Corporation tax is the tax paid by companies on their profits. Unincorporated organisations (such as clubs and societies) also pay corporation tax, if they have taxable income.

Partners in both traditional and limited liability partnerships and sole traders pay income tax instead.

Companies are taxed on the profits made in an accounting period - normally their financial year. However the company going into liquidation or ceasing to trade can also trigger the end of an accounting period.

Tax rates are set for the tax year and where the company’s accounting period and the tax year do not coincide, the profits must be time-apportioned to decide which rate should apply. So, for example, if you made £365,000 profit you would have made an average of £1,000 per day and if the rates changed midway through your accounting period you would pay the appropriate amount – say 200 days at one rate and 165 and the next rate.

Profits can arise from several sources:

1. Trading profits - income from your company’s trading activities, less allowable expenses. For example, if you run a manufacturing or service company, you will have to pay tax on the profits made from selling the goods or services, after allowing for labour, raw material costs, etc.
2. Capital gains - the profits made from selling certain company assets. For example, if you make a profit from selling a shop or factory, it will be taxable unless you reinvest the money.
3. Income from letting out land or buildings.
4. Interest on any money held on deposit. Unlike individuals, companies generally receive interest without tax having been deducted.
5. Most other forms of income or capital gain. For example, any profits made on currency movements.

The total tax due is calculated separately and in general you cannot offset a loss from one source against profit from another.

There is a geographical basis for the tax charge, which depends on where the company is resident for tax purposes.

• Companies resident in the UK pay corporation tax on their worldwide profits.
• Companies resident elsewhere normally pay corporation tax only on their profits from a UK branch or agency. Non-UK profits are generally taxed (at higher or lower rates) elsewhere.

With very, very few exceptions if a company has been registered in England, Wales, Scotland or N. Ireland it will be tax resident in the UK.

A company registered elsewhere in the world will be UK tax resident if it is managed and controlled from the UK. Therefore if you are tempted to set up an offshore company (say in Panama) but run it from the UK the company will be liable to pay tax in the UK – and you would be committing a criminal offence if you didn’t declare the income and pay the tax. Not quite what the sellers of offshore companies would have you believe. But that’s a subject for another post.

This article is designed as a general introduction to what is a very complex piece of legislation. It is my intention to gradually deal with specific areas of Corporation Tax in future postings. However if you have any questions please do post a comment asking for further information or click here to send an email to me and I’ll be pleased to post a specific answer or contact you to discuss your individual circumstances.