4.7 Corporation Tax

Corporation Tax: basis of charge

Corporation Tax (CT) is charged on the taxable profits of a company (and of an LLP that has corporate members, on those members' shares) for an accounting period. A company that is UK resident (incorporated in the UK, or centrally managed and controlled in the UK) is charged on its worldwide profits, with double-tax relief where the question provides a treaty or unilateral credit. A non-UK resident company is charged on profits of a UK permanent establishment and on certain UK-land income and gains. Do not apply Income Tax rates to a company, and do not apply CGT to a company.

Taxable profits are, in outline: income profits of the trade and of other income sources, plus chargeable gains, minus allowable deductions and reliefs. Trading profits start from the accounts and are then adjusted. Expenditure is allowable for the trade only if it is incurred wholly and exclusively for the purposes of the trade and is not capital (capital expenditure may instead attract capital allowances if the asset qualifies). Debits that are private, or that have a dual purpose that cannot be dissected, are disallowed. Entertaining business customers is a classic disallowance. A salary to a director is allowable if it is a genuine earning of the office; a dividend is not.

Chargeable gains of a company are computed on CGT-like principles (proceeds minus allowable expenditure) and then brought into the CT computation. Indexation allowance is only a historic residue for pre-2018 expenditure; do not invent an indexation factor. Group-wide no gain / no loss transfers and the degrouping charge are outline anti-avoidance / grouping mechanics: assets can move intra-group without an immediate gain, but leaving the group within the statutory period can crystallise the deferred gain.

Main CT reliefs — again, conditions not rates:

• Trading loss relief: set a trading loss against other profits of the same accounting period, carry back to the previous 12 months (or a longer statutory window if the question invokes the temporary extension), or carry forward against later profits. Group relief lets a surrendering company surrender losses to a claimant company in the same 75% group for the overlapping period.
• Capital allowances on qualifying plant and machinery (and structures-and-buildings allowances where the question identifies a qualifying building). The annual-investment or writing-down figures are given if a computation is required.
• Research and development relief or credit for qualifying R&D expenditure — know that a dedicated regime exists and that the company must have qualifying staff, consumable, or contracted R&D activity; do not invent the credit percentage.
• Qualifying charitable donations are a deduction against total profits.
• Substantial shareholding exemption can exempt a gain on a disposal of a trading subsidiary where the 10% / 12-month conditions are met.

The charge to tax applies the CT main rate and, where relevant, the small-profits rate and marginal relief. Those percentages and the lower and upper limits are given in the question. Related 51% group companies share the limits; the question will say how many related companies exist if that matters.

Payment, collection and distributions

A company files a Company Tax Return (CT600) and pays CT to HMRC. Filing and payment are different deadlines. Companies that are not required to pay by quarterly instalments must pay CT 9 months and 1 day after the end of the accounting period. Companies whose taxable profits exceed the large-company threshold (and very large companies above a higher threshold) pay by quarterly instalments. Both profit thresholds, and any related-51% company adjustment, are supplied in the question if you must classify the company. Interest runs on underpayments and overpayments. Late filing attracts flat-rate and tax-geared penalties even if no CT is due.

Tax treatment of distributions. A dividend or other qualifying distribution is not deductible in the company's CT computation. It is paid out of profits that have already been (or will be) charged to CT. The shareholder is then charged to Income Tax on dividend income (or, if the shareholder is a company, an exemption for distributions from another company often applies). A distribution in a winding up is generally a capital receipt in the shareholder's hands (CGT), not a dividend, unless anti-avoidance treats a "phoenix" series of liquidations as income. A company purchase of its own shares from an individual shareholder in an unquoted trading company can be treated as capital rather than as a distribution if the statutory trade-benefit and connection-break conditions are met; otherwise it remains an income distribution. If the facts are thin, treat a cash dividend during life as a non-deductible distribution plus shareholder dividend income.

Outline CT anti-avoidance

Functioning knowledge is the map, not the full legislation:

• Close companies (broadly, companies controlled by five or fewer participators, or by participator-directors) face extra charges. A loan to a participator that is not repaid within the statutory period produces a s.455 CT charge on the company (the rate is given if you must compute it). Write-off of the loan can produce income tax on the participator.
• Transfer pricing requires arm's-length pricing on provision between connected persons; it can apply even to two UK companies.
• GAAR applies to abusive CT arrangements.
• Hybrid mismatch and diverted-profits rules attack intra-group deductions that fall into a gap or profits that have been artificially diverted from the UK.
• Transactions in securities and phoenixism targeted rules attack repeated incorporation-and-liquidation extractions designed to turn what is in substance income into a capital distribution.

If directors have extracted value as a loan rather than as salary or dividend, start with s.455 and the employment-income analysis, not with VAT.