Corporation Tax

Corporation tax

Rates
From 1 April 2018
From 1 April 2019
From 1 April 2020
From 1 April 2021
Main rate
19%
19%
19%
19%
Small profits rate
19%
19%
19%
19%
  • A financial year is the year commencing for corporation tax (CT) purposes on 1 April and ending on the following 31 March.
  • For profits arising before 1 April 2015 the 20% small profits rate applied if profits, including taxed (franked) investment income, did not exceed £300,000. Profits between the small profits rate limit and the full rate threshold were taxed at a rate of 21.25% up to £1,500.000 and 21% thereafter. The effect of this is to gradually remove the benefit of the SCR by the time this limit is reached.
  • Budget 2021. The main rate of corporation tax will increase from 19% to 25%. However, there were three safeguard measures announced:
    • the change will not take place until April 2023, giving time for economic recovery to set in
    • the new rate will not apply to companies with profits below £50,000, which will continue to use 19%; and
    • companies with profits exceeding £50,000 but not £250,000 will pay tax at a “tapered” rate.
  • A look at the policy note for the announcement shows that the “tapered” rate will be achieved by permitting an amount of marginal relief to achieve a gradual increase in corporation tax rates. Details of exactly how this will operate are not included in the note.
  • Note that the small profits rate of 19% won’t apply to a company that is a “close investment company”, e.g. a small family investment company.
Deductions
  • Revenue expenses, i.e. expenses not relating to capital, incurred wholly and exclusively for the purposes of the trade are deductible from a company’s income. Revenue expenses of managing investments may also be deducted for CT purposes.
  • Directors’ and employees’ remuneration (salary, benefits, fees etc.) not paid within nine months following the end of the accounting period in which they are claimed will not be deductible for tax until the accounting period in which they are paid.
  • Interest and other costs of borrowing are usually deductible in the period for which they are payable. But there are anti-avoidance rules to stop excessive relief being claimed in advance of actual payment. There are also rules to stop large companies claiming excessive UK interest expense deductions.
  • Depreciation is not an allowable tax deduction. Instead, the cost of capital assets are given relief for tax under the capital allowances system.
  • For most types of expenditure connected with research and development (R&D), small and medium sized entities can claim an enhanced tax deduction. The rate of enhancement is shown in the table below. Where a company makes losses they can instead claim a credit at the rate shown in the table. A business qualifies as an SME where broadly it has fewer than 500 employees, and the company’s an annual turnover should not be more than €100 million and/or its an annual balance sheet value should not exceed €86 million. Larger companies are entitled to a deduction “above the line” at the rate shown below.
  • The amount of R&D relief is capped at £7.5 million per project.
  • From November 2015 HMRC introduced an R&D Advance Assurance scheme for companies claiming R&D. If assurance is given HMRC say they will not make any enquiries into R&D claims for the first three accounting periods.
  • From 1 April 2016, only the repayable tax credit is available for claims under the large company R&D scheme.
  • Budget 2020. From 1 April 2020 the R&D large company resarch and development expenditure credit increases from 12% to 13%.
    From 1 January 2018
    From 1 April 2015
    From 1 April 2014
    From 1 April 2013
    From 1 April 2011 to 31 March 2013
    Enhancement to deduction
    130%
    130%
    125%
    125%
    100%
    R&D credit rate
    14.5%
    14.5%
    14%
    11%
    12.5%
    Above-the-line credit
    12%
    11%
    10%
    9.1%
    -
  • From 1 April 2002 until 7 July 2015 for the cost of acquiring intellectual property (for example, goodwill) and other intangible assets, a company can claim a deduction for the amortisation charged to its profit and loss account under proper accounting principles or if it prefers it can claim a flat rate of 4%.
  • Pension contributions are deductible in the accounting period in which payment is made. If contributions are particularly large they may have to be spread over several accounting periods.
Group relief
  • A group relationship exists if there’s 75% direct or indirect ownership of the ordinary share capital of one company by another. Trading and rental losses, non-trading losses on loan relationships, excess capital allowances, excess management expenses of income in close investment and other companies can be transferred, also known as “surrendered” as group relief, between companies which are members of the same group, provided they’re subject to UK CT.
Losses
  • Until 1 April 2017 losses made by companies can be set against all other income and gains of the same accounting period, with any balance carried back against income and gains of the previous twelve months (not accounting period) or carried forward and set against future income arising from the same trade. Losses made on or after 1 April 2017 which are carried forward may be set against most types of trade and non-trading income received by the company.
  • Excess management expenses and rental losses can be set against all other income and gains of the same accounting period or future accounting periods. They can’t be carried back to previous years.
  • Budget 2021. There will be a two-year period where the carry-back rules for losses will be extended, for both unincorporated businesses and companies. This will apply to tax years 2020/21 and 2021/22 (for unincorporated businesses), and for company accounting periods ending between 1 April 2020 and 31 March 2021 (subject to a maximum of £2 million), and between 1 April 2021 and 31 March 2022 (subject to a separate £2 million maximum). It will allow losses from the relevant period to be carried back to the three previous tax periods.
  • The losses claimed under the new extension will only be able to offset previous trading profits, i.e. it will not be an extension of sideways loss relief. It will therefore not be subject to the restriction on uncapped reliefs, i.e. to the higher of £50,000 and 25% of adjusted total income. Using the extension will not preclude a claim for sideways loss relief to be made first.
Capital gains tax for companies
  • See the Capital gains tax section for how to calculate the indexation allowance.
  • Chargeable capital gains and capital losses are calculated in the same way for companies as for individuals. Net gains arising to a company are added to profits to arrive at the amount chargeable to CT, although no annual exemption is available to companies.
  • Capital gains and losses arising on disposals by trading groups or stand-alone trading companies from substantial (10% ordinary share capital minimum) shareholdings and related holdings in (broadly) trading companies are exempt in most cases provided they have been held for a continuous twelve-month period in the two years prior to disposal.
  • Companies were entitled to reduce their chargeable gains using an indexation allowance to take account of inflation. The allowance couldn’t increase an existing capital loss or turn a gain into a loss. The indexation allowance was withdrawn from December 2017. Therefore, the allowance for gains arising in January 2018 and later is calculated using the indexation factor for December 2017. Gains relating to assets acquired after December 2017 do not qualify for an indexation allowance.
Company dividends
  • Dividends received from UK companies are exempt from CT and since 1 July 2009 most foreign dividends received are also exempt.
Loans to participators
Where a “close company” (broadly, under the control of five or fewer participators, or any number if they are directors) makes a loan (or any other arrangement where value is extracted) to a participator a (notional) corporation tax charge can arise if that loan (or value) is not repaid within nine months of the end of the accounting period during which it was made. In this event the company has to pay an amount to HMRC (s.455 tax). This is due nine months and one day from the end of the relevant accounting period. The rate of the charge is as follows:-
Loans (or value extracted)
  • up to and including 5 April 2016 - 25% x loan/value
  • from and including 6 April 2016 - 32.5%* x loan/value
* Finance Act 2016, Section 50 states that the rate of charge should mirror that of the dividend upper rate in respect of loans or advances made on or after 6 April 2016.
The tax charge can be fully or partially repaid if the loan/value is repaid in full or part (or written off). This cannot be reclaimed from HMRC until nine months after the end of the accounting period in which repayment was made.
Patent box
  • Since 1 April 2013 companies that derive income from the exploitation of a qualifying patent and certain other intellectual property (IP) can elect for a 10% rate of corporation tax to apply to a proportion of the profits attributable to the patent or IP. The proportion is initially 60% and this will increase 10% each year to reach 100% by April 2017.
  • An election for the 10% tax rate to apply must be made within two years of the end of the accounting period in which the patent or IP profits arose.
  • In December 2014 it was announced that the current UK scheme will be wound up in favour of a new scheme (still to be called patent box) having more stringent qualifying criteria.
  • The existing patent box scheme was closed to new entrants in June 2016 but those already benefitting from the existing scheme can continue to do so until 30 June 2021.
Intangible fixed assets
Finance Act 2019 introduced corporatation tax relief for goodwill on intangible fixed assets (but not on the general goodwill of an enterprise) at a fixed rate of 6.5% per annum on costs.