Corporation Tax

If your company profits sit between £50,000 and £250,000, marginal relief can soften the jump from 19% to 25% Corporation Tax.

The Corporation Tax main rate applies to companies with taxable profits above £250,000 and is currently set at 25%. Companies with profits of up to £50,000 are subject to the Small Profits Rate, which remains at 19%.

For companies with profits falling between £50,000 and £250,000, marginal relief applies. This creates a gradual increase in the effective rate of Corporation Tax between the small profits and main rates, rather than a sudden jump. The lower and upper profit limits are proportionately reduced where an accounting period is shorter than 12 months or where a company has associated companies.

The effect of marginal relief is that the effective Corporation Tax rate increases steadily from 19% once profits exceed £50,000, reaching the full 25% rate when profits exceed £250,000.

In practice, Corporation Tax is calculated by applying the main rate of 25% to total taxable profits and then deducting the marginal relief due. The marginal relief standard fraction is 3/200. HMRC provides an online marginal relief calculator to help companies determine the correct amount of Corporation Tax payable based on their profit level and circumstances.

If your business works in film, TV, games or the arts, Creative Industry Tax Reliefs could reduce your Corporation Tax bill and may even generate a payable tax credit.

Creative Industry Tax Reliefs (CITR) are a range of UK Corporation Tax reliefs designed to support companies operating in the creative sector. The reliefs allow qualifying companies to increase the amount of allowable expenditure when calculating their taxable profits, thereby reducing the Corporation Tax they are required to pay. Where a company is loss-making, it may be possible to surrender those losses in exchange for a payable tax credit.

CITR covers a wide variety of creative activities. Reliefs are available for film, animation, high-end television, children’s television and video game production, as well as for theatre, orchestra performances, and museums and galleries exhibitions. More recently, the Audio-Visual Expenditure Credit and the Video Games Expenditure Credit have been introduced, offering an alternative credit-based system for eligible productions.

To qualify for CITR, films, television programmes and video games must meet specific cultural criteria. This is usually achieved by passing a formal ‘cultural test’, which assesses various factors such as content, setting and the nationality of key personnel. Alternatively, a production may qualify through an internationally agreed co-production treaty. Meeting these requirements allows the production to be certified as a British film, British programme or British video game.

Certification is administered by the British Film Institute (BFI) on behalf of the Department for Culture, Media and Sport. The BFI can issue an interim certificate while production is ongoing, followed by a final certificate once the project has been completed. This certification is a key requirement for claiming the relevant tax reliefs.

Corporation Tax relief may be available where your company or organisation makes a trading loss. The loss may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same accounting period.

Where the amount of a trading loss exceeds the profits of the same accounting period, the company may claim to carry back the excess against the profits of preceding accounting periods. The preceding accounting periods are those falling wholly or partly within the preceding period.

Losses may only be carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period.

Any claim for trading losses forms part of the Company Tax Return. The trading profit or loss for Corporation Tax purposes is worked out by making the usual tax adjustments to the figure of profit or loss shown in the company’s or organisation’s financial accounts.

If a company ceases to carry on a trade, the preceding period is three years preceding the accounting period in which the loss is incurred. Accounting periods must be taken in order, most recent first.

For companies with taxable profits of up to £1.5 million the payment of any Corporation Tax is due 9 months and 1 day after the end of your accounting period. The accounting period is usually the financial year of your business but can be different especially in the first year of business.

This deadline means that companies with the popular year end date of 31 December 2019 should have paid any liabilities for that year at the beginning on or before 1 October 2020. Interest is charged from the day after the tax should have been paid until payment has been made. 

HMRC have not extended the date for Corporation Tax Payments and payment remains due 9 months and 1 day after your accounting year end. However, you can apply to HMRC to pay on an instalment basis or defer payment if your finances have been badly affected by coronavirus. If you have missed your payment date, we would recommend contacting HMRC as soon as possible. We can assist you with this process if required. 

There are special rules for companies with taxable profits over £1.5m. These companies are defined as ‘large’ for Corporation Tax purposes and are required to pay tax due in instalments. 

Corporation Tax and related payments must be made electronically. You cannot pay Corporation Tax by post.

A wide variety of grants or subsidies are available to businesses and can be received in addition to the ordinary business income. It is important to identify these and to establish whether they are capital or revenue in nature so that they are dealt with correctly for tax purposes.

Amounts received towards revenue expenditure, such as staff costs, are normally trading receipts and should be included as income or netted off against the relevant expense. Funding which meets capital expenditure is normally treated as a capital receipt. Grants that may be capital in nature include those paid to acquire capital assets, machinery or to facilitate the cessation of a trade or part of a trade.

Some grants may not be for a specific purpose. These are termed undifferentiated receipts. An undifferentiated receipt should be regarded as revenue; however, there is an exception for specific grants paid by Highlands and Islands Enterprise.

Corporation Tax relief may be available where a company or organisation makes a trading loss. The loss may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same or accounting period.

Where the amount of a trading loss exceeds the profits of the same accounting period, the company may claim to carry back the excess against the profits of preceding accounting periods. The preceding accounting periods are those falling wholly or partly within the preceding period.

Losses may only be carried back against profits of a preceding accounting period if the company was carrying on the trade (in which the loss was incurred) at some time in that accounting period.

Any claim for trading losses forms part of the Company Tax Return. The trading profit or loss for Corporation Tax purposes is calculated by making the usual tax adjustments to the figure of profit or loss shown in the company’s or organisation’s financial accounts.

If a company ceases to carry on a trade, the preceding period is three years preceding the accounting period in which the loss is incurred. Accounting periods must be taken in order, most recent first.

It has been confirmed by the Chancellor that the Research and Development Expenditure Credit (RDEC) is to be increased from 12% to 13% on 1 April 2020. The RDEC allows companies to claim an enhanced Corporation Tax deduction or payable credit on qualifying R&D costs. The RDEC replaced the large company scheme that was withdrawn in April 2016. This will help large companies to claim more support for their R&D activities.

There is a separate scheme for smaller companies known as the Small or Medium-sized Enterprise (SME) Scheme. The SME scheme offers more generous reliefs. SMEs can currently claim R&D tax credits of 230% for expenditure.

However, SMEs can elect to claim relief under the RDEC scheme if they are unable to claim relief under the SME scheme because of a grant or subsidy, or because they are carrying out subcontracted R&D work. A company is usually defined as an SME if staff headcount is less than 500 and either turnover is less than €100m, or balance sheet total is less than €86m.

It should be noted that only certain qualifying costs are available for R&D tax reliefs. The government has also said it will consult on whether qualifying R&D tax credit costs should include investments in data and cloud computing.

Where employees are provided with fuel for their own private use by their employers, the car fuel benefit charge is applied. The fuel benefit charge is determined by reference to the CO2 rating of the car, applied to a fixed amount. HMRC has confirmed that the car fuel benefit charge, fixed amount, will increase in 2020-21 to £24,500 (from £24,100).

The fuel benefit charge is not applicable when the employee pays for all their private fuel use.

The standard benefit charge for private use of a company van will increase to £3,490 (from £3,430). A company van is defined as ‘a van made available to an employee by reason of their employment’. There is an additional fuel benefit charge for a van with significant private use. The limit will increase in 2020-21 to £666 (from £655). If private use of the van is insignificant then no benefit will apply.

Following an announcement at Autumn Statement 2016, and subsequent consultations, the government moved forward with plans to charge Corporation Tax to non-UK resident companies with property income. Currently, these companies are chargeable to Income Tax and not UK Corporation Tax.

This measure will come into effect from 6 April 2020 when any non-UK resident companies that carries on a UK property business or has any other UK property income will become liable to Corporation Tax rather than Income Tax as at present.

This change is part of the government’s aim to ensure that all companies are subject to the same tax treatment and to limit some of the reliefs claimed by foreign companies on UK rental income. Whilst the Corporation Tax rate is lower, the benefit of the falling tax rate may not offset the tighter restrictions faced by non-resident companies claiming tax relief on rental income.

This measure is expected to affect a significant number of non-resident company landlords. The restriction may also affect entities that seek to reduce their tax bill on UK property through offshore ownership.

The Corporation Tax main rate will remain at 19% from 1 April 2020. The main rate had been expected to reduce to 17%. However, this reduction was always in doubt after the Conservative election manifesto promised to reverse this announcement.

It has also been confirmed that the Corporation Tax main rate will remain at 19% for the following financial year beginning 1 April 2021. The Chancellor in his Budget speech was keen to stress that even at 19% the UK’s Corporation Tax rate remains the lowest in the G7 and G20.

Some businesses within the quarterly instalment payment regime may have made insufficient payments as a result of calculating their Corporation Tax liability by reference to the 17% rate. HMRC has said that they will work to provide guidance as soon as possible and to advise the correct rate.