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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.

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Category: Taxation

10 Responses to “What is Corporation Tax?”

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  3. James Green says:

    A lot depends on your personal circumstances but it is likely that there is something you could do to legally avoid CGT. However whilst many people go down the route of using offshore companies this can in fact be illegal. The reason for this is that the UK (and most other countries) have anti avoidance legislation. So if a UK resident establishes a Panama company (to use your example) they should declare that to HMRC and pay CGT on gains made by the company even if they do not actually receive the money in the UK. Of course many people do not make the declaration and take the risk that they will not be found out. No reputable professional advisor could suggest that you take this course.

    However, there are legal ways to avoid CGT but these are dependent on personal circumstances and so I cannot go into them here. If you want to discuss it with me contact me via my other website http://www.jamesgreenandco.co.uk

  4. Adam says:

    Hi,
    Is it possible to buy and sell US stock without having to pay UK CGT? would I have to leave the UK or is it possible to set up a company in panama for example and carry out my trades under that company’s name?

    thanks

  5. James says:

    In general John it should be possible for you to set up an Isle of Man company and manage it in such a way that you can legally avoid UK corporation tax. However it isn’t quite as easy as it sounds as even with “mind and management” outside the UK it could still be possible for HMRC to claim that the IoM company has a “permanent establishment” in the UK by the use of a virtual office. I’d have to know much more about what you are selling, what input the UK “office” has, and see the contract between you and the UK office provider.

    Do contact me on james@jamesgreenandco.co.uk to take this further.

    Regards

    James

  6. John Grahame says:

    Interesting article. I run an online business and am thinking about setting up an IoM company. 99% of clients are in the UK and we have a UK virtual office and 1 member of staff there already. However, I will be the company director and I live elsewhere in Europe, and the company and majority of the management of the business will be done where I live too. So, with the majority of the management and control of the business done outside the UK and with only the sales taking place in the UK with UK clients does that mean UK Corporation Tax can probably be avoided?

  7. JGOffshore says:

    Well Leo in practice it makes little difference where a company is resident as to what expenses are allowable for working out the tax due. This is even the case in the Isle of Man as whilst Manx companies pay tax at zero percent you still need to work out the taxable profit as this will affect the tax due by Isle of Man resident shareholders.

    The rules for determining a company’s accounting or trading profit and its taxable profit are different, and are designed with different considerations.

    When working out the trading profit a your accountants will use on of the established international accounting standards laid down by the appropriate Companies Acts, Stock Exchange Rules and so on. These are designed to give a “true and fair view” of the financial strength (or weakness) of the company at the date the accounts were drawn up to. Its fairly imprecise concept hence the need for published standards. And yes, using one standard can give a different result than using another, but so long as it is clear which standard is being applied the theory is that financial analysts will know where the company is at.

    However the rules for determining taxable profit are set out in tax law. In the case of the UK these include the Income and Corporation Taxes Act, 1988 and the various annual Finance Acts. In addition case law has to be taken into account. This results in far more specific rules and since the tax regulations are different to the accounting rules, a different profit figure results.

    As I say there are some differences in detail. For example if a UK company makes a capital gain on the sale of a property then it gets taxed as if this were normal income as part of its Corporation Tax bill. However as there is no concept of Capital Gains Tax in Isle of Man Law (in fact it was only introduced in the UK in 1965) then any such gain is not included when computing the taxable profit of an Isle of Man company.

    Apart from that, when it comes to general costs and expenses there is not much difference no matter where your company is taxable. These include:

    Depreciation on tangible fixed assets
    Amortisation of goodwill on consolidation
    Losses on sale of fixed assets
    Entertainment expenses
    General provisions (e.g. for bad debts)
    Legal and professional fees on acquisitions of a capital nature (e.g. a new factory)
    Political and most charitable donations unless made under Gift Aid
    Fines, generally, e.g. for late payment of tax, NIC or VAT or for contravention of the Companies Act, Factories Acts, Health & Safety Acts etc.

    I hope that helps, Leo.

  8. Leo says:

    Very interesting indeed. Thanks. Can you explain what costs can be deducted from a business registered in offshore finance centre like the Isle of Man?

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