Taxing Terms: Corporation Tax Explained

September 8, 2016 by in category Blog tagged as , , , , , with 0 and 35

In the first of a series of the Taxing Terms beginners’ guide to UK taxation, we look at Corporation Tax

Corporation Tax calculators image

The launch of Corporation Tax in 1965 has harmonised tax rates for businesses. Today, exponents of low taxation see lower rates of Corporation Tax as key to improving competitiveness. Image by Kurhan (via Shutterstock).

Corporation Tax has never been out of the news agenda this year [2016]. All the more so given recent stories with Apple, the Panama Papers, and the speculation of Britain, post-Brexit, becoming a Tax Haven. For businesses and individuals alike it is an emotive issue. Some commentators think low rates enable companies to invest in their plant machinery and computers, and employees.

Whatever route we take five or ten years from now, Corporation Tax isn’t going to go away. Introduced on the 01 April 1965 by Chancellor of the Exchequer, James Callaghan, it was part of the 1965 Finance Act. This Act established a separate system of corporate taxation. Within the same Bill was the introduction of Capital Gains Tax (which we shall focus on in a future part of Taxing Terms).

Before 1965, companies were taxed at the same rate as Income Tax. Back in 1951, the standard rate was 50% in the pound (today, the top rate of Income Tax is 45%, recently reduced from 50%). Company income tax was calculated against the liability of a shareholder who received company dividends.

A dividend would be taxed at 50%, the one-time standard rate. If s/he was a high-rate Income Tax taxpayer, a Surtax would have been applied to their dividends (the liability being placed on the individual rather than the company). There was also a Profits Tax, launched by the then-Chancellor of the Exchequer, Sir Stafford Cripps in 1951. A 10% rate was added to undistributed profits with the then standard rate of 50% applied to distributive profits.

1965 saw an end to the confusion. Over time, there had been differential rates for small businesses. Nowadays, the Corporation Tax rate is 20%, whether you run an off-licence in Woodseats or a superstore chain in Wakefield. It is set to fall to 17% in 2020.

Historical and Future Corporation Tax Rates

Year: Starting Profit Rate (2000 – 05) Small Profit Rate Limit and Rate (1973 – 2015) Standard Rate Chancellor of the Exchequer
1973 N/A £25,000 (52%) 52% Anthony Barber
1979 N/A £70,000 (52%) 52% Denis Healey/Geoffrey Howe
1986 N/A £100,000 (29%) 35% Nigel Lawson
1996 N/A £300,000 (24%) 33% Kenneth Clarke
2000 £10,000 (10%) £300,000 (20%) 30% Gordon Brown
2009 N/A £300,000 (28%) 28% Alistair Darling
2015 N/A Abolished 20% George Osborne
2017 N/A Abolished 19% Phillip Hammond

Source Rules

UK Corporation Tax has five source rules:

  • Schedule A, which is based on income from any land owned in the UK.
  • Schedule D, based on taxable income which doesn’t fall in any other schedule.
  • Schedule F, any income from UK dividends.
  • Changeable gains, which are defined by legislation that is not taxed as a source of income.
  • Controlled Foreign Company Charges, where profits are made by controlled foreign companies where no exemption applies.

Tax Returns and Deadlines

Limited companies need to file two sets of accounts in the first year of trading. If the company started trading a month before the HMRC grants their incorporation date, they would need to send a tax return for the period leading up to their incorporation date, followed by their annual return. If the HMRC’s allocated incorporation date is the 26 May 2016, the second set of accounts would cover the period till the 25 May 2017. The deadline for subsequent tax returns is twelve months after the end of your accounting period (which in the case of our example is the 25 May 2018).

For Further Information…

We can help you with all things of a Corporation Tax related nature if, for instance, you need a tax return doing or a free no-obligation quote. You can either fill in our quick contact form at the bottom of this page or call us on 0114 240 2392. We’ll be happy to help you.

References:

  • GOV.UK website: Corporation Tax Rates and Relief (HM Government, 2016).
  • FigureWizard website: Corporation Tax Rates: a list of all rates detailed since 1971 (FigureWizard Ltd, 2012 – 2016).

Peach Wilkinson Accountants, 08 September 2016.

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