Learning Outcomes
After reading this article, you will be able to explain how corporation tax is calculated, paid, and collected in the UK. You will understand the steps for determining taxable profits, the deadlines for payment and filing, and the consequences of late compliance. You will also be able to identify the main anti-avoidance rules, including the General Anti-Abuse Rule (GAAR), and apply these principles to SQE1-style questions.
SQE1 Syllabus
For SQE1, you are required to understand the practical aspects of corporation tax as it applies to companies in England and Wales. In your revision, focus on:
- The calculation of corporation tax, including income profits, chargeable gains, and allowable reliefs.
- The process and deadlines for payment and filing of corporation tax returns.
- The consequences of late payment or late filing.
- The operation of anti-avoidance rules, including the General Anti-Abuse Rule (GAAR).
- The distinction between tax avoidance and tax evasion, and the legal implications for companies.
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.
- What is the standard deadline for a company to pay its corporation tax after the end of its accounting period?
- Which company form is subject to corporation tax in the UK: a partnership, a sole trader, or a limited company?
- What is the General Anti-Abuse Rule (GAAR) and how does it affect corporation tax planning?
- What are the consequences for a company that files its corporation tax return late?
- How are capital gains treated for corporation tax purposes?
Introduction
Corporation tax is a direct tax charged on the profits of companies and certain other organisations in the UK. It is administered by HM Revenue & Customs (HMRC) and governed primarily by the Corporation Tax Act 2010. Understanding how corporation tax is calculated, paid, and collected is essential for SQE1, as it underpins many aspects of business law and practice.
Companies Liable to Corporation Tax
Corporation tax applies to UK-resident companies and certain non-UK companies with a permanent establishment in the UK. This includes limited companies, public limited companies, and some unincorporated associations. Sole traders and partnerships are not subject to corporation tax; instead, they pay income tax and capital gains tax.
Key Term: corporation tax
A tax charged on the taxable profits of companies and certain other bodies, calculated and collected by HMRC.
Calculation of Corporation Tax
Corporation tax is charged on a company’s total taxable profits for each accounting period. The calculation involves several steps:
Income Profits
A company’s income profits are calculated by subtracting allowable business expenses from its trading income and other sources of income (such as rental or investment income).
Key Term: income profits
Profits from a company’s trading and other income sources, after deducting allowable expenses.
Chargeable Gains
Companies are also taxed on capital gains, known as chargeable gains, which arise from the disposal of assets such as property, shares, or equipment. The gain is the difference between the sale proceeds and the original cost (plus certain allowable costs).
Key Term: chargeable gain
The profit made by a company on the disposal of a capital asset, subject to corporation tax.
Reliefs and Deductions
Companies can reduce their taxable profits by claiming reliefs, such as trading loss relief and capital allowances (tax relief for depreciation on qualifying assets). Capital allowances are deducted from trading profits before calculating the tax due.
Key Term: capital allowance
A deduction companies can claim for the depreciation of certain assets, reducing taxable profits.
Total Taxable Profits and Tax Rate
The company’s taxable profits are the sum of its income profits and chargeable gains, minus any reliefs and deductions. The main rate of corporation tax is set by the government and may change from year to year.
Worked Example 1.1
A company has trading profits of £120,000, a chargeable gain of £30,000, and claims capital allowances of £10,000. What are its taxable profits and how much corporation tax is due if the rate is 25%?
Answer: Taxable profits = £120,000 + £30,000 – £10,000 = £140,000. Corporation tax due = £140,000 × 25% = £35,000.
Payment and Filing of Corporation Tax
Companies are responsible for self-assessing their corporation tax liability and paying the correct amount by the due date.
Payment Deadlines
Most companies must pay their corporation tax within nine months and one day after the end of their accounting period. Large companies (generally those with profits over £1.5 million) must pay in quarterly instalments.
Key Term: accounting period
The period (usually 12 months) for which a company calculates and reports its taxable profits.
Filing Requirements
Companies must file a corporation tax return (form CT600) with HMRC within twelve months of the end of the accounting period. The return must be submitted online and include company accounts and supporting computations.
Key Term: corporation tax return
The form (CT600) submitted to HMRC by a company, detailing its taxable profits and tax due.
Penalties for Late Payment or Filing
If a company fails to pay its corporation tax on time, HMRC will charge interest on the overdue amount. Late filing of the tax return results in automatic penalties, which increase the longer the return is outstanding.
Worked Example 1.2
A company’s accounting period ends on 31 December 2023. By what date must it pay its corporation tax and file its return?
Answer: Payment is due by 1 October 2024 (nine months and one day after 31 December 2023). The return must be filed by 31 December 2024.
Collection of Corporation Tax
HMRC collects corporation tax through the self-assessment system. Companies must calculate their own liability, pay the tax due, and file the return. HMRC may enquire into a return and can amend the assessment if errors are found.
Anti-Avoidance and the General Anti-Abuse Rule (GAAR)
The UK tax system distinguishes between lawful tax planning (tax avoidance) and illegal tax evasion. However, aggressive avoidance schemes are targeted by anti-avoidance rules.
Key Term: General Anti-Abuse Rule (GAAR)
A statutory rule allowing HMRC to counteract tax advantages from arrangements deemed abusive or artificial.
The GAAR enables HMRC to challenge and counteract tax benefits from arrangements that are considered abusive, even if they comply with the letter of the law. Companies must ensure that their tax planning is not only legal but also does not fall foul of GAAR.
Key Term: tax avoidance
Arranging affairs to reduce tax liability within the law, but potentially subject to anti-avoidance rules if arrangements are artificial.Key Term: tax evasion
Illegally concealing income or profits to avoid paying tax, a criminal offence.
Exam Warning
Companies that engage in aggressive tax planning may face HMRC investigation, penalties, and reputational damage if arrangements are found to be abusive under GAAR.
Practical Aspects and Examples
Worked Example 1.3
A company makes a trading loss of £40,000 in the current year. What reliefs are available for this loss?
Answer: The company can offset the loss against total profits of the same accounting period, carry it back to the previous year (subject to limits), or carry it forward to offset against future profits.
Worked Example 1.4
A company files its corporation tax return three months late. What penalty will it face?
Answer: The company will receive an automatic £100 penalty for late filing. If the return is more than three months late, a further £100 penalty applies. Additional penalties apply for longer delays.
Key Point Checklist
This article has covered the following key knowledge points:
- Corporation tax applies to UK companies and is calculated on total taxable profits, including income profits and chargeable gains.
- Companies must self-assess, pay corporation tax by the deadline, and file a corporation tax return with HMRC.
- Capital allowances and trading loss reliefs can reduce taxable profits.
- Late payment or filing leads to penalties and interest charges.
- The General Anti-Abuse Rule (GAAR) allows HMRC to counteract abusive tax arrangements.
- Tax avoidance is legal but may be challenged if arrangements are artificial; tax evasion is illegal.
Key Terms and Concepts
- corporation tax
- income profits
- chargeable gain
- capital allowance
- accounting period
- corporation tax return
- General Anti-Abuse Rule (GAAR)
- tax avoidance
- tax evasion
