Corporation Tax: Tax on Corporate Profits

Corporation Tax is a tax charged on the total profits of a company resident in the UK arising in each accounting period. The rate of corporation tax depends on the level of profits of the company.

Corporation Tax (CT) is a crucial aspect of the financial and legal landscape for businesses. It is the tax levied on the total profits of a company that is resident in the UK during each accounting period. The rate and structure of Corporation Tax vary based on the level of profits, the size of the company, and other factors.

Historical Context

The concept of Corporation Tax was introduced to ensure that companies contribute to the public revenue from their profits. In the UK, Corporation Tax was introduced in 1965, replacing the Income Tax for companies. It has evolved over the years, with various adjustments to rates and reliefs.

Types and Categories

Corporation Tax is categorized based on the profit levels of companies:

• Small Companies’ Rate: Applies to companies with total profits of £300,000 or less. As of 2016-17, the rate was 20%.
• Full-Rate Corporation Tax: For companies with total profits of over £1.5 million. The rate as of 2016-17 was 21%.
• Marginal Relief: Available for companies with total profits between £300,000 and £1.5 million, providing a graduated rate.

Key Events

• 1965: Introduction of Corporation Tax in the UK.
• 1980s-1990s: Significant reforms and rate changes under different governments.
• 2015: A reduction in Corporation Tax rates to stimulate economic growth.
• 2016-17: Current rates and marginal relief structure.

Detailed Explanations

Calculation of Corporation Tax

To calculate Corporation Tax, the following components are considered:

• Total Profits: This includes trading profits, investment income, and capital gains.
• Allowable Deductions: Certain capital allowances and losses carried forward from previous years.
• Chargeable Gains: Profits from the disposal of fixed assets are included.

Important Formulas and Models

For a small company:

$$ \text{Corporation Tax} = \text{Total Profits} \times 20\% $$

For a large company:

$$ \text{Corporation Tax} = \text{Total Profits} \times 21\% $$

For companies eligible for Marginal Relief:

$$ \text{Marginal Relief} = \frac{(\text{Upper Limit} - \text{Total Profits})}{(\text{Upper Limit} - \text{Lower Limit})} \times (\text{Upper Rate} - \text{Lower Rate}) $$

Charts and Diagrams

    pie title Corporation Tax Rates
	    "Small Companies (20%)": 20
	    "Large Companies (21%)": 21
	    "Marginal Relief": 5

Payment Schedule

• Large companies pay Corporation Tax in instalments.
• Other companies pay nine months after the end of the accounting period.

Importance and Applicability

Corporation Tax is essential for:

• Revenue Generation: Contributes significantly to the government’s income.
• Economic Regulation: Helps control economic activities by adjusting rates.
• Fairness: Ensures companies contribute a fair share based on their profits.

Examples

• A small company with profits of £250,000 would pay 20% on these profits.
• A large company with profits of £2 million would pay 21% on these profits.

Considerations

• Tax Planning: Effective tax planning can optimize tax liabilities.
• Compliance: Ensuring compliance with the regulations and timely payments.
• Impact of Changes: Monitoring changes in rates and reliefs is critical for financial planning.

Related Terms

• Capital Gains Tax: Tax on the profit from the sale of assets.
• Income Tax: Tax on personal income, distinct from Corporation Tax.
• Value Added Tax (VAT): Tax on the value added to goods and services.

Comparisons

• Corporate Tax vs. Income Tax: While Income Tax is levied on individual earnings, Corporation Tax is on company profits.
• UK vs. US Corporation Tax: Different rates and structures, with the US having a federal and state-level tax system.

Interesting Facts

• The UK Corporation Tax rate has been one of the most competitive in the G7 in recent years.
• Ireland is known for its low Corporation Tax rate, which has attracted many multinational companies.

Inspirational Stories

• Tech Giants and Tax Planning: Companies like Google and Apple have been known for sophisticated tax planning strategies to minimize Corporation Tax.

Famous Quotes

“Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” — Franklin D. Roosevelt

Proverbs and Clichés

• “Nothing is certain but death and taxes.”
• “A penny saved is a penny earned.”

Expressions and Jargon

• Tax Avoidance: Legal strategies to minimize tax liability.
• Tax Evasion: Illegal practices to avoid paying taxes.

FAQs

What is Corporation Tax?

Corporation Tax is a tax on the profits of companies in the UK.

How is Corporation Tax calculated?

It is calculated based on the total profits of a company, including trading profits, investment income, and chargeable gains, with allowable deductions.

When is Corporation Tax paid?

Large companies pay in instalments, while others pay nine months after the accounting period ends.

What are the current rates for Corporation Tax?

As of 2016-17, the rate is 20% for small companies and 21% for large companies, with marginal relief available for profits between £300,000 and £1.5 million.

References

• Gov.uk Corporation Tax Guide: Link
• HM Revenue & Customs guidelines on Corporation Tax.

Summary

Corporation Tax is an essential fiscal tool for governments and a significant consideration for businesses. Understanding its historical context, calculation methods, rates, and implications helps businesses plan and comply effectively. The role of Corporation Tax in generating public revenue and regulating economic activities underscores its importance in the broader financial ecosystem.