Corporation Tax
Corporation Tax is a tax on a company’s taxable profit. A company being any limited company whether by shares or guarantee, members clubs and associations, trade and housing associations, co-operative groups. A companay tax return consists of the completed Corporation Tax Return CT600 and the annual financial accounts and documents which support the tax calculation.
All companies are required by law to maintain records of that company’s transactions in a manner that must be adequate to enable the company to produce an accurate Company Tax Return. Company tax records must be kept for a minimum of six years from the end of the accounting period and longer if the accounts are submitted late or being enquired into by the Inland Revenue. Company tax records must include all original sales receipts and purchase expenses. Under Companies Act legislation registered companies must also keep accounting records.
Companies are responsible for calculating their own corporation tax liability and paying the corporation tax without prior assessment by the Inland Revenue. Companies which fail to deliver their tax return by the statutory fling date which is normally 12 months after the accounting period are liable to penalties. An accounting period normally being 12 months – can be shorter but never longer. Should a company submit the CT600 Corporation Tax return form without the accounts then it is treated as not having submitted a tax return form.
Current Company Tax Return Forms
The latest version of the CT600 form for 2007 has been available for download from the Inland Revenue website since 31 August 2007. The Corporation Tax Return Form CT600 Version 2 contains two small changes from the previous 2006 version. CT600 (short) for small companies has an additional box on Page 1 so that a company which is a member of a group other than a small group can identify itself. The same additional box is on CT600 plus a new box on page 3 of the 8-page form so that a company with ring fence profits can show the ring fence profits included in its figure of total profits. There are no changes to other forms in the CT600 series at present and all the CT600 Supplementary Pages published in 2006 remain valid and will probably remain so until at least after the 2008 Chancellor’s Budget.
Corporation Tax Rates
While the main rate of Corporation Tax remained at 30% in 2006 and 2007 which will be reducing to 28% in 2008. The small company corporation tax rate applicable to companies with annual profits under
Corporation Tax – A Legal Overview
What is corporation tax?
Prior to 1965, companies paid tax at the same rates and subject to the same rules as individual income tax. In 1965 corporation tax was introduced, under which the profits which a company had made in a fiscal year were calculated and then these profits were taxed at a lower rate.
Corporation tax rates
Corporation tax is currently charged at two different rates. The main rate of Corporation tax currently stands at 28% and this is charged on profits over £300,000 although marginal relief can be claimed between £300,000 and £1,500,000 resulting in a lower rate of tax being paid on these profits.
In order to try and encourage start up business and to bolster economic growth, the government has set a lower rate of corporation tax for small companies which turn small profits and this currently stands at 21% on profits up to £300,000. Between £300,000 and £1,500,000
Corporation tax reform
The coalition government has recently announced a five year plan to reform corporation tax, and this includes a year-on-year reduction in the main rate of corporation tax by one percentage point per year until 2014, when the rate will stand at 24%. In addition, the lower rate of tax will be decreased to 20%.
What about combining profits and losses from different companies?
In many foreign jurisdictions, the principle of “Tax Consolidation” allows companies which belong to the same group to be treated as a single economic entity for the purposes of calculating and collecting tax. This means that any losses incurred by companies in the group are automatically offset against profits generated by other companies in the group.
In the United Kingdom tax consolidation is not allowed, but similar effects can be achieved through two types of tax relief – “group relief” and “consortium relief”.
Group Relief
Any company in a group which makes a loss may surrender these losses to any other company in the group, which can then offset these losses against the profit which it has generated. In order to qualify for this relief, both of the companies must be members of the same “75% group” – this means that they must have a common ultimate parent company, and at least 75% of shares in each company in the group must be held by other companies in the group. Consortium Relief
This applies where one subsidiary company is owned by a consortium of parent companies in which each parent company owns at least 5% of the subsidiary and together the parent companies own 75% of the subsidiary. This might be the case where rival companies wish to co-operate to buy out a company which provides the same essential services to all of them (for example, where rival Internet Service Providers co-operate to buy out the company which owns the telephone lines which they all make use of). If the subsidiary makes a loss, it can surrender this loss to the parent companies in proportion to their shareholdings and the parent companies can offset this loss against their own profits.
Corporations can achieve tax efficiency by consulting a tax barrister or solicitor.
Corporation Tax Benefits
The subject of corporation tax benefits is a complicated one. Most types of business entities – sole proprietorships, partnerships, subchapter S, and limited liability companies – that have not elected to be taxed as regular (or C) corporations have taxes that pass through the business. These taxes appear later on when the owners file their individual tax returns. A regular C corporation and any LLC that elects to be taxed like a corp are separate tax entities that have to file their own tax returns and pay their own taxes.
In the previous decade, the IRS issued its so-called “Check the Box” regulations. Effective beginning 1997, these regulations allow taxpayers to choose the tax status of a business entity without regard to its corporate (or non-corporate) character. Thus, a business entity with more than one owner can elect to be classified as either a partnership or a corporation in order to gain corporation tax benefits. An entity with only one owner can elect to be classified as a corporation or a sole proprietorship. In the event of default (that is, where taxpayer does not make an election), multiple-owner businesses are classified as partnerships and single-person businesses as sole proprietorships.
A business entity that is actually incorporated under state law or one that is required to be a corporation under federal law will have access to corporation tax benefits. Limited liability companies are not automatically treated as being incorporated under state law, which is why they must elect either corporation or partnership status.
Corporation tax benefits under Federal income taxation may acquire more meaning if compared with the treatments to individual taxpayers.
The gross income determination for corporations and individuals is done in the same manner. This includes income derived from business, compensation for services rendered, gains from dealings in property, interest, rents, dividends, to name but a few. Individual and corporation tax benefits contain certain inclusions of gross income, but corporate taxpayers are allowed less exclusions. For instance, both classes of taxpayer may exclude interest on municipal bonds from gross income.
Gains and losses from property transactions are treated similarly. Where non-taxable exchanges are concerned, individual and corporation tax benefits allow non-recognition of gain or loss on a like-kind exchange. Both may defer recognized gain on an involuntary conversion of property. Neither corporations nor individuals are allowed to deduct losses on sales of property to related parties or on wash sales of securities (with certain exceptions). The business deductions of corporations also parallel those of individuals, although certain credits that are personal in nature, like child care credit, are not available to corporations.
A further corporation tax benefit is that corporations pay federal income tax at a rate lower than that of most individuals for the first $75,000 of their profits – 15% of the first $50,000 of profit and 25% of the next $25,000. Professional corporations are charged a flat 35% tax rate. All allowable corporate deductions are treated as business deductions, making the determination of adjusted gross income, which is so essential for individual taxpayers, of little relevance to the corporation. Corporate taxable income is computed simply by subtracting from gross income all allowable deductions and losses. Individuals, on the other hand, have to consider itemized deductions or the standard deduction.