Corporation Tax in the UK

Learn about corporation tax and what it implies for businesses, as well as how to calculate it, file a corporation tax return, and when to pay it.

Сorporation Tax: What Is It?

The income and capital profits of a UK firm are subject to UK corporation tax. Corporation tax is currently set at 19 % for all companies. 

What Will Change in 2023? 

For companies with income over £50,000, the tax rate will rise to 25% in April 2023. Companies with profits between £50,000 and £250,000 will be eligible for a marginal amount of tax relief.

Corporation Tax is due on profits from conducting business as:

• A limited company
• A UK branch or office of a foreign corporation
• An unincorporated association, such as a community organisation or a sports club.

From the sum of all trade receipts, the profits earned from trading are deducted to account for tax benefits and expenses incurred solely for trading. Trading profits are taxed according to the accounting treatment, which is based on an accruals-based system. Capital gains are taxed traditionally.

When Should I Pay Corporation Tax?

There are two ways to pay corporation tax in the UK: either nine months after the accounting period ends (for corporations making less than £1.5 million) or in four equal instalments (for corporations making more than £1.5 million). If a company's annual taxable profits are greater than £20 million, it is compelled to make payments in the third, sixth, ninth, and twelve months of the year. When a company is part of a larger group, the threshold will be divided by the total number of companies in the group.

Losses

Profits and losses from the same or a previous accounting period can be offset against losses incurred in the current or subsequent period, or losses can be carried forward and offset against future profits derived from the same trade. Only capital gains from the same period or later periods can be used to offset capital losses.

Groups can deduct losses from one group company against the profits of another group company, as long as the losses are carried over from one group company to the other. However, corporations with annual profits of more than £5 million will only be allowed to balance 50% of their profits against losses carried forward in a single tax year.

Interest Rates

Interest paid by a UK company is deductible in the calculation of its profits, subject to specific anti-avoidance provisions. On an accrual basis, most deductions are broadly available.

The capacity of companies to deduct interest payments from their taxable profits is restricted by a fixed ratio requirement. Net interest expense deductions are limited to 30% of a group's pre-interest, tax, depreciation, and amortisation earnings in the United Kingdom (EBITDA). Groups having net UK interest expenses greater than £2 million are exempt from the rule.

Goodwill and Intellectual Property (IP) Rights

Intangible assets, such as goodwill and intellectual property, are generally taxed in the same way they are treated in the books. This means that amortising intangible assets can be eligible for tax benefits under certain conditions. Goodwill and customer-related intangibles acquired in the acquisition of an asset are only eligible for a limited amount of relief.

Companies can choose to tax their profits at a lower rate if they can prove that the profits are attributable to patents that meet certain criteria.

Royalties

Companies in the United Kingdom can deduct the cost of royalties paid to authors, provided they don't exceed a market rate. The deduction may be restricted or even cancelled if there is a tax on diverted profits. Certain royalty payments to non-UK citizens may require the deduction of tax at the basic rate of 20%. In addition to copyright, design rights, and patent royalties, UK companies are obligated to deduct tax from payments made in respect of trademarks and brand names.

A non-UK resident who isn't also a resident of a country with whom the UK has a double tax treaty that includes a non-discrimination clause on gross income from intangible property held in low-tax countries and whose income can be linked to sales in the UK will be subject to income tax as of April 6, 2019.

Depreciation

To calculate corporation taxes, depreciation on fixed assets is not allowed. Capital expenditure on plants and machinery, for example, is allowed to be written down at a defined rate. Each company has an annual investment allowance (AIA) that provides complete tax reduction for the purchase of qualifying plants and machinery each year. There is a one-year extension to the AIA. If a company is a member of a group, the group can only have one AIA.

A 'super-deduction' of 130 % is available for new machinery and equipment from April 1, 2021, through March 31, 2023, allowing it to qualify for the 18% "main rate" of capital allowances instead. There is a 50% initial allowance for spending on 'special rate' assets that would have otherwise qualified for the lower % limit. Taxpayers who claim the % special rate expenditure deduction or super deduction face an immediate balancing charge when they sell their assets.

Capital expenditures on certain structures and buildings are eligible for a structures and buildings allowance. Over the course of 50 years, a 2% annual allowance will be made accessible to employees.

Transfer Pricing

The UK's transfer pricing legislation gives HMRC the authority to adjust a UK company's profits for tax purposes if it pays more or less than the market rate for products or services provided by or to non-arm’s length enterprises.

Distributions

After-tax profits are used to pay dividends. When a company distributes dividends, it does not have to pay any taxes. An annual dividend tax allowance is available to individuals. Dividends earned up to a certain sum, currently fixed at £2,000, are exempt from taxation. Dividend income exceeding the exemption will be subject to income tax at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

Diverted Profits Tax (DPT)

The DPT is aimed at boosting the UK's tax revenue from multinational corporations. DPT may, under certain circumstances, restrict or forbid a tax deduction for royalties or other payments made to a foreign-affiliated company.

Tax Avoidance

In 2013, a general anti-abuse rule (GAAR) was implemented. This gives HMRC the ability to combat what it calls "abusive" tax planning.

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