What tax does a company pay?
The following is a very basic guide to the taxation of companies in the UK.
For more information, go to the Inland Revenue
website.
UK companies do not pay income tax or capital gains tax but a single tax, corporation
tax, which is assessed on both their income profits and capital gains: Income
and Corporation Taxes Act, 1988 (ICTA), sec6 (4) (a).
Income profits
The corporation tax on the company's income profits is assessed on the same
general principles as income tax for an individual, on a current year basis.
Most companies' profits will be profits from a trade or business, but income
may arise in other ways, such as rental income from land or premises, or government
securities, or from dividends paid on shares in other companies. There are special
rules with regard to dividend income which are beyond the scope of this database.
Trading profits are assessed on the income from the business less the allowable
expenditure. Expenditure must be incurred wholly and exclusively for the purposes
of the business and must not be expressly excluded or regulated. For example,
there are special rules relating to such matters as company cars, pensions,
entertainment of clients, etc. Capital expenditure does not count as an expense;
such expenditure is relieved by a system of capital allowances (essentially
a depreciation allowance).
Capital gains
Capital gains may arise when a company sells a capital item at a profit. Typically,
this will be land and buildings, shares or intellectual property such as a patent
or copyright, etc. The company's corporation tax is assessed on the increase
in value, that is the price received on sale, less the original cost. Incidental
expenses of purchase and sale, the costs of effecting improvements, indexation
and tapering relief can be taken into account, and there are various reliefs
for particular circumstances, such as re-investment, etc., which are presently
beyond the scope of this database.
Basis of assessment
The basis of assessment is the profits (both income and capital gains) made in the company's accounting reference period (ICTA 1988, sec12). The accounting reference period is the period ending with the company's accounting reference date (i.e. the company's financial year). If the period is more than 12 months, special rules apply.
Tax rates
The capital gains are added to the figure for trading profits to give the company's taxable profits.
The corporation tax rates for the 2006-07 financial year are:
Small company rate (profits up to £300,000): 19%.
Full rate (profits over £1,500,000): 30% (note that all the profit is charged at this rate).
If the profits fall between £300,000 and £1,500,000, the first
£300,000 is taxed at 19% and the remainder at 32.5% ('marginal rate').
This gives a tax rate over the total amount of the profits at a sliding scale
between 20% and 30%.
Examples:
Profit of £200,000.
Tax rate = 19%
Tax = 200,000 X 19% = £38,000.
Profit of £2,000,000.
Tax rate = 30%
Tax = 2,000,000 X 30% = £600,000.
Profit of £1,000,000.
Tax rate = 19% on 300,000 and 32.5% on the remainder.
Tax = 300,000 X 19% = 57,000, plus
700,000 X 32.5% = 227,500
Total = 57,000 + 227,500 = 284,500
Tax rate = 28.45%
For the financial year 2000 - 2001 there was a new starting
rate of corporation tax of 10% on profits up to £10,000, with an effective
marginal rate of 22.5% on profits between £10,000 and £50,000. The
other rates remain the same.
Collection
Every company has to submit to the Inland Revenue a corporation tax return, accompanied by a set of accounts and calculating the corporation tax due. For companies with profits up to £1,500,000 the tax is payable 9 months after the end of the company's accounting period. Companies with profits above this figure pay in four instalments at 7, 10, 13 and 16 months after the end of the accounting period.
Losses
There are various provisions for companies to carry losses forward or back and to set the losses from one trade against the profits of another. There are also provisions to enable group relief, that is, where the losses of one company within a group are set off against the profits of another such company. Detailed consideration of loss relief is presently beyond the scope of this database.
Close companies
ICTA 1988, sec414: A close company is essentially one which is under the control of five or fewer 'participators', or participators who are directors. Participators are shareholders, creditors (usually debenture-holders) and others who are entitled to share in the profits of the company.
Because of the wide definitions of participator and the rules affecting 'associates', many private companies are close companies.
There are special taxation rules for close companies. These include:
Loans to participators
If a loan is made by the company to a participator it must within nine months pay a levy to the inland revenue of 25% of the loan. When the loan is repaid, so is the levy. The levy cannot be recovered if the loan is written off or released, and the participator is then treated as having received income net of basic rate tax. Note that there are Companies Act restrictions on companies making loans to directors.
Benefits in kind
If the participator is a director or other employee taxed under Schedule E on income from the company, benefits in kind will be taxed under that schedule. If not, the benefit is treated as a distribution and taxable as if a dividend.
Gifts
A gift by a close company may be treated as a gift by all the participators in proportion to their interests in the company. The participators may be liable to Inheritance Tax. If the participators do not pay, the company may be made liable.
Close investment holding companies
Such companies are liable to corporation tax at full rate instead of small company rate.
Taking money out of the company
The owners of a company will usually want to take some of the company's profit out of the business for themselves. There are two ways of doing this:-
Payment of salaries or directors' fees
The company can pay its directors (or any other employees) wages, salaries or fees for the work they do and this is taxed under Schedule E in the same way as all employees' earnings. See further Topic 146: What tax do company directors pay?
Payment of dividends
When the company has made profits (after meeting all its expenses, including employees' and directors' remuneration) it may decide to retain all or part of these in the business or to distribute them to the shareholders as a dividend. This dividend is not an expense of the company and cannot be set off against its profits. See further Topic 145: What tax do shareholders pay?
Related topics
The Inland Revenue website gives fuller details.
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