UK Corporation Tax - a quick guide

Companies that are resident in the UK are subject to CT on their profits (income plus gains) arising in an accounting period.

An accounting period cannot be more than 12 months. If a company prepares accounts for more than 12 months, the profits are apportioned between the first 12 months and the remainder. Non-resident companies may be subject to CT where they trade in the UK through a permanent establishment.

• A company incorporated in the UK is treated as UK resident.
• A non-UK incorporated company is treated as resident in the UK if its central management and control is exercised in the UK.

The amounts of income and capital gains are basically determined by the tax rules that apply to individuals. For example, trading profits may be reduced by allowable expenditure incurred wholly and exclusively for the trade. However, companies are subject to many special rules.

Capital gains by companies

A company’s capital gains are subject to CT at the normal rates. Companies continue to receive indexation relief on gains and do not receive taper relief. Capital gains may be offset by capital losses of the same accounting period or capital losses brought forward from previous periods. Roll-over relief is available, but not reinvestment relief. Companies are subject to different identification rules from individuals for disposals of shares and securities.

Rates of tax

The rate of CT is fixed for the financial year ending each 31 March. Where an accounting period straddles this date, the profits are apportioned accordingly.

• The main rate of CT is 30%. This is charged where profits exceed £1,500,000, and in all cases for close investment-holding companies.
• The small companies rate of 20% is charged on the first £300,000 of profits where profits are between £50,000 and £1,500,000.
• Between the lower and upper profit thresholds (£300,000–£1,500,000), profits are in effect charged at a marginal rate of tax of 32.5%.
• Starting with the year to 31 March 2001, a company with taxable profits up to £50,000 is charged at a starting rate of 10% on the first £10,000 and an effective marginal rate of 22.5% on the next £40,000.
• Where a company has associated companies, all the rate thresholds are divided by the number of associated companies plus one. For example, a company with three associated companies will be taxed at 20% on profits between £12,500 (£50,000 divided by four) and £75,000 (£300,000 divided by four). Associated companies are broadly companies under common control.

Corporation tax rates

Corporation Tax Year	2001	2000	1999	1998
Financial year to	31.3.02	31.3.01	31.3.00	31.3.99
Full rate	30%	30%	30%	31%
Small companies rate	20%	20%	20%	21%
Small companies limit	£300,000	£300,000	£300,000	£300,000
Effective marginal rate	32.5%	32.5%	32.5%	335%
Upper marginal limit	£1.5M	£1.5M	£1.5M	£1.5M
Starting rate	10%	10%
Starting rate limit	£10,000	£10,000
Effective marginal rate	22.5%	22.5%
Upper marginal limit	£50,000	£50,000

Company losses

A company’s trading losses can normally be set against:

• Income and gains of the same accounting period.
• Income and gains of the previous year.
• Trading profits from the same trade in future years.

Losses of the final 12 months of a trade can be carried back three years. Losses are set against more recent periods before earlier periods.

Groups of companies

Profits and losses are calculated separately for each company. However, group relief generally allows trading losses, losses on property letting, management expenses and certain other deductions to be surrendered by one company and set against the profits of other companies in the same group.

In general, ’group’ means that 75% of the ordinary share capital of one company is owned by another company; or several companies may share the same parent owning at least 75% of the share capital

Dividends, distributions and advance corporation tax (ACT)

Companies do not have to pay tax at the time they pay a dividend. Corporation tax is paid at the normal time on the company’s taxable profits without any deduction for dividends paid.

• A shareholder receives the dividend with an accompanying tax credit equal to 10% of the dividend plus tax credit. The tax credit is equivalent to the basic rate of income tax on dividends
• Companies pay no tax on dividends received.
• Companies that paid dividends before 6 April 1999 had to pay advance corporation tax (ACT) of one-quarter of the dividend. The ACT could usually be set against a company’s CT liability. The maximum ACT that could be offset was an amount equal to 20% of the company’s chargeable profits, and surplus ACT could be carried back against profits of up to the previous six years.
• Any surplus ACT at 5 April 1999 that was not relieved in this way may be carried forward to periods after 5 April 1999 and set against CT after deducting ’shadow ACT’. Shadow ACT is equal to one-quarter of any dividends paid in the period, ie the ACT that would have been paid if the dividend had been paid before 6 April 1999.