Corporate income tax: the basics at a glance

Most people have a decent understanding of what Value added tax is, who pays it, and why. But what about corporation tax? Who is affected, how high is the corporate tax rate, and how can corporate income tax be calculated? Here, you can read the most important basics of corporate income tax, i.e. tax on the income of legal entities.

Corporate income tax, or corporation tax, is a tax that limited companies, foreign companies with an official UK presence and unincorporated associations must pay. Corporation tax is essentially the business equivalent of paying income tax but instead is applied to registered companies.

Corporations are taxed at a national level by Her Majesty’s Revenue and Customs. According to statistics from the £56 billion was paid in corporate taxes in the UK during 2016/2017. Corporation tax in the UK was regulated by the Income Tax and Corporation Act of 1988 and has since been regulated by the 1997 Tax Law Rewrite Project. The Corporation Act of 2010 is the most current piece of legislation governing corporation tax in Britain.

The following groups are subject to pay corporate income tax in the UK:

• public limited companies
• Foreign corporations who officially operate in the UK
• Unincorporated associations

Companies and businesses in the UK have the option to become corporations when they decide to undergo the incorporation process. This procedure involves registering as a company with Companies House.  They register their classification election by filling out forn IN01 along with a £40 fee and posting to Companies House. Any foreign companies operating in the UK must also register with Companies House. Corporation tax is paid on their net income earned within the UK.

There are three main categories of business that are exempt from corporation tax. These include state-owned companies and assets – including banks to lottery companies. Corporation tax is waived for:

• Sole traders
• Partnerships
• Most non-profits
• Trusts
• Political parties

Of course there are always exceptions to these rules, usually depending again on the specific classification of the business. It is worth consulting with a tax professional to ensure that you are complying with your corporation tax legal requirements.

The amount of corporate tax a company must pay used to depend on the company’s annual profits. Thanks to new legislation passed in 2015, there is a flat rate for corporation tax at 20%. An amendment to this legislation lowered the rate again to 19% for 2017, 2018 and 2019 and the rate will drop again to 17% in 2020. The only company classification with an alternate corporate tax rate are so-called ‘ring fence’ companies. These are companies whose profits stems from oil rights of extraction within the UK. The small profits rate (profits less than £300,00) is 19% for 2018, whilst the main rate (companies with profits of over £300,000) stands at 30%.

When you decide to set up a company in the UK, one of the first things you need to do before starting business is register your company with HMRC, and register to start paying corporation tax. You have three months from starting to do business to register for corporation tax before incurring a late fine. You can register for corporation tax online or through the post. If you apply online, you will need your 10 digit Unique Taxpayer Reference (UTR), which you will have received through the post after registering your company with Companies House. You will also need to provide your company registration number, the official date that business began and the day when your annual financial accounts begin.  

The financial relationship between companies and their shareholders, as well as between companies themselves, can be quite diverse. This means that calculating your corporation tax bill can be just as complex.

Corporate income tax is generally based on net taxable income. This is the gross income minus any applicable tax deductions, such as wages, raw materials or any interest you are paying. In any case, you should begin with determining your corporation’s annual income.

When it comes to the final assessment of corporation tax, however, there are special rules that apply under certain conditions. Here are some of the most important ones:

Capital Claims Allowance

This circumstance dictates that business owners may deduct certain asset costs from their corporate tax bill. Any equipment, machinery or business vehicle that is used exclusively in or for your company can be deducted. You will need to work out the value of the items (receipts if bought new, compared to market value if bought second hand or received as a gift) in order to accurately make the deduction. Other possible capital claims allowances are expenses incurred if you are renovating a business premises in a disadvantages are of the UK, if you work in mineral extraction, dredging, research and developments or if your business has any patents.

Research and Development Relief

This tax relief assists companies who undertake research and development in their field. Your field must be in science or technology to receive this relief, and you must be able to prove that you successfully or unsuccessfully tried to overcome uncertainty that could not be worked out by a professional in the field. Your research and development should include a a new process, product or service or provide or develop on an already existing one. If these conditions can be proved, you may apply for Small and medium sized enterprises (SME) R&D relief, or a research and development expenditure credit. For more information, please visit this government guide.

Disincorporation relief

If you decide to transition from a limited company to a sole trader or partnership structure, you may be able to avail of relief during the transferal of assets. This means you will not have to pay corporation tax for disposing assets when shareholders receive them to continue operating the business in its new structure. There are certain eligibility criteria that must be met, more information can be found here. Disincorporation relief must be filed for by both the company and the shareholders who will receive the assets, and must be filed within 2 years of the transfer date (companies that are already closed are ineligible). Simply file a Disincorporation Relief claim form with your Company Tax Return to avail of this allowance.

The Patent Box

If your company invents something that becomes patented, you may apply for a lower rate of corporation tax through the Patent Box. The rate of corporation tax you must pay will drop from 19% to 10%. This benefit can only be used if your company exclusively owns or licenses the patent and you must have worked on development of the patent. Patent Box recognizes patents granted by the UK Intellectual Property Office, the European Patent Office or from certain European Economic Area nations (more information available here. Patent Box deductions can be applied for through your Company Tax Return or separately through the mail.

Creative Industry tax reliefs

There are a number of tax reliefs available for companies that work in the creative industry. Eligible candidates must be liable for corporation tax and work in the production and development of films, childrens’ TV programs, animation programs, video games, theater productions, orchestral concerts or museum/gallery exhibitions. To qualify you must pass a cultural test administered by the British Film Institute. Again, these reliefs can be claimed on your Company Tax return, upon having passed your cultural test. More information on the different relief options and their criteria can be found here.

You may be able to avail of corporation tax relief if your company has made financial losses, either through trading, selling or disposing of capital assets or property income. This relief is obtained by offsetting the amount lost against other profits during the same financial period. The three types of loss you may claim against are terminal, capital or property income losses. Terminal loss claims can be filed within 3 years of trading stopping, and is filed with your Company Tax return or in the mail to HMRC. Property income losses are also filed with your Company tax return.

Corporation tax is filed as part of your Company Tax Return (CT600) for Corporation Tax. This form is filed with HMRC.  In order to fill out the form, you will need to assess your total profit (or loss) that dictates your Corporation Tax, as well as your corporation tax bill. You can only do this if you have already completed your company’s annual accounts. The most common way of filing for corporation tax is online, using your Government Gateway ID and password on the HMRC website. The paper form filing method is only acceptable if you have a verifiable excuse for not using the only method, or if you want to file in Welsh.

If your profitable tax threshold is less than £1.5 million, then you have 9 months a day after your company’s accounting period to pay. If your profitable tax threshold is above this, you will need to pay in instalments.

Please note the legal disclaimer relating to this article.