Corporation tax (UK)

3 key takeaways

• Corporation tax is levied on the profits of companies and certain other entities operating in the UK.
• The standard rate of corporation tax can vary, and there are specific rates and allowances that can apply to different types of profits.
• Companies must calculate their tax liability, file returns, and pay corporation tax to HM Revenue and Customs (HMRC).

What is corporation tax?

Corporation tax is a tax on the profits of UK-resident companies and the UK activities of non-resident companies. Profits subject to corporation tax include trading profits, investment profits, and capital gains. The tax is administered by HM Revenue and Customs (HMRC), and companies are required to file annual tax returns to report their profits and calculate their tax liability.

Key components of corporation tax:

• Taxable Profits: Includes trading profits, investment income, and capital gains.
• Tax Rates: The standard rate of corporation tax, which can be adjusted by the government. Different rates may apply to certain types of income or entities.
• Allowances and Reliefs: Companies can claim various allowances and reliefs to reduce their taxable profits, such as capital allowances, research and development (R&D) tax credits, and group relief.

Example:

A UK-based company with trading profits of £500,000 and capital gains of £100,000 would calculate its corporation tax liability based on the applicable tax rate. If the standard corporation tax rate is 19%, the total tax due would be £114,000 (£600,000 x 19%).

Importance of corporation tax

• Revenue Generation: Corporation tax is a significant source of government revenue, funding public services and infrastructure.
• Economic Policy Tool: The government can use corporation tax rates and allowances to influence business investment and economic growth.
• Compliance and Regulation: Ensures that companies contribute fairly to the economy and adhere to tax laws and regulations.

Advantages and disadvantages of corporation tax

Advantages:

• Revenue Source: Provides a steady source of revenue for the government.
• Economic Incentives: Allows the government to incentivize certain business activities through tax reliefs and credits.
• Fairness: Ensures that businesses contribute to the funding of public services and infrastructure.

Disadvantages:

• Administrative Burden: Compliance with corporation tax regulations can be complex and time-consuming for businesses.
• Impact on Investment: High corporation tax rates may discourage business investment and expansion.
• Tax Avoidance: Opportunities for tax avoidance can reduce the effectiveness of the tax system and lead to inequities.

Real-world application

Corporation tax is applied to various types of businesses and profits in the UK, and companies must follow specific procedures to comply:

• Filing Returns: Companies must file annual corporation tax returns with HMRC, detailing their profits and tax calculations.
• Payment Deadlines: Corporation tax payments are typically due nine months and one day after the end of the company’s accounting period.
• Tax Planning: Businesses often engage in tax planning to minimize their tax liability within the bounds of the law, taking advantage of available reliefs and allowances.

Practical Examples:

• Small Businesses: Small businesses may benefit from lower tax rates or specific reliefs designed to encourage growth and investment.
• Multinational Corporations: Large, multinational companies must navigate complex rules regarding the taxation of international profits and transfer pricing.

Related topics

• Income tax
• Value-added tax (VAT)
• Capital gains tax
• Tax reliefs and credits
• HM Revenue and Customs (HMRC)
• Tax compliance

Understanding corporation tax is crucial for businesses operating in the UK, as it directly impacts their profitability and compliance requirements. By staying informed about tax rates, allowances, and filing obligations, companies can effectively manage their tax liabilities and contribute to the broader economic system.