Corporation tax

Having established a branch or subsidiary the next step is to consider what level of corporate tax liability may arise in the entity. For this, one needs to determine both the applicable rate of tax and the level of taxable profits.

Corporation tax rates year to 31 March

Notes:

1. The profit limits are reduced where there is more than one company under common control in the worldwide group. If there is a parent and a subsidiary under common control the limits are all divided by 2.
2. The rate of tax applicable to a branch will be considered by reference to the combined profit of the branch and the overseas parent. This is only for purposes of determining the appropriate tax rate and only branch profits are taxable in the UK.

Corporation Taxation - Companies

Scope

Companies that are incorporated under UK law, and other companies that are managed and controlled from the UK, are liable to corporation tax on their worldwide profits.

Companies not incorporated under UK law, and not managed and controlled from the UK, are liable to corporation tax on trading profits that they derive from a UK branch or agency. Where there is a double tax treaty between the UK and the country in which such a company is based then the terms of the double tax treaty may modify the extent to which the company is liable to corporation tax. Foreign companies are also liable to UK tax on other sources of income derived from the UK, subject again to the terms of any relevant double tax treaty.
 

Taxable Profits

Corporation tax is charged on a company’s income and chargeable gains for each of its accounting periods. With effect from 1st July 2009 all Foreign and UK Dividends will be treated in the same way and will generally be exempt from UK corporation tax if they fall into an exempt class and anti-avoidance provisions do not apply.
 
The principal part of a trading company’s corporation tax computation is the adjustment of its profits for tax purposes. The starting point is the company’s profit or loss before tax as shown by the statutory accounts. Disallowable expenses (e.g. depreciation and entertaining) are added back and allowances (e.g. tax relief on fixed asset additions) are deducted. Capital receipts and expenses are generally excluded.

The general rule for deductible expenses is that they must be ‘wholly and exclusively’ incurred for the purposes of the trade. Special reliefs, or tax repayments for certain loss making companies, are available in respect of revenue expenditure on research and development. Companies are also liable to corporation tax on their chargeable gains. There is an ‘indexation relief’ available to ensure that tax is levied only on real gains and not on any proportion that is attributed to inflation.

Gains or losses on the disposal of substantial shareholdings in trading companies (10% or more) are exempt where certain conditions are satisfied.

Capital Allowances

Capital allowances allow a business to deduct the cost of capital assets, such as plant & machinery, against taxable income. The rates of allowance generally vary from 10% to 100%. An annual investment allowance of £50,000 is available to a group of companies or a single company effective from 1 April 2008. A new temporary first year allowance of 40% effective from 1 April 2009 will be available for qualifying expenditure incurred in excess of the £50,000 annual investment allowance limit.
 

Calculation of Liability

Corporation tax rates are specified for ‘financial years’, commencing on 1 April. The Financial year 2009, for example, will run from 1 April 2009 to 31 March 2010. If an accounting period ends on some other date, chargeable profits are time-apportioned to financial years. There are different rates of corporation tax depending on the level of profit. A reduced rate of 21% currently applies if profits for a year do not exceed £300,000. The full rate of 28% applies if profits exceed £1,500,000. If profits fall between the lower and higher limits (£300,000 and £1,500,000) a sliding scale formula is used which results in an effective marginal rate of 29.75%.

The higher and lower limits are reduced if the company has ‘associates’ (i.e. companies under the same control anywhere in the world). If, for example, a company has a parent company and two fellow subsidiaries, the limit must be divided by four, as this is the total number of companies in the group.
 

Due dates for payment

For small companies, corporation tax is payable nine months after the end of the accounting period. For companies which make profits in excess of £1.5m per annum (or pro rated by the number of associated companies), corporation tax is payable by quarterly instalments, commencing 6 months and 14 days from the commencement of the company’s accounting period (i.e. commencement date 1st January 2009, 1st instalment due 14th July 2009). The tax payable is based on the estimated taxable profit for that accounting period. N.B. Interest is charged on late payment of Tax.

Corporation Taxation

Relief for losses

The normal rule for company trading losses is that they can be carried back and set off against the profits of the previous year. With the onset of the recession many companies did not have sufficient profits to make use of their losses in this way. Therefore, the UK Government has announced that losses of up to £50,000 could be carried back for three years. This, initially, only applied to losses made in accounting periods ending in the period 24 November 2008 to 23 November 2009. However, the three year carry back is to be extended for a further year, to accounting periods ending in the period 24 November 2009 to 23 November 2010. The extension will again be limited to £50,000, giving a total of £100,000 over two accounting periods. The losses will be offset against later years first.
 

Administration of taxes

A system of self-assessment operates. Companies are responsible for calculating their own tax liability. Interest is payable or receivable on any under/overpayments of tax subsequently agreed with the UK Tax Authorities. A corporation tax return is required from companies in respect of each accounting period. A penalty is levied for late filing of returns.

Corporation Taxation - Taxable profits

The level of taxable profits will, to an extent, depend upon the trading model adopted – the following applies to both a branch and a company. The UK has transfer pricing legislation which dictates that trading between connected parties needs to be on an arms-length basis. This is to stop international groups manipulating intra-group transactions so that profits always flow to the country with the lowest tax rate.

For example; if the business model were such that the UK entity is to provide just marketing and technical support, a fee would be charged to the parent for the services provided. It is this fee, less related costs of providing these services and maintaining the entity, that would be subject to UK tax.
 
If the UK entity is structured so that it can enter into contracts with third party customers in its own right, it is more likely to have a buy/sell arrangement. In this case, sales to third parties will be recorded within the UK entity accounts. Intra-group and third party purchases and other costs of sales will be offset against this, as will all overheads and other intra-group and third party costs.

Please contact Gerry Collins if you would like to start doing business in the UK.