The fundamentals of UK Corporation tax?

Corporation tax in the UK – the basics      

Introduction

This note seeks to summarise the more basic aspects of the UK Corporation tax regime which needs to be considered when a company is incorporated in (and therefore tax resident in) the UK or a non-UK resident company which becomes tax resident in the UK or creates a taxable permanent establishment in the UK.

What is Corporation tax

Corporation tax (the UK’s version of what is described in some jurisdictions as corporate income tax) is the corporate tax charged on the assessable worldwide profits generated by a UK corporate body or unincorporated association.  Such entities include limited companies, unlimited liability companies, members’ clubs, political associations, trade associations and authorised unit trusts.

Companies subject to Corporation tax

Companies resident in the UK are taxed on their worldwide income and gains, although there are territorial aspects to the UK’s tax regime including, but not limited to, the ability for a UK company to elect for the assessable profits of an overseas permanent establishment to be excluded from the Corporation tax charge.

Non-UK tax resident companies are also liable to Corporation tax in certain circumstances:

  1. it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom;
  2. it carries on a trade of dealing in or developing UK land
  3. it carries on a UK property business (I.e. a rental business generating income); or
  4. it has other UK property income.

Historically, non-UK investors have used non-resident companies to hold UK commercial and residential real estate.  Such companies were subject to the UK’s less complex Income tax regime however further to recent changes to the UK tax regime, such companies are now subject to the more complex Corporation tax regime as from 6 April 2020.     

The mechanics of Corporation tax

The calculation of Corporation tax is referable to an accounting period.  This is usually the same period for which the company prepares its financial statements and therefore spans 12 months. However, there may be instances where the period of account may not match the accounting period, such as when commencing a trade or winding down a business. As a result there may be shorter accounting periods for which tax is calculated.

Corporation tax rate (s)

The main rate of Corporation tax is 19% however as from 1 April 2023, the rate is currently legislated to increase to 25% for companies with profits over £250,000 and a small profits rate of 19% introduced for companies with profits of £50,000 or less with marginal relief applying of 26.5% applying between £50,000 and £250,000. 

The stated rationale for the rate increase is paying for the economic support given to citizens and companies during the Covid-19 pandemic.

Practical aspects of submitting a Corporation tax return

Companies falling within the Corporation tax regime are required to electronically submit a CT600 tax return to HM Revenue & Customs (“HMRC”) for each accounting period.  

The return must be submitted together with a computation indicating how the tax liability (or allowable loss) has been calculated as well as the signed financial statements for the period.  In most circumstances, the financial statements will have to be attached to the submission as an iXBRL tagged document.  

Arnold Hill & Co LLP has the aforementioned software to facilitate the submission of UK tax returns.

The filing deadline for returns is one year after end of the accounting period to which they relate. Companies filing their returns late will incur late filing penalties.

Corporation tax payment mechanisms

Most companies subject to Corporation tax are required to pay their annual tax liability 9 months and 1 day after the end of the referable accounting period.  For instance, a company with an accounting period ended 31 December 2021, is required to pay its Corporation tax liability by 1 October 2022.

However, if a company is considered “Large” or “Very Large” (generally companies with assessable profits in excess of £1.5m or £20m respectively), it will be required to pay Corporation tax by way of quarterly instalments.

(The aforementioned limits are divided by the number of associated companies).

There is a de minimis exemption to the quarterly instalment regime if the Corporation tax payable in accounting period is less than £10,000.

Please note that late interest charges will be incurred by a company if the tax is paid late.

Tax computations: adjustments and considerations

The starting point for the preparation of a tax computation is the pre-tax accounting result for the period.

Assessable profits are determined by making tax adjustments to the accounting profit (loss) before tax, as required by the UK’s tax code.

Broadly, expenses incurred wholly and exclusively for the purposes of trade are deductible for tax purposes while items such as depreciation, client entertainment and capital expenditure found in the profit and loss account are disallowed.  Tax relief on fixed assets and other items of a capital nature may be available in the form of capital allowances, the UK’s version of tax depreciation.

Within a tax computation, assessable profits consist of not just taxable trading profits but also chargeable gains and profits from a company’s loan relationships, the part of the UK’s tax code relating to the tax treatment of profits (and losses) arising from its corporate debt.

Utilisation of tax losses

Utilisation of current year or brought forward trading losses can reduce total tax liability.

There are however a multitude of tax losses which can be crystallised in a UK tax computation, with each type of loss having their own specific rules of usage and restrictions.

The UK does not have the concept of group consolidation.  However, tax losses can also be transferred between group companies, where the prerequisite conditions as to beneficial ownership are met.  

Conclusion

We have sought to summarise fundamental aspects of the Corporation tax regime.  Companies who have real estate, undertake R&D or trade cross-border will find that the tax rules are considerably more complex.  Arnold Hill & Co LLP has a breadth of experience to help you navigate through the complexity.

Contributing Advisors