Corporation Tax
Introduction to Taxation, ch. 10
Business Law, chs. 15 and 16
Company Tax
• Corporation tax
• Directors salaries and fees
• Dividends
• Comparison
Corporation tax
• Companies do not pay
– Income tax
– Capital gains tax
– Inheritance tax
• Companies pay corporation tax on
their
– Income profits, and
– Capital gains
Income profits
• Assessed by reference to the
categories of income tax
– Trading income (business profits)
– Savings income (interest/dividends)
– Property income (rent)
• Capital gains assessed by CGT rules
– use same process to calculate gain
Differences
• No personal allowances
- No equivalent of IT personal allowance
- No CGT allowance
• Capital Gains
- Indexation not frozen in 1998
- Tapering relief not available to companies
• Different basis of assessment
- CT assessed on the company’s accounting
reference period - payable 9 months later
• Different tax rates
Corporation tax rates
Profit up to £300,000 all at
20 %
Eg profit £70,000 – tax is 20% of £70,000 = £14,000
Profits between £300,000 and £1,500,000
– 20% on first £300,000
– 32.5% above that
Profit over £1,500,000 all at
30%
Eg profit £1.6m – tax is 30% of £1.6m = £480,000
Example of the marginal
rate
• Profits = £950,000
• First 300,000 taxed at 20% =
60,000
• Next 650,000 taxed at 32.5%
• 650,000 x 32.5% =
211,250
• Total tax =
271,250
Corporation tax – rates
cont’d
• Important issue is to ascertain which
band the taxable profit falls within ie
is it:
• - up to £300,000 or
• - between £300,000 and £1.5m or
• - over £1.5m
• This then determines the applicable
rate
Losses
• Trading losses
– can be set off against other income or
capital gains in the same accounting
period,
– or carried back one year
– or carried forward
• Capital losses
– cannot set against income
– can be set against capital gains in
future periods (indefinitely)
Groups of companies
• Many companies are groups of companies
• Typically, a holding company owns the shares
in the other companies in the group
• Tax planning issues about whether to create a
group like that or just have separate
companies
• Generally, the losses of one company in the
group can be set against the profits of other
companies
Close companies
• One controlled by five or fewer ‘participators’
or by participators who are directors
• ‘Participator’ is widely defined, but includes
shareholders and others who share profits
• ‘Associates’ are treated as one participator
(eg close family, partners and trustees of family
settlements)
• In practice, most smaller private companies
are close companies
Special rules
• Company lends over £15,000 to participator
– Company liable to tax of 25% of loan value
(repayable when loan paid off)
• Company gives benefits in kind to participator
or associate
– Treated as a distribution (dividend)
– Taxable as investment income
• Company makes gift to participator
– Can be treated as gift by other participators
to the recipient - inheritance tax
implications
Taking money out of the
company
• 1. Pay fees and salaries to directors
• 2. Pay dividends to shareholders
Directors’ salaries
• An expense for the company
• Director has to pay income tax under
ITEPA 2003 (employment income)
• Company deducts tax under the P.A.Y.E.
system
• National insurance contributions
payable by both the company and the
director
Dividends
• Not an expense for the company
• No tax effect on the company
• Investment income for the
shareholder
• Taxed at special rates:
– 10% standard rate (tax credit !)
– 32.5% higher rate
Compare partnership &
company
•
•
•
•
Partners pay tax at IT rates
Higher rate (40%) on income over £39,825
Paid on all profits (including retained)
Companies pay much lower rates, higher rate
is 30% and that is re profits over £1.5m
• Dividends have tax advantage (especially
when recipient is not higher rate tax payer)
Example
• Business with three individuals
• Total profits = £120,000
• Take out £32,000 each
• Compare partnership tax and
company tax
As a partnership
• Profits per partner =
£40,000
(NB all taxable even if some (£8k) left in
business)
• Less personal allowance
5,225
• Taxable
34,775
• 10% on 2,230
223
• 22% on 32,370
7,121
• 40% on 175
70
• Total tax per partner
7,414
(Total retained funds is 3 x £8k = £24,000)
As a company
• Company pays corporation tax
• Pays small salaries to directors
– e.g. £6,000
• Directors are also shareholders so
rest paid to them as dividends
- ie £26,000
Company’s corporation tax
• Company’s profits
(after all other expenses)
• Less salaries (3 x 6,000)
• Taxable profits
• Tax at 20%
• Distributable profits
• Dividends (3 x 26,000)
78,000
• Retained profit
120,000
18,000
102,000
20,400
81,600
3,600
•
•
•
•
•
•
•
Each individual gets
£32,000
Director’s salary
6,000
Less personal allowance
5,225
Taxable income
775
Taxed at 10% starting rate
£77.50
Rest (26,000) is taken as dividend
Still less than 34,600 basic rate so 10%
But covered by tax credit
0
• Total tax paid by indv =
£77.50
Comparison
• As partners, each pays
• Total tax
(x3)
22,242
•
•
•
•
7,414
Company pays
20,400
Each director pays 77 (x3) 231
Total
20,631
Total saving re whole business
1,611
Cont’d
• BUT Total saving for individuals
£7,414 – £77 = £7,337
(There would also be NI contributions as
well, which would work out more for the
partners)
• Note also the difference in retained
profits:
Partnership - £24,000
Company - £3,600