Corporation tax is charged on the profits of companies and of unincorporated bodies that are not partnerships, for example members' clubs. The term “profits” includes all sources of income and capital gains. It also includes dividends (UK and overseas), although most will not be taxable.
Corporation tax is charged on the worldwide profits of UK-resident companies. Non-resident companies carrying on a trade in the UK through a 'permanent establishment' are charged on the income arising from the permanent establishment and on capital gains on the disposal of assets in the UK used for the purposes of the trade or otherwise for the permanent establishment. Double taxation relief is available where profits are taxed twice.
The rate of corporation tax is fixed by reference to financial years. The financial year commences on 1 April and thus the financial year 2015 is the year commencing on 1 April 2015, and so on. With the exception of the lower rates of corporation tax for companies with small profits, corporation tax is a “flat” tax on the profits of companies.
For recent financial years the rate of corporation tax has been fixed as follows:
|Financial year||Rate per cent|
A lower rate of corporation tax applies to companies with small profits for financial years before financial year 2015 (see below).
The “patent box” regime was introduced from financial year 2013. Under this regime companies can elect to claim an additional deduction in calculating taxable profits, with the effect that a percentage of the relevant profits attributable to qualifying patents are taxed at a reduced rate of 10%, whether paid separately as royalties or embedded in the sales price of products. The regime is being phased over four years, so for example in financial year 2014, 70% of the relevant profits are effectively taxed at 10% and in financial year 2015, 80% of the relevant profits are taxed at 10%, increasing to 100% of relevant profits for financial year 2017. The stated aim of this “patent box” rate is to strengthen the incentives to invest in innovative industries.
Special rules apply to companies in liquidation.
For financial years prior to 2015, where the profits chargeable to corporation tax fall between £300,000 and £1,500,000 (the “upper limit”) marginal relief is available, unless the company is a close investment-holding company (such companies are not eligible for this relief).
There is no need to make a formal claim for this relief.
Marginal relief operates such that where a company's profits exceed the lower limit but do not exceed the upper limit, the charge to corporation tax on the company's taxable total profits is reduced by an amount calculated in accordance with a statutory formula—
F × (U – A) × (N ÷ A)
F is the standard fraction (ie the fraction set by Parliament);
U is the upper limit;
N is the amount of the taxable total profits (the profits chargeable to corporation tax);
A is the amount of the augmented profits—its taxable total profits plus any franked investment income. However, franked investment income is excluded where it is received—
The rules in heads (1) and (2) above apply equally to franked investment income received by another person on behalf of or in trust for the company, but not to any such income received by the company on behalf of or in trust for another person.
The fraction set by Parliament in the above formula is as follows—
Under the general definitions, a “51 per cent (75 per cent) subsidiary” is a body corporate more than 50 per cent (at least 75 per cent) of the “ordinary share capital” of which is beneficially owned directly or indirectly by another body corporate. However, in determining whether one company is a 51 per cent subsidiary of another for the purposes of excluding franked investment income—
“Ordinary share capital” means all the issued share capital of the company except non-participating shares carrying a fixed-rate dividend, though “issued share capital” does not include founder members' deposits in a company limited by guarantee.
A “trading or holding company” means a trading company (ie a company the business of which consists wholly or mainly of the carrying on of a trade or trades) or a company the business of which consists wholly or mainly in holding shares or securities of trading companies which are its “90 per cent subsidiaries” (ie in which it holds directly not less than 90 per cent of the ordinary share capital). A company is owned by a “consortium” if at least 75 per cent of its ordinary share capital is beneficially owned amongst them by companies, each owning at least 5 per cent and beneficially entitled to at least 5 per cent of any profits available for distribution to equity holders and of any assets so available on a winding-up. Such companies are the “members of the consortium”.
The marginal relief formula is modified where a company has profits for an accounting period that consist of both ring fence profits and other profits.