Corporation Tax is the UK Treasury's fourth-largest source of revenue. If you already have a basic idea of what income tax is, you will easily understand the concept of corporate tax.

Corporation Tax is charged on profits made by corporations operating in the United Kingdom (earnings made by unincorporated enterprises, such as sole traders and partnerships, are taxed on their income rather than their trading profits). Companies that operate in more than one country are taxed on profits that are deemed to have come from UK-based assets and production activities, in general. Different rates of corporation tax have been imposed on banks, North Sea oil and gas production, small profit firms, and income made from patented inventions at various times.

 

Taxable profits

Profit is defined as revenue minus costs in general terms.

Corporation Tax is levied on profits from trading (the sale of goods and services) and investments, after deducting day-to-day expenses (known as 'current' or ‘revenue' expenditure, which includes wages, raw materials, and interest payments on borrowed funds) and numerous other deductions, most notably investment cost allowances. It's also levied on capital ('chargeable') gains, or the profit made when an asset is sold for more than it cost. If a corporation experiences a loss because its capital costs exceed its revenue, it can offset the loss against profits made in previous years, subject to certain conditions.

While current expenses are normally deductible, research and development (R&D) tax relief allow businesses to deduct more than 100% of eligible current R&D expenses. Small and medium-sized businesses get more R&D tax breaks than huge corporations.

Since April 2016, the corporation tax rate has been 19% for all limited enterprises. Previously, the rate was determined by the company's profits (also future profits). Limited Companies, unlike individual people, do not receive any type of tax-free allowance, hence all profits are taxable.

Investment (or capital) expenditure on things like machinery and structures, unlike current expenditure, is not automatically deductible when computing taxable earnings. Capital allowances, on the other hand, allow businesses to deduct capital expenditures from taxable profits over several years.

Capital allowances come in a variety of shapes and sizes, each with its own structure and generosity. In practice, most small and medium-sized businesses can immediately deduct the majority of their investment costs under the annual investment allowance (AIA). For the two years from April 1, 2021, to March 31, 2023, businesses can deduct more than the entire cost of specific investments — a so-called 'super-deduction', a policy strongly tied to the news that the main corporation tax rate will rise from 19 percent to 25% in April 2023.

Companies are usually taxed on the earnings they make throughout the course of the year in which their financial statements are prepared (though it can differ in some cases, notably in the first and last years of business). The majority of businesses chose to begin their accounting years in April to coincide with the tax year. However, if a company's accounting year straddles two tax years (for example, it prepares its accounts on a calendar-year basis) and the tax rate changes, the profits for the accounting year are taxed at a weighted average of the two tax rates based on the number of days in the accounting period before and after the tax rate change.

Corporation tax is paid in four equal instalments by large corporations based on their projected liabilities for the accounting year. Small and medium-sized businesses pay their whole tax payment nine months after the fiscal year ends.

 

Tax rates for corporations

The primary corporate tax rate in 2021–22 is 19 per cent. Profits from patented innovations are taxed at a lower rate of 10%, known as the 'patent box' policy. Banks and North Sea oil and gas production are subject to higher charges.

 

More information on the patent box

Profits earned from patents that fall under the UK's patent box scheme are subject to a lower 10% corporation tax rate. This includes revenue from the sale of goods or services that use a qualifying patent, as well as revenue from licensing and royalties in some situations. Between 2013 and 2017, the relief was gradually implemented. The patent box rules are complicated, and they were significantly amended in 2016.

In general, a company must hold (or solely licence) a UK- or EU-registered patent related to an invention that it played an important role in creating or putting into a finished product in order to qualify for the patent box (in other words, the patent cannot be purchased from another company). While only UK-based businesses are eligible for the patent box, the research that leads to the patent does not have to be conducted in the UK.

 

Who pays corporation tax? And how much corporation tax limited companies really pay?

Because earnings fluctuate dramatically with the economic cycle, revenue is highly volatile. Despite the long-term fall in the primary rate of corporation tax, revenue from corporation tax has not decreased as a percentage of GDP — it has remained largely in the region of 2–3% of GDP for much of the last half-century. This is due to the fact that the corporation tax base has risen at a greater rate than GDP. This is due to a combination of increased company profitability and governmental reforms that extend the scope of taxable profits.

Corporation tax revenues are significantly skewed: the vast majority of revenue comes from a small number of corporations that make enormous profits. Enterprises that submitted a tax payment of £1 million or more paid 55 per cent of total corporation tax in 2018–19, a group of fewer than 5,000 companies accounting for just 0.3 per cent of the population of corporation-tax-paying corporations.

Certain industries are also significantly reliant on corporate tax revenue. Financial services, in particular, contribute a disproportionate amount of corporation tax revenue: it accounts for roughly 7% of UK economic production but around 22% of corporation tax revenue.

Corporation tax has an impact on how much money corporations invest and where their real operations are located, according to research.

Between the end of your business year and the statutory filing deadline, you must file your corporation tax return. The statutory filing deadline is either 12 months after the end of the fiscal year or three months after you receive a notice from HMRC requiring you to deliver a return, whichever comes first.