Corporation Tax Rates

Current Corporation Tax Rates and Limits (pdf)

What is Corporation Tax?
Basis of Assessment
Calculating Corporation Tax
Self Assessment Corporation Tax Return
Non Corporate Distributions (NCD's)

What is Corporation Tax?

There are currently eight taxes that are levied in the UK by central government. These are divided into two major categories, Direct and Indirect.

Direct Taxes
- Income Tax
- National Insurance
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- Stamp Duty
Indirect Taxes
- Value Added Tax (VAT)
- Customs Duties (including duties on alcohol, petrol and tobacco

Corporation Tax amounts to approximately 12% of the total tax collection.

Corporation tax is paid by companies resident in the UK for tax purposes. A company can mean a corporate body but also an incorporated association (other than a partnership or a local authority or a local authority association) such as a sports club or political association. Additionally the UK branches or agencies of a non-resident company are also subject to Corporation Tax.

A company is resident in the UK if that is where it is incorporated; a company that is incorporated out side of the UK can be considered resident if its central management and control is exercised in the UK.

Corporation Tax is assessed under schedules. Each schedule has a set of rules used to determine the amount of income that is taxable.

Schedule A – Income from land and buildings
Schedule D Case I – Trading profits (or losses) usually from accounts
Schedule D Case III – Interest on non-trading loans
Schedule D Case V – Income from foreign possessions
Schedule D Case VI – Non-trading gains on intangible fixed assets
Chargeable Gains – Capital gains

Special rules apply when a company has a “loan relationship”, which basically means the company either owes or is owed amounts provided as a loan. This can cover bank deposit accounts (notionally the company has lent money to the bank), loans from banks or other creditors as well as bonds. If the loan relates to trading then any interest payable or receivable is dealt with as schedule D Case I, however if it is non-trading then the interest is dealt with as schedule D Case III. Note that bank deposit interest receivable is always treated as non-trading.

Similar special rules also exist for dealing with intangible fixed assets, some times known as “Intellectual Property”.

Making sure you compute the correct amount of taxable income under each schedule can be a complex area and it is always prudent to seek qualified advice.

Basis of Assessment

Companies prepare financial accounts periodically; these periods are known as Periods of Account. Periods of account are usually 12 months however they can be shorter or longer than this at a time when a company modifies its year-end date.

Corporation Tax is calculated on the basis of Accounting Periods. An Accounting Period starts when a company starts to trade, or immediately after the previous accounting period ends. An Accounting Period ends usually 12 months after the start, although it can end at the end of a period of account if it is earlier. So if a company has a period of account of say 15 months then it is split into two accounting periods the first of 12 months and the second of three months.

The diagram outlines the assessment basis

In this example it will be necessary to allocate profits (or losses) between the relevant accounting periods. There are rules for doing this. Trading income, before deducting capital allowances, is apportioned on a time basis. Capital allowances are calculated specifically for each accounting period. Interest paid or received in relation to non-trading loans (bank deposit interest is always non-trading) is accrued to each accounting period (using the appropriate rates of interest so is not necessarily time based). This area can be complex and professional advice should be sought.

Calculation of Corporation tax

The rates of corporation tax are fixed for Financial Years, which run from 1 April to the following 31 March. A financial year is identified with respect to the year in which it begins, so the year beginning on 1 April 2004 and ending on 31 March 2005 is known as FY 2004.

Four rates of corporation tax are currently set:

Starting rate
Small companies rate
Main rate
Non-corporate Distribution rate

The starting rate applies to profits of not more than £10,000

The Small companies rate applies to profits of not more than £300,000

The main rate applies to profits above £300,000

The Non-corporate distribution rate is a minimum rate of corporation tax that can apply when a company makes a distribution of dividends to persons (i.e. not companies). See the Non-corporate Distributions (NCD’s) section for more information.

In order to prevent a step change in the applicable rate as a company’s profits grow, transitional arrangements known as taper relief exist:

Starting rate to Small companies rate
Small companies rate to main rate

The bands for taper relief are also set for a financial year together with a “fraction” to be applied in the calculation of taper relief.

The band and examples of the calculations are available in the down loadable file above.

When an accounting period straddles two financial years in which the various rates, bands and fractions change; the profits are apportioned on a time basis and the calculations separately done for each financial year.

In making corporation tax calculations appropriate professional advice is strongly recommended.

Self-Assessment Corporation Tax Return

A system of self-assessment exists for companies, similar to that for individuals. The self-assessment form is known as the CT600, and it must be filed together with a copy of the company’s statutory accounts and tax computations no later than 12 months after the end of the period of account. A company must pay its corporation tax no later than nine months after the end of its accounting period. The tax is due whether or not the CT600 has been filed. Revenue and Customs guides and relevant forms can be downloaded from the following web site: www.hmrc.gov.uk/ctsa/guide.htm

Non Corporate Distributions (NCD's)

Small companies have recently become subject to a new piece of tax legislation known as Non-corporate Distribution. The legislation appeared in section 28 of the Finance Act 2004 and introduced a new and additional rate of corporation tax known as the Non-corporate Distribution Rate (NCDR).

Its effect is to remove the benefit of the low starting rate of corporation tax if the profits of the company are distributed as dividends to individuals rather than being paid out as salary and subject to PAYE or being reinvested in the business.

NCDR applies where dividend distributions to persons are made after 1 April 2004. It application is by comparing the underlying rate of corporation tax that the company has suffered with the NCDR. If the underlying rate is less then the NCDR then the equivalent value of dividend distributions to individuals is taxed as corporation tax at the NCDR (rather than the lesser underlying rate), the balance of the taxable profits being taxed at the underlying rate. Note NCDR is not a tax on the distribution but an actual corporation tax.

In circumstances where the underlying rate is greater than the NCDR no action is necessary.

There are rules dealing with circumstances where distributions to persons exceed the profit in the year as well as where a group structure exists.

The rate and examples of the calculations are available in the down loadable file above.

It is recommended that professional advice is taken in dealing with this whole area.