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
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
| Small Companies Rate * | 19% | 20% | 21% | 21% | 21% | 20% | tba |
| Marginal Relief Fraction | 11/400 | 1/40 | 7/400 | 7/400 | 7/400 | 3/200 | 3/200 |
| Main rate of Corporation Tax | 30% | 30% | 28% | 28% | 28% | 26% | 25% |
| Special rate for unit trusts and open-ended investment companies | 20% | 20% | 20% | 20% | 20% | 20% | tba |
For the years 2006 to 2012 the following limits have been the same:
- Small companies corporation tax limit = £300,000
- Marginal relief lower limit = £300,000
- Marginal relief upper limit = £300,000
(*) Small businesses are those classed with profits of less than £300,000 which has been the same figure since 1994. The main rate of corporation tax is charged on profits over £300,000 and for those with profits between £300,000 and £1,500,000 a marginal tax relief is provided by a predetermined fraction. NB: The marginal rate fraction for 2011/2 is estimated at present.
Calculating Marginal Relief
If your profits are between £300,000 and £1,500,000 then you will receive a small tax credit based upon the fraction noted above (which is slowly decreasing) on the difference between your profits and the upper marginal relief limit.
Example for 2011/12 for profits of £1,000,000
- Step 1: Calculate total taxable profits = £1,000,000
- Step 2: Calculate Corporation Tax due at the main rate of 25% = £250,000
- Step 3: Subtract taxable profits from upper limit for Marginal Small Companies' Relief £1,500,000 - £1,000,000 = £500,000
- Step 4: Multiply by the MSCR fraction 7/400 to calculate the relief you can claim = £500,000 x 3 divided by 200 = £7,500
- Step 5: deduct the relief from the Corporation Tax due = £250,000 - £7,500 = £242,500
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.
In the budget of March 2011 the main rate of corporation tax is set to reduce to 23% over the next few years.
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).
Updated from 2011 budget