Corporation Tax in the United Kingdom

Introduction

Corporation tax is the tax charged on the profits of companies and other incorporated bodies in the United Kingdom. The tax is governed by the Corporation Tax Act 2009 (CTA 2009) and the Corporation Tax Act 2010 (CTA 2010), which consolidated and reformed the earlier legislation. Corporation tax is charged on the profits of companies resident in the UK and on the profits of non-UK resident companies that are attributable to a UK permanent establishment. HM Revenue and Customs (HMRC) administers the tax.

Charge to Corporation Tax

Corporation tax is charged on the profits of a company for an accounting period. Profits comprise: trading income (profits from the company’s trade); chargeable gains (gains on the disposal of capital assets); and non-trading income (including investment income and interest).

The rate of corporation tax is set by Parliament for each financial year (running from 1 April to 31 March). The main rate of corporation tax is currently 25 per cent for companies with profits over £250,000. A small profits rate of 19 per cent applies to companies with profits of £50,000 or less, with marginal relief for companies with profits between £50,000 and £250,000.

Calculation of Trading Profits

Trading profits are calculated in accordance with generally accepted accounting practice (GAAP) , subject to adjustments required by tax law. The starting point is the company’s statutory accounts, which are adjusted for: disallowable expenditure (such as client entertaining and fines); capital expenditure (which is dealt with through capital allowances rather than deductions); and timing differences.

Capital allowances provide relief for expenditure on plant, machinery, and certain other capital assets. The annual investment allowance (AIA) provides a 100 per cent deduction for expenditure on plant and machinery up to £1 million per year. Other capital allowances include writing down allowances for cars and fixtures, and structures and buildings allowances for qualifying construction costs.

Chargeable Gains

Companies are charged to corporation tax on their chargeable gains, calculated broadly in accordance with the principles of capital gains tax but at the corporation tax rate rather than the CGT rate. The principal reliefs include: indexation allowance (relief for inflation up to December 2017); substantial shareholding exemption (exemption for gains on the disposal of substantial shareholdings in trading companies); and roll-over relief (deferral of gains on the replacement of business assets).

Research and Development Relief

The UK tax system provides generous research and development (R&D) relief for companies that incur qualifying R&D expenditure. The R&D expenditure credit (RDEC) provides a taxable credit of 20 per cent of qualifying R&D expenditure for large companies. The SME R&D relief provides an additional deduction of 86 per cent of qualifying R&D expenditure and, for loss-making companies, a payable tax credit of up to 14.5 per cent.

R&D relief is a significant feature of the UK tax system, designed to incentivise innovation. HMRC has increased its compliance activity in this area, with a focus on abuse and error.

Transfer Pricing

The UK’s transfer pricing rules (in Part 4 of TIOPA 2010) require that transactions between connected persons (such as companies in the same group) be priced on an arm’s-length basis — that is, at the price that would have been agreed between independent parties dealing at arm’s length.

The rules apply to transactions between UK companies and their non-UK affiliates, and between UK companies where one is in a tax-transparent jurisdiction. Companies must maintain transfer pricing documentation and may be required to make adjustments to their profits to reflect arm’s-length pricing.

Group Relief and Losses

Group relief enables a company to surrender its trading losses to another company in the same group, reducing the group’s overall tax liability. The relief is available to companies that are at least 75 per cent owned by the same parent company.

Trading losses may be carried forward indefinitely and set against future profits of the same trade. Since 2017, the carry forward of losses has been restricted to 50 per cent of profits, subject to a £5 million threshold.

HMRC Enforcement

HMRC has extensive powers in relation to corporation tax, including: the power to issue information notices; the power to conduct compliance checks; the power to issue assessments and penalties; and the power to prosecute criminal offences of tax evasion. The Corporate Criminal Offence of failure to prevent the facilitation of tax evasion (under the Criminal Finances Act 2017) imposes strict liability on companies that fail to prevent their employees or agents from facilitating tax evasion.

Conclusion

Corporation tax in the United Kingdom taxes the profits of companies, calculated by reference to accounting profits adjusted for tax purposes. The rate of tax, the reliefs for capital expenditure and R&D, the transfer pricing rules, and the provisions for group relief and loss relief provide a comprehensive tax code for businesses. HMRC’s enforcement powers ensure compliance with the tax code.