UK Corporation Tax: What You Need to Know

Corporation Tax is a tax levied on the profits of companies operating in the UK. It is an important source of revenue for the UK government and helps fund public services such as healthcare, education, and infrastructure. If you own or run a business in the UK, it is essential to understand Corporation Tax and how it applies to your company.

What is Corporation Tax?

Corporation Tax is a tax on the profits of limited companies, foreign companies with a UK branch or office, and some other types of organizations. It is calculated on the taxable profits of a company for each accounting period, which is usually 12 months. The tax rate for Corporation Tax is set by the government and can change from year to year.

How is Corporation Tax Calculated?

The amount of Corporation Tax a company must pay is calculated based on its profits for the accounting period, minus any allowable expenses, allowances, and reliefs. The current rate of Corporation Tax in the UK is 19%, which is one of the lowest in the G7.

Companies must file a Corporation Tax return and pay any tax due within nine months and one day of the end of their accounting period. Failure to file a return or pay tax on time can result in penalties and interest charges.

Who is liable for Corporation Tax?

Any company or organization that is incorporated in the UK or carries out business in the UK is liable for Corporation Tax on their taxable profits. This includes both private and public limited companies, as well as non-profit organizations and charities that generate income from trading activities.

Foreign companies that have a permanent establishment in the UK, such as a branch or office, are also liable for Corporation Tax on profits derived from their UK activities. However, if a foreign company does not have a permanent establishment in the UK, it is only liable for Corporation Tax on profits derived from certain UK activities, such as selling goods or services to UK customers.

What are the allowable expenses, allowances, and reliefs?

When calculating Corporation Tax, companies are allowed to deduct certain expenses from their profits to reduce their tax liability. These include:

• The cost of goods sold or materials used in production
• Wages and salaries of employees
• Rent and utilities for business premises
• Interest on business loans and overdrafts
• Depreciation and amortization of assets
• Research and development costs

In addition to these expenses, there are also several allowances and reliefs available to companies that can further reduce their tax liability. These include:

• Annual Investment Allowance (AIA) – allows companies to deduct the full cost of certain types of capital expenditure, such as plant and machinery, from their taxable profits
• Research and Development (R&D) Relief – allows companies to claim additional tax relief on qualifying R&D expenditure
• Patent Box Relief – reduces the Corporation Tax rate to 10% on profits from patented inventions and certain other intellectual property
• Capital Allowances – allow companies to claim tax relief on certain types of capital expenditure, such as the cost of buying or improving business premises

Why is Corporation Tax Important?

Corporation Tax is an essential source of revenue for the UK government, contributing significantly to funding public services such as healthcare, education, and infrastructure. The tax also helps to create a level playing field for businesses operating in the UK, as it ensures that all companies pay their fair share of taxes based on their profits.

Furthermore, Corporation Tax plays an important role in supporting economic growth and investment. The UK government provides various incentives and reliefs to encourage businesses to invest and innovate, such as the Annual Investment Allowance and R&D Relief. These incentives help to boost business growth and create jobs, which in turn supports the wider economy.

Moreover, Corporation Tax is a vital tool in maintaining the UK’s international reputation as a destination for business investment. By ensuring that companies pay their fair share of taxes, the UK can maintain its position as a transparent and attractive location for businesses to operate in.

What are the recent changes to Corporation Tax?

In March 2021, the UK government announced significant changes to Corporation Tax, aimed at supporting businesses impacted by the COVID-19 pandemic. From April 2023, the Corporation Tax rate will increase to 25% for companies with profits over £250,000. However, small businesses with profits of £50,000 or less will continue to be taxed at the current rate of 19%, and there will be a tapering system for businesses with profits between £50,000 and £250,000.

The government also announced a new Super Deduction scheme, which allows companies to claim a 130% tax deduction on qualifying capital investments such as machinery and equipment. This incentive is designed to encourage businesses to invest and modernize and is expected to provide a significant boost to the economy.

UK Corporation Tax In Summary

Corporation Tax is a tax on the profits of companies operating in the UK and is an important source of revenue for the government. Companies must file a Corporation Tax return and pay any tax due within nine months and one day of the end of their accounting period. Any company or organization that is incorporated in the UK or carries out business in the UK is liable for Corporation Tax on their taxable profits.

When calculating Corporation Tax, companies are allowed to deduct certain expenses from their profits to reduce their tax liability. Additionally, there are various allowances and reliefs available to companies that can further reduce their tax liability. These include the Annual Investment Allowance, Research and Development Relief, Patent Box Relief, and Capital Allowances.

Corporation Tax is important because it helps to fund public services, creates a level playing field for businesses operating in the UK, supports economic growth and investment, and maintains the UK’s international reputation as a destination for business investment.