Corporation Tax
INTRODUCTION
These notes are intended to be a brief introduction to the background
of Corporation Tax in the UK. They are certainly not comprehensive;
there is a huge amount of legislation covering company law, employee
taxes, company taxation and employment legislation.
Companies pay Corporation Tax on their income and gains. Many of
the rules are similar to the way in which Income Tax is charged
for unincorporated businesses (partnerships and sole traders) but
there are important differences.
These notes cover the main rules of the tax and give some general
tax planning guidance, although professional advice should always
be obtained on particular situations.
THE BASIC RULES
Corporation Tax is charged on trading and investment income (excluding
dividends received from other UK companies) and on Capital Gains.
ACCOUNTING PERIODS
The tax is charged for tax accounting periods, which are never longer
than 12 months. The tax accounting period will usually be the same as
the year for which the company makes up its annual accounts. However, if
a company has an accounts period of, say 15 months, there
will be a 12 month tax accounting period, followed by a three month
tax accounting period.
THE RATES OF TAX
The rates are set for a financial year. The financial year 2002 is
the year beginning 1 April 2002 and ending 31 March 2003. If a
company's tax accounting period straddles two financial years, and
the tax rates change, its profits are first apportioned on a
time basis between the two financial years and then charged tax
at the rates applicable for each financial year.
Since April 2000 there have been three rates of Corporation Tax for each financial year:
a) The full rate (30% since April 1999), paid on profits above the upper relevant amount
(£1,500,000)
b) The small companies rate (19% from April 2002 and 20% during the period April 1999 to
March 2002), paid on profits below the lower relevant amount (£300,000).
c) The starting rate (0% from April 2002 and 10% during the period April 2000 to
March 2002), paid on profits below the first relevant amount (£10,000).
The relevant amounts of £1,500,000, £300,000 and £10000 are reduced proportionally for tax
accounting periods of less than 12 months.
Where profits fall between upper and lower limits, the profits are charged first at the
higher rate, but then a marginal relief is deducted.
The result is that the effective rates of Corporation Tax are now (from April 2002) as follows:
Total profits up to £10,000 pa - zero tax on profits.
Total profits £10,000 to £50,000 pa - zero tax on first £10,000, plus 23.75% on excess.
Total profits £50,000 to £300,000 pa - 19% on all profits
Total profits £300,000 to £1,500,000 pa - 19% on first £300,000, plus 32.75% on excess
Total profits over £1,500,000 pa - 30% on all profits
ASSOCIATED COMPANIES
Where several companies (including overseas companies) are
associated with each other, the lower and upper limits are
divided by the number of associated companies and so the full
rate and Small Companies Rate of Corporation Tax become payable at a lower earnings figures.
Associated companies for this purpose are broadly those where
one company has control of the other, or both are under common
control. There need not be a parent and subsidiary company relationship.
PAYMENT DATES
Corporation Tax for most companies is due for payment 9 months after the
end of the accounting period. This payment is known as Mainstream
Corporation Tax.
CONCLUSION
Corporation tax is a complex subject and in summary notes we can do no more than
outline the main points. There will be many areas on which directors will need
professional advice from their accountants.
Majors, Chartered Accountants, normally prepare the company's financial accounts
for client companies. From that information and the underlying records we then
prepare the company's Corporation Tax Return for approval and signature by the
directors before submitting it to the tax authorities.
Please remember that the website has been written in very general terms.
You should always obtain individual advice based on your own particular
circumstances. Why not take advantage of a free initial discussion?
© Majors, Chartered Accountants, 2002; Updated 25 April 2002