Learning About Corporation Tax

Whereas individuals pay income tax and capital gains tax on their income and gains respectively, UK resident limited companies and other organisations such as clubs, societies, and associations pay just corporation tax, on both. This article discusses corporation tax and is useful reading for those preparing for the CII R03 or AF1 exams.

This article is relevant to examinable tax year 2022/23 and is correct as at 10 January 2023.

Who pays corporation tax?

In addition to UK-based companies and organisations, a company that is incorporated overseas, but whose central management is controlled in the UK, will be deemed to be UK resident and therefore subject to UK corporation tax.

Rates of Corporation Tax

Corporation tax rates are set at the start of each financial year with the financial year starting on 1 April and ending on 31 March. The current financial year is referred to as FY 2022 and a flat rate of corporation tax of 19% applies to all companies.

Dividends received from other UK companies are referred to as franked investment income and are not charged to corporation tax.

How is corporation tax charged and how can it be mitigated?

Corporation tax is charged on a company’s accounting period rather than the financial year. Accounting periods can never be longer than 12 months and are usually the same as the period for which a company makes up its accounts.

From a tax planning perspective, where a company has scope to reduce their income to reduce their taxable profits, perhaps by paying additional pension contributions or bonuses to employees, then they might like to consider doing so. Expenses wholly and exclusively incurred for the purpose of business, except for entertaining expenses and charitable donations under gift aid, can also be deducted.

Companies benefit from indexation allowance for gains made up to December 2017 but not an annual exempt amount. Otherwise, the gain or loss is worked out in the same way as for an individual and then charged to corporation tax. A company’s chargeable gains are added to a company’s income when determining total profits.  Capital losses cannot be offset against trading profit or investment income. However, they can be set against chargeable gains of the same period or carried forward to be set against future chargeable gains.

Relief can be given for trading losses where a claim for loss relief is made within 2 years of the end of the loss-making period. This can be offset against other income and chargeable gains from the same accounting period or, if there are none, carried back to the previous period. Any losses not used in this manner can then be carried forward, but there are restrictions on the relief. Where profits exceed £5m, loss relief is restricted to £5m plus 50% of the excess. The same limit applies to capital losses carried forward. 

Deadlines for returns and payments

Whilst large and very large companies generally make quarterly payments on account, for small- and medium-sized companies, corporation tax is usually due 9 months and 1 day after the end of the company’s accounting period.

For large companies (those with profits of £1.5m or more), quarterly instalments are made in months 7, 10, 13, and 16 following the start of the company’s accounting period.

For very large companies (those with profits over £20m), each instalment is due 4 months earlier.

HMRC imposes penalties for late submission of a company’s self assessment return, which is due 12 months after the end of the accounting period it covers. Interest will be charged on any late tax.

Grab the resources you need!

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Alternatively, you can try one of our AF1 resources, if that is the exam on your horizon.