparable Uncontrolled Price (CUP) — use similar third-party transactions
• Resale Price — start with resale price to unconnected party, deduct gross margin
• Cost-Plus — start with cost, add appropriate markup
• Transactional Net Margin Method (TNMM) — widely used for intermediate functions
• Profit Split — for integrated value chains

Diverted Profits Tax (DPT):

• 25% rate (higher than CT) on "diverted profits" — targets multinational companies artificially shifting profits out of UK
• Very serious — designed to be punitive and encourage companies to align with arm's-length principle
• Applies where PEs are avoided or inter-group arrangements lack economic substance

Payment of corporation tax:

Small companies:

• CT payable 9 months and 1 day after the end of the accounting period
• Example: year-end 31 March 2025 → CT due 1 January 2026

Large companies (£1.5m+ augmented profits):

• Pay CT in quarterly instalments
• Instalments due on 14th day of:
  • 7th month of the accounting period (first instalment, at 3.5 months)
  • 10th month of the accounting period
  • 13th month (1 month after period end)
  • 16th month (4 months after period end)
• Example (year to 31 March 2025): instalments on 14 October 2024, 14 January 2025, 14 April 2025, 14 July 2025
• Each instalment = 25% of estimated total CT liability (pro-rated if AP shorter than 12 months)

Very large companies (>£20m augmented profits):

• Pay CT earlier — all within the accounting period!
• Instalments due on 14th day of months 3, 6, 9, and 12 of the accounting period
• Example (year to 31 March 2025): instalments on 14 June 2024, 14 Sep 2024, 14 Dec 2024, 14 March 2025
• Introduced to accelerate tax collection from the largest groups

Thresholds divided by 51% group companies: £1.5m and £20m thresholds are divided among the number of 51% group companies. Also pro-rated for short accounting periods.

Filing deadline:

• Online CT600 filing with XBRL-tagged accounts + computation
• Due 12 months after the end of the accounting period
• Late-filing penalties apply from day after the deadline