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.