Corporation Tax

The phrase "corporation tax" is used to describe effectively the income tax paid by businesses in terms of general corporate taxation.

The tax rates change from time to time as different budgets are introduced but corporation tax is different from capital gains tax and VAT.

Who Pays Corporation Tax ?

All limited companies in the UK will pay taxes on yearly profits at a pre-determined rate expressed as a percentage. Other organisations such as clubs and associations also have to pay this type of tax.

Profits for companies are normally expressed as EBIT earnings before interest and tax and accountants can help businesses understand what type of deductions can legally be made against profits to reduce any tax liability.

The following types of organisations must pay corporation tax in the UK:

Limited companies incorporated in the UK, foreign-based companies with a permanent place of business in the UK, members’ clubs, such as social clubs, sports clubs and holiday clubs, societies, such as friendly societies and provident societies, associations, such as housing associations and trade associations, co-operatives, other unincorporated associations, groups of individuals carrying on a business that is not a partnership, charities, or companies that are subsidiaries of - or wholly owned by - a charity, NHS foundation trusts if they are carrying out significant commercial activities that are not part of core health care delivery, such as running a commercial laundry.

Tax Rates For 2006 - 2009

These are the corporation tax rates for financial years starting on 1 April

Small Companies Rate *

	2006	2007	2008	2009
19%	20% *	21% *	21% *
Small Companies Rate can be claimed by qualifying companies with profits at a rate not exceeding	£300,000	£300,000	£300,000	£300,000
Marginal Small Companies Relief Lower Limit	£300,000	£300,000	£300,000	£300,000
Marginal Small Companies Relief Upper Limit	£1,500,00	£1,500,00	£1,500,00	£1,500,00
Marginal Small Company Relief (MSCR) Fraction	11/400	1/40	7/400	7/400
Main rate of Corporation Tax	30%	30%	28%*	28%*
Special rate for unit trusts and open-ended investment companies	20%	20%	20%	20%

The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply.

The Budget 2007 announced a staged increase in the small companies rate of Corporation Tax from 19 per cent to 20 per cent from April 2007, 21 per cent from April 2008 and 22 per cent from April 2009. However, the increase from 21 per cent to 22 per cent from April 2009 has been deferred until April 2010. This deferral was announced by the Chancellor in his November 2008 Pre-Budget Report and will apply from 1 April 2009.

Note (*) For companies with ring fence profits the small companies' rate of tax on those profits remains at 19 per cent and the MSCR fraction 11/400 for financial years starting 1 April 2007, 2008 and 2009, and the main rate 30 per cent for financial years starting on 1 April 2008 and 2009. Ring fence profits mean the income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf.

Profits Exempt From Corporate Tax

Some organisations are exempt from corporation tax under certain HMRC rules.

Charities are exempt from paying corporation tax so long as they can satisfy HMRC that the income is applied to charitable purposes, for example, trading profits generated where those profits arise from and are applied to charitable purposes, profits from any fundraising events provided that those profits are applied to charitable purposes.

When To Inform HMRC You Are Trading

If you start a new limited company and you begin to carry on business or trade, you must tell HMRC within three months. The best way to do this is to complete and send in form CT41G (New company details) to HMRC.

HMRC sends a newly formed limited company an 'Introductory Pack' within six weeks of being told by Companies House that a new company exists. This pack contains explanatory notes and forms CT41G (New company details) and CT41G (Dormant company insert). The Introductory Pack is usually sent to your company's registered office. However, even if you don't receive a pack you must still tell HMRC your company or organisation is active, for example carrying on business or trading. You can download forms CT41G (New company details) and CT41G (Dormant company insert).

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