What is Corporation Tax?
Corporation tax, also referred to as corporate tax, is quite complex and has undergone numerous reforms by various governments over the years. In the UK, companies eligible for paying corporation tax involves a limited company, any foreign company with a UK branch or office, a club, co-operative or other unincorporated association. The current (2023-2024) main rate of corporation tax is 25% for all the limited companies in the UK. This rate is applicable to companies with profits exceeding GBP 250000. For companies with augmented profits below GBP 50000, a lower rate of 19% is applicable. Furthermore, companies with augmented profits between GBP 50000 to 250000 are subject to a tapered rate, determined on a sliding scale.
Why is it Essential for Businesses?
Taxation for businesses, especially corporation tax, holds relevance for several key reasons. Some of the top reasons have been listed below:
- Revenue generation and public services: Corporation tax is one of the significant sources of revenue for the HMRC (HM Revenue and Customs). The funds collected through this tax are utilised to finance public services like education, infrastructure, healthcare and national security.
- Supports economic stability: By levying corporation tax in the UK, HMRC can regulate the overall economy, thereby influencing business investment and development.
- Encourages fair business practices: Tax on company profits helps level the playing field among business owners. This help ensures that every company regardless of its size contributes a fair share to the economy.
- International competitiveness: The overall structure of the UK corporation tax attracts foreign investors. A competitive tax rate can encourage multinational enterprises to invest in or expand their operations in the UK, resulting in job creation and economic growth.
Who is Liable to Pay Corporation Tax?
Under the UK corporation tax regime, the following entities are liable to pay:
- Limited companies: All UK based limited companies are eligible to pay corporation tax on their profits.
- Foreign companies with UK branches or offices: The companies that operate through a permanent establishment like a branch or office in the UK come under corporate tax liability.
- Cooperatives and clubs: Certain types of organisations like cooperatives, clubs and associations operating as companies are also liable for corporate tax liability.
- Other associations: Lastly some other types of organisations like trade associations and member clubs, may be required to pay corporation tax, if they generate taxable profits.
Methods of Calculating Corporation Tax
- Calculate total income:
- Determine all income sources, including trading, investment, and capital gains for the financial year.
- Deduct allowable expenses:
- Subtract business expenses such as salaries, rent, and utilities. Make sure that non-deductible costs like entertainment are excluded.
- Apply capital allowances:
- Deduct capital allowances for eligible assets like machinery. Utitlise the Annual Investment Allowance (AIA) for maximum deductions.
- Adjust for tax reliefs:
- Apply relevant reliefs such as R&D tax credits, the Patent Box, or Creative Industries Tax Relief (CITR).
- Adjust for any trading or capital losses carried forward or back.
- Apply the correct tax rate:
- Profits up to £50,000 are taxed at 19%.
- Profits over £250,000 are taxed at 25%.
- Use marginal relief for profits between £50,000 and £250,000.
- Utilise group relief:
- If part of a group, consider offsetting losses within the group to minimise the overall tax liability.
Key Considerations
- Timing of income and expenses: Enhance tax efficiency by carefully scheduling income and expense recognition.
- Stay updated: Monitor tax law changes and thresholds to ensure tax compliance.
- Utilise available reliefs: Take full advantage of all relevant reliefs to reduce taxable income.
- Accurate reporting: Ensure timely and accurate submission of tax returns to avoid tax penalties.
Common Deductions and Reliefs Available to Businesses
Under UK corporation tax, businesses can benefit from several deductions and reliefs that help reduce their taxable profits. Here are some of the most common ones:
- Annual investment allowance (AIA): AIA provides 100% tax relief on qualifying capital expenditures up to £1 million.
- Capital allowances:
- Full expensing: If you purchase an asset that qualifies for 100% first-year allowances then you can deduct the entire cost from your profit before tax.
- Super deduction: 130% capital allowances for qualifying plant and machinery investments made before 31st March 2023, standard allowances may apply afterward.
- First year allowances (FYAs): 100% FYAs remain available for specific energy-efficient and environmentally beneficial equipment.
- Writing down allowances (WDAs): UK businesses can claim WDAs on capital expenditure not fully covered by the AIA, the main rate set at 18% and a special rate of 6% for long-life assets and integral features
- Research and Development (R&D) Relief: Applicable if your company engages in R&D activities.
- The Patent Box: This relief is available if your company earns profits from patented inventions.
- Creative Industries Tax Relief (CITR): This relief is relevant if your company generates profits from theatre, film, television, animation, or video game productions.
- Relief on Goodwill and Related Assets: Includes relief for goodwill, customer relationships, and unregistered trademarks.
- Disincorporation Relief: If you are transitioning from a company to a sole trader, ordinary business partnership, or limited partnership.
- Relief for Terminal, Capital, and Property Income Losses
- Relief for Trading Losses
Key Dates for Filing and Paying Corporation Tax
A company’s accounting period affects its deadlines to pay corporation tax and filing a company tax return.
- Deadline for Registering for Corporation Tax: Within 3 months of commencing any business activity.
- Deadline for Paying the Corporation Tax Bill: 9 months and 1 day after the end of your accounting period for corporation tax, unless classified as a large company
- Deadline for Filing Your Company Tax Return: 12 months after the conclusion of the accounting period for Corporation Tax.
Consequences of Late Filing or Payment
Timely submission of your business tax returns is crucial to avoid unnecessary costs and complications. Adherence to deadlines is not only a good practice but also an effective corporate tax planning strategy. However, if you still fail to comply with these deadlines then you will have to face certain penalties as follows:
- 1 day late: A £100 penalty will be imposed.
- 3 months late: An additional £100 penalty will be applied.
- 6 months late: HMRC will estimate your corporation tax bill and impose a penalty of 10% on any unpaid tax.
- 12 months late: Another 10% penalty on any unpaid tax
If your tax return is late 3 times consecutively then £100 penalties increase to £500 each. Moreover, if your tax return is late for more than 6 months then HMRC will send you a notice detailing the corporation tax amount they believe you owe. This is known as “tax determination” and you cannot appeal against this determination. Furthermore, you must pay the corporation tax due and submit your tax return, HMRC will then recalculate the interest and penalties you need to pay.
Quick Insight: Missing a corporation tax payment is a costly mistake! Not only will interest pile up on the unpaid balance, but HMRC takes serious action—like calling in debt collectors, dipping into your bank account, selling off assets, dragging you to court, or even shutting down your business.
Strategies to Monitor and Reduce Corporation Tax
- Claim Allowable Expenses Deduct allowable expenses like tools, travel, marketing, and employee costs to minimise your corporation tax. Make sure these are exclusively for business use and keep updated records to meet HMRC corporation tax compliance.
- Pay Yourself a Salary Paying yourself a salary from company profits is tax-deductible and lowers your corporate tax liability. You can consider dividends for a lower tax rate, but remember they are not deductible on business tax returns.
- Employer Pension Contributions Employer pension contributions are tax-deductible and reduce your UK corporation tax. You make keep contributions within the annual allowance to avoid penalties and ensure effective corporate tax planning.
- Early Payment to HMRC Paying your UK corporation tax early can earn interest, helping manage corporate tax liability and ensuring tax compliance within the financial year.
Overview of Recent Changes in UK Corporation Tax Policies
Since 1st April 2023, the UK corporation tax rate for profits exceeding £50,000 has increased to 25%. Companies with profits between £50,000 and £250,000 may qualify for marginal relief, which can lower their tax liability. Here is a timeline of the changes in the rates of corporation tax over time.
| 2024-25 | Small profits rate: 19% Main rate (eligible for Marginal Relief): 25% Main rate (not eligible for Marginal Relief): 25% |
| 2023-24 | Small profits rate: 19% Main rate (eligible for Marginal Relief): 25% Main rate (not eligible for Marginal Relief): 25% |
| 2022-23 | Profit below £300,000: 19% Profit above £300,000: 19% |
| 2021-22 | Profit below £300,000: 19% Profit above £300,000: 19% |
| 2020-21 | Profit below £300,000: 19% Profit above £300,000: 19% |
Must read: Marginal Relief in UK corporation tax reduces the tax burden for companies with profits between £50,000 and £250,000, gradually increasing the tax rate from the lower to the main rate.
A Comparison of Corporation Tax Systems
Here is a concise comparison of corporation tax systems across the UK, USA, India, and other major economies as of 2024:
- United Kingdom
- Main rate: 25% (profits over £250,000).
- Small profits rate: 19% (profits up to £50,000).
- United States
- Federal rate: 21%.
- State taxes: vary by state (0% to 12%).
- India
- Corporate tax rate: 25% (for companies with turnover up to ₹400 crore), 30% for others.
- Germany
- Effective rate: 30-33% (including trade tax).
- Japan
- Effective rate: Around 30% (including local taxes).
Predictions and trends in corporate taxation
- Global minimum tax: The global minimum corporate tax rate of 15% is expected to standardise corporate tax liability across jurisdictions, impacting taxation for businesses and minimising tax competition.
- Digital services taxation: As the digital economy grows, more countries will likely introduce digital services taxes, influencing corporate tax planning and influencing the tax on company profits for tech giants.
- Environmental taxes and green incentives: Governments are expected to increase environmental taxes, impacting limited company tax and corporate tax liability in response to climate goals. Alongside environmental taxes, enhanced capital allowances and other incentives for green investments will help make expenses tax deductible and minimise overall corporate tax liability.
- Increased tax transparency and reporting: Public country-by-country reporting will become more common, affecting HMRC corporate tax registration and filing corporate tax returns. Stricter tax reporting obligations may lead to more detailed disclosures, ensuring corporate tax compliance and avoiding tax penalties.