Corporation tax - Basis of charge

Learning Outcomes

This article explains the basis of charge to UK corporation tax, including:

• how corporation tax applies to the total profits of companies and certain unincorporated associations;
• the tests for corporate residence, including incorporation and central management and control, and how treaty tie-breakers may modify residence;
• the circumstances in which non-UK resident companies are within the UK charge, focusing on permanent establishments, UK property businesses and UK land-related gains;
• the composition of total profits, distinguishing trading income, property business income, loan relationship profits and chargeable gains, and noting key non-deductible items and capital allowances;
• the separate treatment of gains within the chargeable gains regime and of intangible fixed assets within the corporate intangibles regime, together with significant reliefs such as rollover relief and the substantial shareholdings exemption;
• how statutory accounting periods are determined, how they interact with a company’s period of account, and why accounting periods cannot exceed 12 months;
• the operation of the corporation tax financial year, including time-apportionment of profits when an accounting period spans 1 April and CT rates change;
• the current corporation tax rate structure, including the small profits rate, main rate, marginal relief and the adjustment of thresholds for associated companies and short accounting periods.

SQE1 Syllabus

For SQE1, you are required to understand the basis of charge for UK corporation tax, with a focus on the following syllabus points:

• Identifying chargeable persons and entities for corporation tax purposes (companies and certain unincorporated associations).
• Understanding the territorial scope of corporation tax, including residence and permanent establishment for non-resident companies.
• Knowing the components of taxable profits (total profits), specifically how trading income, property business income, and chargeable gains are determined for corporation tax.
• Appreciating the significance of accounting periods and their interaction with the corporation tax financial year, including apportionment of profits when rates change.
• Recognising the CT rate structure (small profits rate, main rate, and marginal relief) and the impact of associated companies on thresholds.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following entities is generally liable to UK corporation tax?
   1. A sole trader operating in the UK.
   2. A partnership where all partners are individuals resident in the UK.
   3. A company incorporated and managed in the UK.
   4. A charity registered in the UK.
2. On what basis are UK resident companies typically charged to corporation tax?
   1. Only profits arising from UK activities.
   2. Worldwide profits, including income and chargeable gains.
   3. Only chargeable gains arising in the UK.
   4. Only trading profits arising worldwide.
3. A company incorporated in France has a sales office in London which negotiates and concludes contracts on its behalf. Is the French company likely to be liable for UK corporation tax?
   1. No, because it is not incorporated in the UK.
   2. Yes, on its worldwide profits because it trades in the UK.
   3. No, because its central management and control is outside the UK.
   4. Yes, on profits attributable to its UK permanent establishment.

Introduction

Corporation tax is the charge on the profits of companies and certain other bodies (such as clubs and societies structured as unincorporated associations). It is distinct from income tax and capital gains tax, which apply primarily to individuals and partnerships. The core CT statutes are the Corporation Tax Act 2009 (CTA 2009) and Corporation Tax Act 2010 (CTA 2010), supported by the Taxation of Chargeable Gains Act 1992 (TCGA 1992) for companies’ chargeable gains.

CT applies to “total profits” of a company arising in its accounting period. Total profits comprise income profits (including trading profits and property business profits, and other income such as profits from loan relationships) and chargeable gains. Certain types of income (such as most distributions from other companies) are exempt from CT in many cases, while depreciation is not deductible and is replaced by capital allowances or other statutory reliefs.

Key Term: Profits (for Corporation Tax)
The sum of a company's income (e.g., trading profits, property business profits, investment income as defined in CTA) and its chargeable gains arising in an accounting period, computed under corporation tax principles and after deducting allowable expenses and reliefs.

Chargeable Persons and Territorial Scope

The liability to UK corporation tax depends primarily on a company’s residence status and, for non-resident companies, whether the company has a UK permanent establishment or UK property business income.

UK Resident Companies

A company is resident in the UK for CT purposes if either:

• It is incorporated in the UK; or
• Its central management and control (CMC) is exercised in the UK (a common law test focusing on where high-level strategic decisions are made).

Key Term: UK Resident Company
A company liable to UK corporation tax on its worldwide total profits (income and chargeable gains), determined either by its place of incorporation or by the location of its central management and control.

Residence can be affected by double tax treaties. A company that is dual-resident under domestic rules may be treated as resident in only one jurisdiction under a treaty “tie‑breaker” (commonly the “place of effective management” or a competent authority agreement). In the absence of such treaty application, UK resident companies are liable to CT on worldwide total profits, with reliefs and credits available to mitigate double taxation according to statutory and treaty rules.

Key Term: Central management and control
The common law test of corporate residence focusing on where the company’s top-level strategic decisions are made (typically at board level), not merely where day-to-day operations occur.

Non-UK Resident Companies

A company that is not resident in the UK may nevertheless be liable to UK corporation tax:

• On trading profits attributable to a UK permanent establishment; and/or
• On UK property business profits (since April 2020, non-resident landlord companies are within CT rather than income tax); and
• On chargeable gains from direct disposals of UK land or on certain indirect disposals of interests in UK property-rich entities (with specific rules governing scope and exemptions).

Key Term: Permanent Establishment
A fixed place of business in the UK through which a non-resident company carries on its trade (such as a branch, office, factory, or workshop), or the activities of a dependent agent in the UK who habitually has authority to and does conclude contracts on behalf of the company. Activities that are merely preparatory or auxiliary do not usually amount to a permanent establishment. An independent agent acting in the ordinary course of its business will not create a PE.

If a non-resident company has a UK permanent establishment, it is liable to CT on the profits attributable to that PE on an arm’s length basis. This includes trading income arising directly or indirectly through the PE, income from property or rights used by the PE, and certain chargeable gains on the disposal of assets used for the purposes of the PE’s trade. The UK also taxes non-resident companies on UK property business profits and on gains related to UK land (and, in defined circumstances, shares in property‑rich entities) even where the company has no PE.

Worked Example 1.1

Global Solutions Ltd is incorporated in England and has offices in London and New York. TechCorp Inc. is incorporated in the USA but has a branch office in Manchester that independently negotiates and concludes sales contracts for the UK market. Which company is liable for UK CT and on what basis?

Answer:
Global Solutions Ltd is a UK resident company because it is incorporated in the UK. It is liable for UK CT on its worldwide profits (from both London and New York). TechCorp Inc. is not UK resident, but its Manchester branch office constitutes a permanent establishment in the UK. Therefore, TechCorp Inc. is liable for UK CT on the profits attributable to its UK branch activities.

Worked Example 1.2

NordRent SA is incorporated and managed in Luxembourg. It owns an office building in Birmingham and receives rent, but it has no UK staff and no UK branch. Is NordRent SA within UK corporation tax?

Answer:
Yes. From April 2020, non-resident landlord companies are subject to UK corporation tax on UK property business profits even without a UK permanent establishment. NordRent SA will compute UK property business profits under CT rules and pay UK CT on those profits, with reliefs or treaty provisions potentially available to mitigate double taxation.

Taxable Profits: The Basis of Charge

Corporation tax is charged on a company’s total profits for an accounting period. The computation aggregates income profits and chargeable gains and applies relevant reliefs, deductions, and allowances.

Key Term: Total profits (for Corporation Tax)
The aggregate of a company’s income profits (including trading and property business profits and other taxable income streams such as profits from loan relationships) and chargeable gains for an accounting period, less permitted reliefs and losses.

Income Profits

Income profits are computed according to corporation tax principles in CTA 2009. Key points include:

• Trading income is computed on an accruals basis, recognising trading receipts and deducting allowable trading expenses incurred wholly and exclusively for the purposes of the trade. Examples of allowable expenses include staff costs, rent, utilities, raw materials, and repairs. Certain items are specifically disallowed (e.g., depreciation, business entertainment, penalties/fines, and corporation tax itself).
• Depreciation is not deductible. Relief for qualifying capital expenditure is given through capital allowances rather than accounting depreciation.

Capital allowances:

• Annual Investment Allowance (AIA) provides a 100% deduction for qualifying plant and machinery up to a statutory cap.
• Writing-down allowances (WDAs) apply at prescribed rates to expenditure pooled into the main rate pool or special rate pool.
• First-year allowances may be available in specified circumstances. Since April 2023, “full expensing” (a 100% first-year allowance for companies on qualifying main-rate plant and machinery) and a 50% first-year allowance for special-rate assets have been introduced and made permanent, subject to detailed conditions.
• Separate regimes apply for intangible fixed assets (CTA 2009, Part 8), loan relationships, derivative contracts, and other specific categories.

Property business income:

• Companies carrying on a property business compute property income profits under CT rules, with deductions for expenses incurred wholly and exclusively for the property business (such as repairs, management fees, and allowable interest where applicable). For non-resident landlord companies, these profits are within CT from April 2020.

Other income:

• Profits and losses on loan relationships and derivative contracts are brought into account under specific statutory regimes.
• Most dividends received by companies are exempt from corporation tax under various distribution exemption categories, though the detailed rules should be checked.

Chargeable Gains

Companies pay corporation tax on chargeable gains. The basic computation is:

• Disposal proceeds less allowable costs (acquisition cost and allowable incidental costs of acquisition/disposal, and enhancement expenditure).
• Indexation allowance applies to adjust certain costs for inflation up to December 2017 (frozen thereafter and not applied to post-December 2017 periods).
• Companies do not have an annual exempt amount. Reliefs may include rollover relief (deferral when proceeds are reinvested in qualifying assets), holdover arrangements in limited cases, group rules for gains, and the substantial shareholdings exemption (SSE) for qualifying disposals of shareholdings in trading companies or trading groups.

Important distinctions:

• Intangible fixed assets (such as goodwill and certain intellectual property) are generally brought within the corporate intangibles regime rather than the chargeable gains rules, leading to an income treatment under CTA 2009 Part 8.
• Special rules apply to UK land and property-rich entities, including for non-resident companies.

Worked Example 1.3

Innovate Ltd, a UK resident company, has the following results for its accounting period:

• Trading income after allowable expenses but before capital allowances: £500,000
• Capital allowances claimed: £50,000
• Sale of an office building (purchased 10 years ago) resulting in a chargeable gain after indexation allowance: £75,000

What are the company's total profits chargeable to corporation tax for the period?

Answer:
Income Profits = Trading income less capital allowances = £500,000 - £50,000 = £450,000

Chargeable Gains = £75,000

Total Profits = Income Profits + Chargeable Gains = £450,000 + £75,000 = £525,000

Innovate Ltd's total profits chargeable to CT are £525,000.

Accounting Periods

Corporation tax is charged on profits arising in a company’s accounting period. Accounting periods are determined by statute and cannot exceed 12 months. The rules define when an accounting period begins and ends (for example, when a company starts trading or acquires a source of chargeable income, at the end of a 12-month period, on the end of the company’s period of account, or on cessation of trade or UK residence).

Key Term: Accounting Period (for Corporation Tax)
The period for which corporation tax is calculated. It begins when a company comes within the charge to CT (e.g., it starts to trade or receives a chargeable source of income) and ends on the earliest of: 12 months from commencement, the end of the company’s period of account, or other statutory end events (such as cessation of trade or change of residence). Accounting periods cannot exceed 12 months.

The corporation tax “financial year” runs from 1 April to 31 March. Where the accounting period spans a change in the CT rate or financial year, profits must be apportioned on a time basis between the relevant financial years and each part charged at the applicable rate.

Key Term: Financial Year (for Corporation Tax)
The CT financial year runs from 1 April to 31 March. CT rates are set for each financial year. If a company’s accounting period straddles 1 April, profits are apportioned between the financial years for rate purposes.

CT rate structure (from 1 April 2023):

• Small profits rate (SPR): 19% for companies with profits up to £50,000.
• Main rate: 25% for companies with profits over £250,000.
• Marginal relief: reduces the effective rate for companies with profits between £50,000 and £250,000.

Thresholds are divided by the number of associated companies (where two or more companies are under common control or one controls the other, subject to detailed rules), and proportionately adjusted for short accounting periods.

Key Term: Associated company
For CT rate thresholds, companies are associated if one controls the other, or both are under common control. The small profits and main rate thresholds are divided by the number of associated companies, and adjusted for short accounting periods.

Worked Example 1.4

Delta Ltd has an accounting period of 12 months ended 30 September 2024 with taxable total profits of £120,000. It has one associated company. What CT rate applies?

Answer:
With one associated company, Delta Ltd has two associated companies in total, so the standard thresholds (£50,000 and £250,000) are divided by 2. The adjusted thresholds are £25,000 (SPR) and £125,000 (main rate). With £120,000 of profits, Delta Ltd falls into the marginal band, so marginal relief applies to reduce the effective rate below 25%. Profits would be apportioned by days if the accounting period straddled 1 April, but here the entire period falls within a single financial year, and marginal relief is computed by the statutory formula.

If an accounting period does not align with the CT financial year and the rate changes, apportion the profits between the two financial years on a time basis and apply the relevant rate structure to each portion.

Key Term: Rate apportionment
When an accounting period spans 1 April, profits are split by time into the old and new financial years, and the rates (including marginal relief rules) for each financial year are applied to the relevant portion.

Revision Tip

Ensure you can:

• Distinguish a UK resident company’s worldwide charge from a non-resident company’s UK charge via permanent establishment and UK property rules.
• Identify total profits components and common disallowable expenses (e.g., depreciation and business entertainment).
• Apply capital allowances to trading computations, and recognise when gains fall under chargeable gains versus the intangibles regime.
• Determine the start and end of accounting periods and apportion profits where rates or financial years change.
• Recognise the current CT rate structure, thresholds, and the impact of associated companies.

Key Point Checklist

This article has covered the following key knowledge points:

• Corporation tax applies to the total profits of companies and certain unincorporated associations.
• A company is UK resident if incorporated in the UK or if its central management and control is exercised in the UK; treaty tie-breakers may affect dual residence.
• UK resident companies are taxed on worldwide total profits; non-UK resident companies are taxed on profits attributable to a UK permanent establishment and, separately, on UK property business profits and specified UK property gains.
• A permanent establishment can be a fixed place of business or a dependent agent with authority to and habitually concluding contracts; independent agents do not create a PE and preparatory/auxiliary activities are excluded.
• Total profits for corporation tax include income profits (trading and property business) and chargeable gains. Depreciation is not deductible; relief is provided via capital allowances and specific regimes (e.g., intangibles).
• Companies do not have an annual exempt amount for gains; reliefs such as rollover relief and substantial shareholdings exemption may apply.
• Accounting periods are defined by statute and cannot exceed 12 months; profits are apportioned if the accounting period straddles 1 April when rates change.
• Current CT rate structure includes a small profits rate, main rate, and marginal relief; thresholds are adjusted for associated companies and for short accounting periods.

Key Terms and Concepts

• UK Resident Company
• Central management and control
• Permanent Establishment
• Profits (for Corporation Tax)
• Total profits (for Corporation Tax)
• Accounting Period (for Corporation Tax)
• Financial Year (for Corporation Tax)
• Associated company
• Rate apportionment