Corporation Tax (CT)

Definition

Corporation Tax (CT) is a mandatory tax imposed by the UK government on the total profits of companies that are resident in the UK. This tax applies to all entities that are classified as companies or unincorporated associations. The payable corporation tax rate depends on the profitability of the company, wherein the tax structure comprises different rates applicable for small and large companies.

Key Elements

Resident Companies: Companies deemed to be resident in the UK are subject to Corporation Tax.
Accounting Period: This is the financial period for which the corporation tax is calculated.
Rates: As of the financial year 2016-2017, the small companies’ rate was at 20% for total profits of £300,000 or less, while the full rate of 21% applied to companies with profits exceeding £1.5 million.
Marginal Relief: Applicable to companies with total profits between £300,000 and £1.5 million. This relief decreases the rate of tax for companies whose profits are on the threshold of moving from a lower tax rate to a higher tax rate.
Payment Schedules: Large companies make instalment payments, whereas other companies pay Corporation Tax nine months after their accounting period ends.
Capital Allowances and Losses: Certain capital allowances and losses carried forward from previous years are deductible for tax purposes.
Chargeable Gains: Profits from the disposal of fixed assets are included in the calculation of total taxable profits.

Examples

Small Company: A company with total profits of £250,000 in the financial year 2016-2017 would be taxed at the small companies’ rate of 20%. Therefore, the tax owed would be £50,000 (£250,000 * 0.20).
Large Company: A company with total profits of £2 million in the same period would pay Corporation Tax at the full rate of 21%. The tax owed would be £420,000 (£2,000,000 * 0.21).
Marginal Relief: A company with total profits of £1 million would qualify for marginal relief, reducing the effective tax rate slightly from the full rate.

Frequently Asked Questions (FAQs)

Q: What is the current rate of Corporation Tax in the UK? As of April 1, 2023, the UK Government has set the main rate of Corporation Tax at 19% for all non-ring fence profits.

Q: When is Corporation Tax due? For large companies, payments are made in instalments. Other companies must pay their Corporation Tax nine months and one day after the end of their accounting period.

Q: Can losses from previous years affect the current Corporation Tax liability? Yes. Companies can offset losses from previous years against their current profits to reduce their Corporation Tax liability.

Q: What are “chargeable gains”? Chargeable gains refer to the profits made from disposing of fixed assets, such as property or equipment. These are included in the total taxable profits for Corporation Tax purposes.

Q: Do non-UK residents pay Corporation Tax? Generally, Corporation Tax primarily applies to companies resident in the UK. However, non-resident companies with a permanent establishment in the UK are also subject to Corporation Tax.

Q: What are capital allowances? Capital allowances are deductible items that a company can claim for depreciation of assets, such as machinery or equipment, reducing the taxable profit.

Capital Allowances: Deductions companies can claim for the depreciation of over several years of capital assets like machinery and buildings.
Chargeable Gains: Profits realized on the disposal of fixed assets which are subject to tax.
Marginal Relief: A tax relief mechanism reducing the tax rate for companies whose profits are between the lower and higher corporation tax rate thresholds.
Accounting Period: The period, typically 12 months, for which company accounts are prepared to calculate the total profits subject to Corporation Tax.

Online Resources

Suggested Books for Further Study

“UK Taxation: A Simplified Guide for Students” by Lynne Oats and John Carmichael
“Taxation: Policy and Practice” by Andy Lymer and Lynne Oats
“Tolley’s Corporation Tax 2022-2023” by Philip Rutherford

Accounting Basics: “Corporation Tax” Fundamentals Quiz

### What defines a company as being liable for Corporation Tax in the UK? - [ ] Location of main office. - [x] Residency status. - [ ] Employee count. - [ ] Industry type. > **Explanation:** Liability for Corporation Tax in the UK is determined by the residency status of a company. If the company is considered resident in the UK, it is subject to Corporation Tax. ### What tax rate applied to small companies in the 2016-2017 tax year? - [ ] 15% - [x] 20% - [ ] 25% - [ ] 30% > **Explanation:** In the 2016-2017 tax year, the small companies' rate for Corporation Tax was 20% for total profits of £300,000 or less. ### When are large companies required to pay their Corporation Tax? - [ ] At the end of the financial year. - [ ] Within six months. - [x] In instalments. - [ ] Within three months. > **Explanation:** Large companies are required to pay their Corporation Tax in instalments. ### How can losses from previous years affect a company's current Corporation Tax? - [ ] Increases the taxable amount. - [ ] No effect. - [x] Reduces the taxable amount. - [ ] Converts into dividends. > **Explanation:** Losses from previous years can be offset against current profits to reduce the amount of taxable profit, thereby lowering the Corporation Tax liability. ### When must non-large companies pay their Corporation Tax? - [ ] At the end of the financial year. - [ ] In instalments. - [ ] Before the financial year ends. - [x] Nine months and one day after the end of the accounting period. > **Explanation:** Non-large companies must pay their Corporation Tax nine months and one day after the end of the accounting period. ### What effect do capital allowances have on taxable profits? - [ ] Increase profits. - [x] Reduce profits. - [ ] Increase tax rate. - [ ] Have no effect. > **Explanation:** Capital allowances reduce the taxable profits by allowing companies to deduct certain expenses, including depreciation of fixed assets. ### What is considered a chargeable gain? - [ ] Revenue from sales. - [ ] Annual dividends. - [x] Profits from disposing of fixed assets. - [ ] Stock market gains. > **Explanation:** Chargeable gains refer to profits that result from the disposal of fixed assets and are included in the company's total taxable profits for Corporation Tax. ### To which financial instruments do capital allowances typically apply? - [ ] Stocks - [x] Fixed assets (e.g., machinery or buildings) - [ ] Cash equivalents - [ ] Debt instruments > **Explanation:** Capital allowances typically apply to fixed assets such as machinery or buildings, allowing companies to claim depreciation over time. ### Which term describes a tax relief mechanism reducing the tax rate for companies between profit thresholds? - [ ] Capital Allowance - [ ] Chargeable Gain - [x] Marginal Relief - [ ] Profit Reduction > **Explanation:** Marginal relief is a tax relief mechanism that reduces the tax rate for companies whose profits fall between certain thresholds, preventing a sudden increase in tax liability. ### By what factor office location determines Corporation Tax liability? - [ ] Always - [ ] Sometimes - [ ] Infrequently - [x] Never > **Explanation:** Corporation Tax liability is not determined by the office location but by the residency status of the company in the UK.

Thank you for exploring the concept of Corporation Tax with us, and we hope you find this structured information and the quiz questions valuable in boosting your understanding and skills!