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Corporation Tax

This page summarises recent developments relating to the Company tax commentary in Quick Overview, and provides links to the updated commentary.

Everest-Corporation Tax

Table of Contents

What’s new in Company tax

This page summarises recent developments relating to the Company tax commentary in Quick Overview, and provides links to the updated commentary.

¶20000: Rate of corporation tax for financial year 2023 (FA 2021).

¶21075: The taxation of coronavirus support payments including payments made under the SEISS and the CJRS.

¶29050: Cap for R&D payable tax credit for SMEs.

¶32215: Trading loss carry-back relief: temporary extension of carry-back period to three years for accounting periods ending between 1 April 2020 and 31 March 2022 (FA 2021).

Paul Davies, Glyn Fullelove and Stephen Relf

8 September 2021

18000 Scheme of corporate tax

Contents:

 

18000 Introduction and background to corporation tax

Introduction to company taxation

Corporation tax was first imposed by Finance Act 1965 and separated the tax liabilities of a company and its shareholders. Prior to 1965, there was no general distinction between a company and any other person in so much that all persons were subject to income tax.

Tax devolution

The Corporation Tax (Northern Ireland) Act 2015 received Royal Assent on 26 March 2015 and provides for the devolution of tax powers to allow Northern Ireland to set its own rate of corporation tax. Whilst the power to set the corporation tax rate over most trading profits is being devolved, it does not include taxation of non-trading profits such as income from property nor over a range of special trading activities. The power to determine the corporation tax base, including reliefs and allowances, will remain with the UK Parliament.

At the time of writing, the power has not yet been devolved. At Autumn Statement 2016, the Government announced that it was continuing to work closely with the Northern Ireland Executive towards the introduction of a Northern Ireland rate of Corporation Tax, subject to the Northern Ireland Executive demonstrating it has placed its finances on a sustainable footing.

Legislation: F(No. 2)A 1997, s. 30–33, 35 and Sch. 4, 5

In-Depth: ¶700-000

 

18005 Corporation Tax Legislation

Corporation Tax Act 2009

The Corporation Tax Act 2009 (CTA 2009), which received Royal Assent on 26 March 2009, was the first of three Acts to rewrite the former provisions of the tax code applicable to companies. It is the longest single Act to have been passed by Parliament and, at the time, included 1,330 sections and four schedules. The Act applies to accounting periods ending on or after 1 April 2009.

The Corporation Tax Act 2009 rewrote the charge to corporation tax and the primary corporation tax code used to compute the income of companies for corporation tax. The Corporation Tax Act 2009 removed the schedular system of taxing income, replacing it with the following main heads of charge:

•trading income;

•property income;

•loan relationships;

•intangible fixed assets;

•intellectual property; and

•miscellaneous income.

The Corporation Tax Act 2009 covers the charge to corporation tax, accounting periods, residence of companies, as well as those provisions which relate to trading income and income from other sources. The Act also contains those provisions necessary to calculate income from loan relationships, derivative contracts and intangible fixed assets. Also included in the act are those provisions which cover particular categories of expenditure including expenditure on research and development as well as film expenditure and remediation of contaminated land.

Corporation Tax Act 2010

The Corporation Tax Act 2010 is the second of two rewrite Acts which address corporation tax. Whereas the first, CTA 2009, mainly rewrote the provisions dealing with the computation of a company’s income, CTA 2010 is wider in application, rewriting the provisions dealing with:

•the calculation of corporation tax payable on a company’s profits. This includes the renaming of the small companies’ rate of corporation tax as the ‘small profits rate’ and the enactment of a number of extra-statutory concessions concerning the former small companies’ rate;

•losses and reliefs, including group relief and qualifying charitable donations relief;

•special types of business and company, including close companies and charitable companies;

•patent box;

•distributions; and

•tax avoidance including the transactions in securities rules.

The Corporation Tax Act 2010 has effect for accounting periods ending on or after 1 April 2010.

Taxation (International etc) Act 2010

The Taxation (International and Other Provisions) Act 2010 is the third and final of the rewrite Acts. It was relatively short, comprising 382 sections (albeit with 11 Schedules) and mops up the ‘business’ related issues and focuses on the international tax issues: Double Tax Relief, Transfer Pricing, Advance Pricing Agreements, Tax Arbitrage, Financing Costs and Income (the worldwide debt rules), Offshore Funds and the CFC rules.

As with CTA 2010, TIOPA 2010 has effect for accounting periods ending on or after 1 April 2010.

Legislation: CTA 2009, Sch. 2, para. 10; CTA 2010, Sch. 2, para. 10

In-Depth: ¶700-275

18010 Bodies Liable to Corporation Tax

Corporation tax is charged on the profits of companies.

A company is any body corporate (e.g. a company incorporated under the Companies Act 2006 or predecessor Acts) or unincorporated association (e.g. a club or an authorised unit trust), but not a partnership, local authority or local authority association. Health service bodies are exempt from corporation tax.

There are three main types of incorporated company under the Companies Act 2006.

•A company formed so that, for example, a sole trader, family members or several partners can carry on a business and still retain control of its management and share any profits made, while separating the liability of the company from its members. The liability of such a ‘private company’ is limited by shares.

•A company formed to allow members of the public to invest in its profits without being involved in its management. The liability of such a ‘public company’ is limited by shares.

•A company formed for charitable, public or social purposes, which is limited by guarantee.

An incorporated company has a legal identity separate from that of its shareholders, with its own rights, powers, duties and liabilities, and is likewise a taxable entity distinct and separate from its shareholders.

Income tax and corporation tax cannot be charged on the same income or profits of a taxpayer. Any company paying corporation tax on its profits is not liable to suffer income tax on those profits.

Legislation: CTA 2009, s. 2, 3; CTA 2010, s. 1121

In-Depth: ¶700-550

18015 The Charge to Corporation Tax

Corporation tax is an annual tax and is charged for each financial year.

A financial year runs from 1 April to the following 31 March. Thus, the financial year 2018 started on 1 April 2018 and ends on 31 March 2019. Although corporation tax is charged for each financial year, it is computed and assessed by reference to a company’s accounting periods (¶18020) and apportioned between relevant financial years where the accounting period does not fall wholly within one financial year.

Corporation tax is charged on the profits of companies. Profits means income and chargeable gains. For the rules for calculating income and chargeable gains, see ¶21050.

Companies within the charge to corporation tax are not chargeable to income tax or capital gains tax. A company’s chargeable gains are, subject to exceptions, calculated in the same way as for capital gains tax purposes (see ¶35000) and then charged to corporation tax (subject to the territorial scope limitations below).

A body is within the corporation tax charge if it has a source of income within the charge to corporation tax. A source of income is within the corporation tax charge if corporation tax is chargeable on the income arising from that source (or would be if there were any such income).

UK resident companies are within the charge to corporation tax on all of their profits wherever arising.

Non-UK resident companies are within the charge to corporation tax in certain specified circumstances. See ¶19000 for the territorial scope of UK corporation tax in relation to non-UK resident companies.

A company may come within the corporation tax charge if it:

•acquires an appropriate source of income, not previously having had one; or

•becomes UK resident while having an appropriate source of income.

Conversely, a company may cease to be within the corporation tax charge if it:

•ceases to have an appropriate source of income; or

•becomes non-UK resident ceases without retaining a source of income within the charge to corporation tax for non-resident companies.

This checklist will help you to prepare corporation tax computations.

Legislation: CTA 2009, s. 2, 3, 4, 8

In-Depth: ¶700-550

18020 Accounting periods

Related content

•Decision tree: Assistance with allocating profits to accounting periods

Corporation tax is charged by reference to accounting periods. Under the Companies Act 2006, a company is obliged to prepare accounts for each of its financial years, which are the periods between its accounting reference dates. A company’s accounting financial years are normally 12 months in length but, confusingly, they are not always. Where a company changes its accounting reference date, the financial year can be as short as a few months or as long as 18 months. To prevent abuse and to create uniformity, tax legislation lays down certain rules to define what is an accounting period for tax purposes.

CTA 2009, s. 9 states that an accounting period for corporation tax begins on one of the following occasions:

(1)Whenever the company first comes within the charge of UK corporation tax, perhaps by becoming UK resident, or by starting to trade, or acquiring a source of income.

(2)When an accounting period ends without the company ceasing to be within the charge to corporation tax.

CTA 2009, s. 10 states that an accounting period ends on the earliest of the following occasions:

•12 months after the accounting period started;

•an accounting date of the company (that is to say, the date to which the company makes up its accounts – which has been held to mean accounts made up on which the auditors have formally reported and which are laid before the company in general meeting – so, for example, drawing up management accounts will not bring the accounting period to an end);

•on the company beginning or ceasing to trade in respect of all of the trades carried on by it;

•the company beginning or ceasing to be resident in the UK;

•the company ceasing to be within the charge to corporation tax;

•on the company beginning or ceasing to be in administration; and

•the commencement of winding up of the company.

Example

Begonia Ltd was incorporated on 7 February 2017. It issued 50,000 ordinary shares on 25 April 2017 and most of the subscription moneys were placed in a bank deposit account on 29 April 2017. The company commenced trading on 1 July 2017 and registered to draw up its accounts to 31 December each year. Begonia Ltd’s accounting periods would be as follows:

•29 April 2017 to 30 June 2017: this period begins when Begonia Ltd acquires a source of income (the bank deposit account) and, in practice, would end on the day before trading commences;

•1 July 2017 to 31 December 2017: this period starts on the day after the expiry of the previous period and ends on the date to which accounts are first drawn up; and thereafter

•a period ending on 31 December each year.

Where a company’s financial year does not coincide with an accounting period, because, for example, the period of account exceeds 12 months, it will be necessary to allocate profits and losses between accounting periods. The general rule is that this is to be done on an actual basis with the exception of trading profits (before deduction of capital allowances), profits of a property business, management expenses and miscellaneous income which are to be allocated on a time basis.

Example

Amaryllis Ltd has traded for some years and accounts have previously been prepared annually to 31 March. As a result of being taken over, the company has prepared accounts for the 18-month period to 30 September 2017.

The following information has been extracted.

•Trading profits for the period, as adjusted for taxation purposes, but before capital allowances, were £137,250.

•The company is entitled to capital allowances on plant and machinery of £5,220 for the 12 months to 31 March 2017 and £2,750 for the six months to 30 September 2017.

•The accounts for the period showed the following investment income: Bank deposit interest (£1,530) and exempt dividends (£4,000).

•Interest of £18,000 was charged on a 12% £100,000 loan note issued for a £100,000 loan.

•The company covenanted to make an annual payment of £1,000 to Oxfam on 31 December each year. The first £1,000 was paid on 6 January 2017.

As the period of account exceeds 12 months, the company would have to prepare corporation tax computations for the following two accounting periods:

(1)1 April 2016 to 31 March 2017 (12 months);

(2)1 April 2017 to 30 September 2017 (6 months, ending on the date to which accounts are prepared).

 

18025 Income

The concept of income

Corporation tax is charged on the profits of companies, being their income and chargeable gains. It is therefore important to understand what constitutes income for these purposes.

Prior to the enactment of the Corporation Tax Act 2009, corporation tax was imposed on income computed according to income tax rules. For accounting periods ending on or after 1 April 2009, income is liable to corporation tax if it falls within one of the heads of charge laid out in CTA 2009 (see below). However, there is no general definition of ‘income’ in CTA 2009 or in any of the other Tax Acts. It is therefore necessary to rely on general principles. For example, the fundamental differences between income and capital have been much discussed by economists, capital often being likened to the tree or the land, and income to the fruit or the crop. There are also a number of things which are obviously income (e.g. business profits, interest and dividends), whilst there are also other things which are obviously not (e.g. a lump sum legacy and a prize).

In addition, there have been a large number of judicial decisions in regard to the question whether a particular item is ‘income’. Although the courts have refrained from attempting to formulate any precise tests of general application, some general points arise. For example, income will usually have an element of periodicity, recurrence or regularity although it does not follow that an isolated payment could not be income. Also, the characterisation of a receipt or surplus as income is unaffected by the fact that the recipient is bound to use it in a particular way and cannot enjoy it as a profit in the ordinary sense.

In Countrywide Estate Agents FS Ltd, an up-front payment of £25m made in exchange for the company undertaking to use its position to introduce the third party’s products to the customers of the group and held by the lower-tier tribunal to be revenue in nature and not, as the company had argued, a (capital) disposal of part of its goodwill.

As stated above, for accounting periods ending on or after 1 April 2009 income is liable to corporation tax if it falls within one of the heads of charge laid out in CTA 2009. This means that the charge to corporation tax on income is driven by the particular heads of the charge to corporation tax on income as set out in CTA 2009. The main heads of charge are as follows:

•trading income (see ¶21070);

•property income (see ¶22000);

•loan relationships (see ¶25000);

•intangible fixed assets (see ¶36000);

•intellectual property falling outside the intangible fixed asset regime; and

•miscellaneous income (e.g. past cessation receipts, non-trading gains on intangible fixed assets, profits on disposal of know-how or patent rights, gains from artificial transactions in land, etc.).

Case: Countrywide Estate Agents FS Ltd [2010] TC 00557

In-Depth: ¶701-200

Restriction on deductions – rules applying generally

Restrictions are imposed on certain deductions. The restrictions apply to all income charged to corporation tax, including trading and property income, and also to expenses of management and expenses of companies with investment business. The restriction applies to the following expenses:

(1)remuneration not paid, broadly, within nine months of the end of the accounting period;

(2)contributions to an employee benefit trust (but see ¶21160 for details of a specific corporation tax deduction when benefits are provided out of the trust);

(3)business entertainment and gifts;

(4)annual payments;

(5)social security contributions (except employers’ National Insurance contributions);

(6)penalties, interest and VAT surcharges;

(7)crime-related payments; and

(8)dividends and other distributions.

Legislation: CTA 2009, Pt. 20, Ch. 1

In-Depth: ¶703-200

19000 Company residence

19000 Territorial scope of corporation tax

A UK-resident company is chargeable to corporation tax on all its profits wherever arising except (from 19 July 2011) where a company elects for profits and losses from its non-UK permanent establishments (PEs) to be exempt from corporation tax (¶19020).

A non-UK resident company is generally within the charge to corporation tax on:

(1)The profits and chargeable gains attributable to a UK trade carried on through a UK permanent establishment;

(2)(Before 6 April 2019) ATED-related and non-resident (NRCGT) chargeable gains;

(3)(From 5 July 2016) on profits from a trade of dealing in or developing UK land;

(4)(From 1 April 2019) on chargeable gains on an interest in UK land and on assets that derive at least 75% of their value from UK land; and

(5)(From 6 April 2020) on profits of a UK property business or on other UK property income (formerly chargeable to income tax where not attributable to a UK permanent establishment).

A non-UK resident company may also fall within the scope of the diverted profits tax (¶61600).

Legislation: CTA 2009, s. 3, 5 and Pt. 5; FA 2015, Pt. 3 (diverted profits tax)

In-Depth: ¶764-400; ¶775-000 (BEPS)

19005 Determination of company residence

Three rules apply in determining if a company is UK-resident for corporation tax purposes:

•the incorporation rule whereby a company which is incorporated in the UK is UK resident;

•the case law rule whereby a company which has its central management and control in the UK is UK resident

•the tie-breaker rule whereby a company which is treated as non-UK resident by any double taxation arrangements is non-UK resident for corporation tax purposes despite the application of the incorporation or case law rules.

Where a non-resident company receives any payment from which income tax has been deducted, it may set the amount of income tax deducted against any assessment for corporation tax on that income. The company is not entitled to a repayment of income tax until the assessment for the accounting period is finally determined and a repayment appears due.

Special provisions apply to:

•a controlled foreign company (CFC) – see ¶39000; and

•a Societas Europaea (SE) or a Societas Co-operative Europaea (SCE).

Legislation: CTA 2009, s. 14–18; FA 1998, Sch. 18, Pt. 10A (SE)

In-Depth: ¶764-000

19010 Residence and companies

A company will be resident in the UK if it is incorporated in the UK or if it is centrally managed and controlled in the UK.

Incorporation

A company incorporated in the UK will be regarded as resident in the UK. Where a company is given a different place of residence by a rule of law, that rule is ignored for the purpose of the incorporation rule.

This can clearly give rise to dual residence, as a company managed and controlled in another jurisdiction will also be UK resident if incorporated in the UK.

An important exception to the incorporation rule is provided by CTA 2009, s. 18 which was originally introduced in 1994. If a company is regarded as resident in another territory under the domestic law of that territory and also resident in the UK under UK tax legislation (e.g. by reason of being incorporated there) and there is a Double Taxation Agreement (DTA) between the UK and the other territory that includes a ‘tie breaker’ test and under the tie breaker test, the company is regarded as resident in the other territory (typically, under DTAs following the OECD model, because the ‘effective management’ of the company is exercised from the other territory), then the company will not be regarded as UK resident for UK tax purposes.

Central management and control

Prior to the statutory deeming provisions previously enacted in Finance Act 1988 (see under Incorporation, above) there was no statutory definition of residence for tax purposes. The test for residence developed by the courts and described below continues to apply where a company is incorporated outside the UK.

The courts determined in the early case of Calcutta Jute Mills Co Ltd v Nicholson Ex D that the test for residence was where the real business of the company is carried on, which is where its central management and control takes place. Several cases have been decided on this issue since then and the management and control criterion has stood the test of time.

The concept of central management and control is, in broad terms, directed at the highest level of control of the business of the company and can be distinguished from the place where the main operations of the business are to be found.

In the case of De Beers Consolidated Mines Ltd v Howe, a South African company operating in South Africa but controlling its important affairs in the UK was held to be resident in the UK, where the board meetings on important issues took place and where the majority of the board were resident. Other decisions made in favour of HMRC on the same grounds include New Zealand Shipping Co Ltd v Thew HL; American Thread Co v Joyce, HL; John Hood & Co Ltd v Magee KB.

It is particularly difficult to apply the ‘central management and control’ test in the situation where a subsidiary company and its parent operate in different territories. In this situation, the parent will normally influence, to a greater or lesser extent, the actions of the subsidiary. Where that influence is exerted by the parent exercising the powers which a sole or majority shareholder has in general meetings of the subsidiary, for example to appoint and dismiss members of board of the subsidiary and to initiate or approve alterations to its financial structure, HMRC would not normally seek to argue that central management and control of the subsidiary is located where the parent company is resident. However, in cases where the parent usurps the functions of the board of the subsidiary or where that board merely rubber stamps the parent company’s decisions without giving them any independent consideration of its own, HMRC draw the conclusion that the subsidiary has the same residence for tax purposes as its parent.

The case of Wood v Holden appeared in the Court of Appeal in January 2006. In this case, HMRC contended that a Dutch company used as part of sophisticated capital gains tax planning scheme, was resident in the UK. The CA stressed that the burden of proof was on HMRC to show that a company was UK resident and that HMRC in this case had not done so. The court held that the company’s decisions, which were influenced by UK accountants, were made by the trust which was set up by the managing director of the company in the Netherlands, and that without those decisions having been made by the trust, the agreements that were the subject of the decisions would not have been entered into. There was no evidence produced by HMRC to show that the company was controlled otherwise than by the trust in the Netherlands, and that the meetings in which the transactions were approved were mere formalities.

In the case of News Datacom Ltd v HMIT, the special commissioners considered that it must first be decided whether the functions of the constitutional organs have been usurped. That was not so in this this case. If the constitutional organs have not been usurped, it becomes essential to recognise the distinction between an outsider to those organs who influences the decisions of those organs, and one who dictates what those decisions should be. In this regard, the special commissioners found that any outside influence was exercised outside the UK, therefore the company could not be UK resident.

It is therefore clear that the first thing to consider is whether the functions of the board are actually carried out by the board or whether they have been usurped by some other person or persons. If usurped, then the company will be resident where those functions are carried out. Where the functions of the board are indeed carried out by the board, the company will be resident where the functions of the board are carried out, but if it transpires that there are outsiders who influence the board to such an extent that it could be said that the board are merely ‘rubber stamping’ decisions that have already been made elsewhere and by other people, then the company will be resident where the decisions are actually made.

In the more recent case of Laerstate BV v R & C Commrs, the First-tier Tribunal found that a company incorporated in the Netherlands was centrally managed and controlled by its sole shareholder, and sometime director, in the UK. This does not mean to say that the existence of a dominant shareholder will always determine the residence of a company; it is still necessary to establish who exercises central management and control of the company and from where. The tribunal found that even where a majority shareholder instructs directors on how to act, and the directors consider those wishes and act on them, it will still be their decision: ‘the borderline is between the directors making the decision and not making any decision at all’. Where directors engage in ‘mindless signing’, they cannot be said to have made a decision and so cannot be said to exercise central management and control.

In Development Securities plc, the Upper Tribunal found that the functions of the board of directors of Jersey incorporated special purpose vehicles were not effectively usurped by the actions and decisions of the parent company in the UK. The case demonstrates the importance of determining, under local company law requirements, the precise nature of the duties and obligations of the directorsʼ of any purported non-UK tax resident company. In the absence of any employee or creditor stakeholders in the SPVs, the authorisation of an otherwise uncommercial transaction (viewed in isolation) may not necessarily give rise to an usurpation of the boardʼs powers provided there has been no breach of directorsʼ duties and obligations. The SPVs were not UK-tax resident.

SP 1/90 sets out the residence tests and HMRC’s view of the test of management and control.

Legislation: CTA 2009, s. 14, 18 and Sch. 2, Pt. 5

Cases: Calcutta Jute Mills Co Ltd v Nicholson Ex D (1876) 1 TC 83; American Thread Co v Joyce, HL (1913) 6 TC 163; John Hood & Co Ltd v Magee KB (1918) 7 TC 327; New Zealand Shipping Co Ltd v Thew HL(1922) 8 TC 208; Unit Construction v Bullock (1958) 38 TC 712; Esquire Nominees Ltd v Commr of Taxation (1971) 129 CLR 177; Re Little Olympian Each Ways Ltd [1995] 1 WLR 560; Untelrab Ltd v McGregor; Unigate Guernsey Ltd McGregor (1995) Sp C 55; Wood v Holden (HMIT) [2006] BTC 208; News Datacom Ltd v HMIT (2006) Sp C 561; Laerstate BV [2009] TC 00162; Development Securities plc [2019] BTC 518

In-Depth: ¶764-100

19012 Migration from UK

If a company ceases to be UK-resident, it is normally required to notify HMRC and to pay tax on any capital gains which have accrued on assets it holds, except for certain assets that continue to be employed in a UK trade, thereby remaining within the charge to UK tax.

This requirement does not apply in the case of companies which cease to be UK resident by virtue of the provisions that treat certain dual resident companies (those treated as non-UK resident by virtue of a double taxation agreement) as not resident for all tax purposes (see ¶19010).

In certain circumstances, certain gains which accrued whilst the company was UK resident can, by election, be treated as deferred (postponed gains) until the assets are sold (or certain other events occur).

Where an asset ceases to be a chargeable asset as a result of a company ceasing to carry on a UK trade carried on through a UK permanent establishment, there is a deemed disposal (except where the cessation is in connection with certain no gain/no loss transfers).

Legislation: TCGA 1992, s. 185

In-Depth: ¶764-220

19015 Permanent establishments

The concept of a permanent establishment (PE) is much used in double taxation treaties and, where applicable, the treaty definition overrides the statutory definition in CTA 2010, Pt. 24, Ch. 2. The statutory definition is nevertheless intended to accord, in large part, with that in common use in the UK’s tax treaties.

The statutory definition provides that a company has a PE in a territory if (and only if) either:

(1)It carries on business (wholly or partly) through a ‘fixed place of business’ in that territory; or

(2)There is an agent in the territory acting habitually on the company’s behalf who is not acting in an independent capacity in the ordinary course of his own business.

However, it will not be treated as having a PE if the activities carried on are merely of a preparatory or auxiliary character (e.g. storage, display, delivery operations or collecting information) and (with effect from 1 January 2019) are not part of a fragmented business operation.

A fixed place of business can include a number of possible types of establishment, but is not exclusively:

•a place of management;

•a branch;

•an office, factory or workshop;

•any project for construction or installation or building site;

•an installation or structure for the exploration of natural resources, as well as a mine, quarry, oil or gas well, or any other place where natural resources are extracted.

Case law has determined that a trade is carried on where its contracts are concluded (Pommery & Greno v Apthope) and ‘where the operations take place from which the profits in substance arise’ (F L Smidth & Co v Greenwood). In most cases, the substance of the business operations will be where the contracts are concluded.

The profits attributable to the PE comprise the following:

•trading income arising directly or indirectly through or from the permanent establishment;

•any income from property or rights used by, or held by or for the permanent establishment; and

•chargeable gains on the disposal of assets situated in the UK which are used for the purposes of the trade carried on though the permanent establishment.

For clarification, Finance Act 2003 inserted a new section and Schedule which describe exactly what will be regarded as the chargeable profits of a PE of a non-resident company. Broadly, the profits attributable to the PE shall be those which it would have made had it been a separate entity dealing with the non-resident on arm’s length terms – referred to as the ‘separate enterprise principle’. Certain assumptions may be made in order to support this stand-alone treatment, namely that:

•the PE shares the same credit rating as the non-resident company; and

•it has such equity and loan capital as would be expected given that treatment.

Expenses incurred, in the UK or elsewhere, for the purposes of the PE (whether reimbursed by the PE or not) will be allowable for corporation tax purposes on the same basis as a UK company. Certain costs are specifically disallowed or allowance for them is modified as follows:

(a)No relief is available for any payments akin to royalties made by the PE to another part of the non-resident for the use of intangible assets. However, a contribution towards the creation of such an asset may be deductible;

(b)Unless the PE carries on a business as a bank, deposit-taker, money-lender, debt-factor or similar, or deals in commodity or financial futures, and pays interest, etc. in the ordinary course of that business, no deduction will be available for interest or other costs of finance made by the PE to another part of the non-resident; and

(c)Where the non-resident provides goods or services to the PE, they will be dealt with as an expense incurred by it for the PE (and hence allowable in calculating the chargeable profits of the PE, see above), except where they are goods or services that the non-resident supplies in the normal course of its own business. In that latter case, the stand alone ‘separate enterprise principle’ will apply in order to determine the amount deductible.

Legislation: CTA 2009, Pt. 2, Ch. 4; CTA 2010, Pt. 24, Ch. 2; TIOPA 2010, s. 6(2)(e)

In-Depth: ¶764-260ff.

19020 Non-UK permanent establishments

The general rule is that a UK resident company is liable to corporation tax on its worldwide profits including those earned through a non-UK permanent establishment (PE) (¶19000). This is the case whether or not the income is remitted to the UK although relief is available where the company is unable to remit the overseas income.

Trading income and expenses relating to the PE are included within total trading income. However, where the trade of the PE is carried on wholly outside the UK, a loss arising in that trade can only be used to relieve future profits of that trade (¶32210).

Credit relief is available where foreign tax has been suffered on the profits attributable to the PE, although only to the extent that the foreign tax does not exceed the corporation tax payable on those profits as determined for UK tax purposes (¶61040). Where the trade is not carried on wholly outside the UK, any unrelieved foreign tax can be carried forward and offset against corporation tax payable on the profits of the PE in future periods.

A company can elect (under CTA 2009, s. 18A) for the profits and losses attributable to its PEs to be exempt from corporation tax. Once made, the election is irrevocable and applies with regard to all of the company’s PE, current and future. Transitional provisions apply to restrict the application of the exemption where there are historic losses. Where this is the case, profits will be exempt once those losses have been fully matched with profits (either on a company basis or by reference to individual PEs where a streaming election has been made). An anti-avoidance rule applies to prevent profits which would otherwise remain within the charge to corporation tax from being diverted to an exempt foreign branch. Restrictions also apply with regard to small companies (in which case only profits and losses from certain types of territories, ‘full-treaty territories’, are subject to exemption) and close companies (in which case exemption is denied in respect of profits derived from chargeable gains).

The CFC rules apply to branches within the scope of the branch exemption. Consequently, branch profits will be exempt only if the branch meets the lower level of tax test, in which case it will not fall within the CFC rules, or if another CFC exemption applies.

Legislation: CTA 2009, Pt. 2, Ch. 3A

In-Depth: ¶764-750

20000 Rates of corporation tax applicable to most company profits

Rates of corporation tax are set by reference to a financial year. This means that, where a company’s accounting period straddles more than one financial year, the chargeable profits of the accounting period must be apportioned between the applicable financial years for the purposes of calculating the company’s corporation tax liability.

•For financial year 2021 (the 12 months beginning 1 April 2021) the main rate of corporation tax on non-ring fence profits (most non-oil and gas profits) is 19%.

•For ring fence profits (oil and gas profits) see ¶20010.

•For financial year 2022, the main rate of corporation tax is 19%.

•For financial year 2023, the main rate will increase to 25% and a small profits rate of corporation tax will apply at the rate of 19% on profits up to £50,000. Marginal relief will apply to profits between £50,000 and £250,000 to smooth the transition between the small profits rate and the main rate.

•From 1 April 2023, marginal relief = F × (U – A) × (N ÷ A) where F is the standard marginal relief fraction of 3/200ths; U is the upper limit of £250,000; A is the amount of augmented profits (¶704-100) and N is the amount of taxable total profits.

Close investment-holding companies (¶35870) are not permitted to benefit from the small profits rate and marginal relief.

•The patent box (¶30000), a preferential regime for profits arising from patents and other qualifying intellectual property rights, permits companies to elect for profits from qualifying rights to be taxed at an effective rate of 10%.

Authorised investment funds (¶15775) and open-ended investment companies pay tax at the rate at which income tax at the basic rate is charged for the year of assessment which begins on 6 April in the financial year concerned.

•A tax rate of 45% applies to receipts of restitution interest, i.e. to compound interest received in respect of awards made under common law claims for the recovery of tax paid under a mistake of law.

Diverted profits tax (¶61600) (strictly a separate tax in its own right) applies at a rate of 25% (31% from 1 April 2023) to certain profits diverted from the UK through the avoidance of a UK taxable presence or through the involvement of entities or transactions lacking economic substance.

Legislation: CTA 2010, s. 4(2) (taxable total profits); FA 2020, s. 6 (main rate for financial year 2021); CTA 2010, s. 18A (small profits rate); CTA 2010, s. 18B (marginal relief); CTA 2010, s. 18D (lower limit and upper limit); CTA 2010, s. 18L (augmented profits); CTA 2010, s. 18N (close investment-holding companies)

HMRC Manuals: CTM01750

In-Depth: ¶701-425 (restitution interest); ¶704-000 (main rate of CT); ¶705-000 (patent box); ¶777-000 (diverted profits tax); ¶782-060 (authorised investment funds etc.)

Key Data: ¶9-000

20020 Companies and income tax

Exclusions apply to remove most income received by companies from the charge to income tax.

The company may have to deduct income tax from certain payments and pass this tax on to HMRC. The tax is accounted for under a system of quarterly returns (CT61) where income tax due to HMRC is set off against any income tax suffered at source by the company. Where the amount of income tax suffered exceeds the amount payable to HMRC, the company may set the excess amount against the corporation tax due (or get a repayment if there is no CT liability).

In so far as they are not to other UK companies, payments from which tax must be deducted (relevant payments) are:

(1)annuities and other annual payments (like deeds of covenant – although not for qualifying donations to charity, see ¶21120);

(2)patent royalties;

(3)annual interest paid (except to a bank carrying on business in the UK):

(a)by a company;

(b)by a partnership which includes a company; or

(c)to someone whose usual place of abode is outside the UK; and

(4)copyright royalties paid to someone whose usual place of abode is outside the UK.

Tax is deducted at the basic rate. Where tax has been deducted from a payment, the recipient may demand a certificate of deduction of tax, showing the gross and net payment and the amount of tax deducted.

Tax deduction schemes also apply to the following in essentially the same way as for individuals:

•PAYE (see ¶9700);

•payments to subcontractors in the construction industry (see ¶6450);

•payments to non-UK resident entertainers and sportsmen (see ¶1605);

•public revenue dividends; and

•foreign dividends.

Legislation: ITA 2007, Pt. 15; CTA 2010, s. 967, 968

HMRC Manuals: CTM35000ff.

Other Material: HMRC’s guidance on the Form CT61 procedure (https://bit.ly/2xWqueu)

In-Depth: ¶117-000;  ¶194-900; ¶700-100

20025 Double tax relief

If income and gains are not exempted from tax in the UK (e.g. by the application of the distribution exemption provisions (see ¶33000) or the branch exemption regime (see ¶19020)), relief for foreign tax (known as ‘double tax relief’ (DTR)) is usually available in one of three forms:

(1)as a result of the operation of a double taxation agreement (‘treaty relief’);

(2)by way of ‘unilateral relief’; or

(3)by deduction from profits taxable in the UK.

Where credit is claimed against UK tax for the foreign tax suffered (under (1) or (2) above), relief is capped at the amount of corporation tax payable. Unrelieved foreign tax in respect of a trade carried on through a PE, and managed at least in part in the UK, can be carried forward and offset against corporation tax payable on the profits of the PE in future periods.

For tax treaties, see ¶61000.

In-Depth: ¶170-000

20010 Rates of tax applicable to ring fence (oil & gas) profits

•The main ring fence profits rate of corporation tax applies to profits arising from ring fence activities (specified North Sea oil and gas development activity) at a rate of 30%.

•The small ring fence profits rate of corporation tax applies to profits falling below the lower limit of £300,000 at the rate of 19%.

Marginal relief smooths the transition between the small ring fence profits rate and the main ring fence profits rate by allowing a deduction from a company’s tax liability calculated at the main rate where that company’s ring fence profits fall between the lower limit of £300,000 and the upper limit of £1,500,000.

Marginal relief = the marginal relief fraction of 11/400ths × (upper limit of £1,500,000 – augmented profits per CTA 2009, s. 279G) × (taxable total profits ÷ augmented profits).

Legislation: CTA 2010, s. 279A (ring fence rates of tax); CTA 2010, s. 279B (marginal relief); CTA 2010, s. 279G (augmented profits)

In-Depth: ¶795-000

Key Data: ¶9-000

21000 Profits from a trade

The charge to corporation tax on income applies to the profits of a trade. There are no references to a company carrying on a profession or vocation in the corporation tax legislation.

Legislation: CTA 2009, s. 35

HMRC Manuals: BIM15050

In-Depth: ¶707-000

21010 The meaning of ‘trade’

The word ‘trade’ is incompletely defined in the legislation. ‘Trade’, it is stated, ‘includes any venture in the nature of trade’: without a definition of ‘trade’, this is of limited assistance. The only thing to do, as Lord Denning MR once declared, is to look at the usual characteristics of a trade and see how the transaction under consideration measures up to them. While some activities are deemed to be trades by statute (see ¶21015) for the most part, decided cases must be studied, to distinguish the borderline between trading and other activities: most of such cases fit easily within one or more of the ‘badges of trade’ (see ¶21020).

Legislation: CTA 2010, s. 1119

Cases: JP Harrison (Watford) Ltd v Griffiths (HMIT) (1962) 40 TC 281; McMorris [2015] TC 04204; Thomson [2018] TC 06598

HMRC Manuals: BIM20000ff.

In-Depth: ¶707-000

Document downloaded on 15-09-2021 from Croner-i Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.

This article was correct at the date of publication. It is intended as an aid and cannot be expected to replace specific professional advice and judgment. No liability for errors or omissions will be accepted. It is the responsibility of those using the information to ensure it complies with the law at the time of use and that it is used in line with relevant rules and regulations governing the subject matter in question.

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