introduction to corporate taxation_new

8/12/2019 Introduction to Corporate Taxation_new

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Corporate Tax

A. INTRODUCTORY NOTE

1. This section presents analyses of the direct taxes paid by companies:mainly corporation tax and, for companies extracting oil or gas from the North Sea,petroleum revenue tax. This chapter excludes the windfall tax on the excess profits of

privatisedutilities

which

was

introduced

in

the

July 1!

"udget

#see the Table T1.$%.

B. CORPORATION TAX

An outline and major milestones

2. &orporation tax is charged on the profits made by companies, public corporations and

unincorporated associations such as industrial and provident societies, clubs andtrade associations. The tax is charged on the profits made in each accounting period,

i.e. the period over which the company draws up its accounts. The rates of taxationare set for the financial year 'pril to (arch) where an accounting period straddles *1

(arch the profits are apportioned between the two financial years on a time basis.

3. &ompanies have been charged to corporation tax since 1+. "efore that they were

liable to income tax on their total income and also to profits tax. The system

introduced in 1+ charged a uniform rate on all profits and an additional charge to

income tax was made when profits were distributed.

4. -n 1!* a partial imputation system was introduced to mitigate the double tax charge

when profits are distributed. This was achieved by the twin mechanisms of advance

corporation tax #'&T% and tax credits.

5. -n July 1!, the new /overnment began a series of reforms of tax credits and

corporation tax payments. 0ayments of tax credits to pension schemes and 2companies were abolished on dividends paid on or after $ July 1! and the

remaining payments of tax credits were cut from + 'pril 1. '&T was abolished fordividends paid on or after + 'pril 1 as were 3oreign -ncome 4ividends which

allowed companies to pay dividends without tax credits. ' system of 5uarterlyinstalment payments of corporation tax was introduced for large companies for

accounting periods ending on or after 1 July 1.

Te partial imputation s!stem

6. ntil 'pril 1 a company paid '&T when it paid a dividend. This tax could be set

off, within a limit, against the corporation tax liability of the accounting period. The

remaining tax liability was called 6mainstream6 corporation tax. 7ne purpose of '&Twas to finance the tax credit which the 8xche5uer made available to the shareholderreceiving the dividend. The tax credit could be set against the shareholders incometax liability on the dividend or, until the payment of tax credit was abolished for non9

taxpayers and exempt institutions, the credit would be paid to the shareholder.

7. ' company which could not set off the whole of the '&T paid against the tax charged

on its profits had 6surplus '&T6. This could be carried bac for up to + years #up to $

years before 1;


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Tax rates

8. The rates of corporation tax from 1+ to those set in 3inance 'ct $== are shown in

the Table T'.+. >ates were substantially reduced from 1;* to 1;+ as part of a

range of measures which included the abolition of stoc relief and ma?or changes tocapital allowances. The rate of '&T changed in line with the basic rate of income taxuntil 1$9*. 3rom then until its abolition the rate was lined to the lower rate ofincome tax of $= per cent with a transitional rate for '&T #e5uivalent to $$. per cent%in 1*9%. -n the $== 0re9"udget

>eport, the N&4> and Aero per cent rates were replaced with a single banding set at the

small companies rate of 1 per cent. This rate was raised to $= per cent from 1 'pril $==!

and $1 per cent from 1 'pril $==;. The main rate of &T was reduced from *= per cent to

$; per cent from 1 'pril $==;.

Pa!ment and assessment arran"ements

10.'&T was payable on the 1


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except that companies have no exempt amount and company gains are not affected


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by the reforms made in 1; to capital gains tax. "efore 1;!, gains charged to

corporation tax were reduced by a specified fraction to produce the e5uivalent of the

tax rate on gains by individuals.

14. &apital allowances provide relief, for corporation tax purposes, for the consumption or

depreciation of capital assets incurred for the purposes of carrying on a trade.

4ifferent types of assets 5ualify for different rates of allowances #see the Table T'.%.&apital allowances may be claimed in the year in which they accrue and any unused

capital allowances may be carried forward to set against &apital /ains in later years.They may also be carried bac in the same way as trading losses. Tax credits were

introduced in the 1 "udget, and extended later, to provide enhanced relief forresearch and development and some other types of expenditure. 3or some types of

expenditure non taxpayers can receive a payable tax credit.

15.' company which maes a trading loss may carry that loss bac for 1 year #* years

from 11 to July 1!% to set against the profits of an earlier accounting period. 'n

unrelieved trading loss can also be carried forward without time limit to set against

income from the same trade in a future accounting period.

16. 4eductions are allowed from a companys total profits for any charges #interest and

other payments% it pays and, in the case of an investment company, its managementexpenses. 3rom 'pril 1+, new 6loan relationship6 rules have been in force for the

treatment of interest and similar payments. ' deduction against the tax liability isallowed for income tax deducted at source from interest received #to the extent that it

is not used to cover income tax the company itself deducts on interest payments itmaes%. 4ouble taxation relief for foreign tax is allowed as a deduction against the taxcharged on profits.

Compan! "roups

17. &ertain special rules and reliefs apply to companies which operate as a group. '

company which maes a trading loss can surrender that loss as group relief to set

against the profits of an e5uivalent accounting period of another group member.'ssets can be transferred between group members without giving rise to achargeable gain at the time of transfer. "efore the abolition of '&T a subsidiary couldpay a dividend to its parent company without paying '&T and a parent couldsurrender '&T it had paid to a subsidiary company.

Inter#$ompan! di%idends

18.' company is not taxable on a dividend received from another company resident in

the nited 2ingdom #2%. Such dividend income if received with the tax credit iscalled 6franed investment income6. Chen the company itself pays a dividend itmaes a 6franed payment6. ' company only had to pay '&T on the excess of its

franed payments over its franed investment income.

3. TAXATION O& OI' AND (A) PRODUCTION *INC'UDIN( PETRO'EU+ RE,ENUE

TAX-

Petroleum re%enue tax

19. &ompanies which earn profits from the extraction under licence of oil and gas from

the 2 and its continental shelf #mainly from the North Sea% are liable to petroleumrevenue tax #0>T% as well as corporation tax on their share of the production of fields

approved for development before 1 (arch 1*. >evenues from fields approvedafter that date are only sub?ect to corporation tax on their profits.

20. nlie corporation tax, 0>T is not assessed on each companys profits for a 1$

month accounting period. -nstead, it is assessed every six months on each

companys share of the cash flow from each separate oil field. 3ields are determinedon geological grounds by the 4epartment of Trade and -ndustry #formerly by the

4epartment of 8nergy%. The assessment also includes tariff receipts from the hire of
http://www.hmrc.gov.uk/stats/corporate_tax/menu.htmhttp://www.hmrc.gov.uk/stats/corporate_tax/menu.htmhttp://www.hmrc.gov.uk/stats/corporate_tax/menu.htmhttp://www.hmrc.gov.uk/stats/corporate_tax/menu.htm


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infrastructure, such as pipelines, and receipts from the sale of some assets. 3ields


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from which gas has been sold to "ritish /as #&entrica from early 1!% under

contracts agreed before July 1! are generally exempt from 0>T. 3rom 1 January

$==< 0>T was abolished on new tariffing business under contracts completed on or

after 'pril $==*.

21. "roadly, oil and gas sales are brought into tax at their arms length value #with special

rules applying where the sale is not at arms length%. These are termed 6gross profits6.&osts of finding, appraising, extracting and transporting the oil and gas to a place of

reasonable delivery are deducted. 0>T gives immediate full relief for allowable

expenditure rather than writing down allowances and revenue deductions. There are

also deductions for royalties and other licence payments.

22. Earious further deductions and reliefs are available against income assessed for 0>T

liability:

1 Fosses when expenditure is greater than income: such losses can be carriedforward or bacward indefinitely)

2 plift: a supplement of * per cent is given on past capital expenditure beingcarried forward to the pay9bac period to compensate for interest and other

finance costs being non9deductible against 0>T. The pay9bac period covers thetime when the cumulative field income exceeds the cumulative costs #allowableexpenditure, including uplift, royalty, and any advance petroleum revenue tax%)

3 7il 'llowance: for fields approved for development up to *1 (arch 1;$, an oilallowance e5ual to the profits of the field up to the value of =.$ million tonnes ofoil is given for each + month chargeable period, sub?ect to a total of milliontonnes per field. 3or fields given development consent after *1 (arch 1;$ andbefore 1+ (arch 1*, a double allowance #=. million tonnes per chargeableperiod up to a total of 1= million tonnes per field% is given for offshore fieldsoutside the Southern "asin of the North Sea) Southern "asin fields approvedbetween those dates receive an allowance of =.1$ million tonnes up to a total of$. million tonnes)

4 Tariff >eceipts 'llowance: this excludes from charge tariff income from each

satellite field approved for development before 1+ (arch 1* up to a limit of theincome from processing =.$ million tonnes in a + month chargeable period)

5 8xploration and 'ppraisal >elief: offshore expenditure on exploration andappraisal, lie other spending can, if necessary, be carried forward to be setagainst revenues in the same field. Gowever expenditure occurring between 1+(arch 1;* and 1 (arch 1* could obtain immediate 0>T relief by being setagainst any profits in a developed field of the same company. This relief wasphased out in the period to 1 (arch 1)

6 nrelievable 3ield Foss: when a field is abandoned with a net loss for 0>Tpurposes, this can be transferred to a productive field)

7 &ross 3ield 'llowance: companies cannot in general defer tax on profits in onefield by offsetting costs in another. Gowever, the cross field allowance hasallowed 1= per cent of development expenditure in offshore fields outside theSouthern "asin of the North Sea and approved for development between 1!(arch 1;! and 1 (arch 1* to be deducted from profits in other fields)

8 >esearch >elief: since 1;!, certain research expenditure not related to specific

fields has been deductible, but only after a three year delay. The first such relief

appears in assessments for the first + months of 1=.

23. Tax is charged on profits arising in each chargeable period and the rates at which

petroleum revenue tax has been charged are:

1! to 1!;


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1;* to June 1*!, percent

from July 1*,= percent


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24. Safeguard relief may be set against the tax charge. This is available in chargeable

periods up to pay9bac and for half as many periods again. -f, in any of these periods,

the tax charge would otherwise reduce the return on a field for the period, beforecorporation tax, to less than 1 per cent of the cumulative 6upliftable6 expendituremeasured on the basis of historical cost, the charge is cancelled. There is also a

tapering provision which limits the charge to a maximum of ;= per cent of the excess

if the rate of return on the field exceeds 1 per cent of the cumulative upliftableexpenditure.

25. 0>T is paid in + e5ual monthly instalments of one eighth of the previous half yearly

chargeable periods liability with the first payment due at end of the second month ofeach new chargeable period. The sixth payment is followed a month later by a

balancing payment of the outstanding liability for the half year based on companiesself assessment of its liability for the period. This payment coincides with the firstinstalment payment for the next chargeable period. 'ssessments are issued by tax

-nspectors three months after they have received companies self assessments. 'nyrepayments from the carry bac of losses would be made subse5uently.

Corporation tax

26. The corporation tax regime for companies which operate in the North Sea allows any

>oyalty and 0>T liability as a deduction against chargeable profits. There arehowever special rules which prevent profits from oil and gas production beingreduced by losses transferred from other activities) North Sea profits are ring fencedfor corporation tax purposes. Similarly '&T accounted for on dividends paid byassociated 2 resident companies outside the ring fence could not be set off againstthe tax liability of companies within the ring fence. &ompanies have been able toclaim a 1== per cent first year allowance for most North Sea capital expenditureincurred on or after 1! 'pril $==$. Since "udget $== North Sea companies havebeen re5uired to mae three instalment payments rather than the usual four, initiallywith the 'pril $==+ instalment payment being brought forward to January $==+, butwith the three payments will be e5ualised in subse5uent years. North Sea companies

mostly have calendar year accounting periods.

27.' new 8xploration 8xpenditure Supplement #88S% was introduced for exploration and

appraisal expenditure on or after 1 January $==< to enable companies with no

corporation tax liability to enhance the value of the relief by + per cent a year for a

maximum of + years. 'n extension of the 88S to cover all ring fence expenditure

#nown as the >38S% was announced in the $== 0re9"udget >eport.

28. To accompany the increase in the supplementary charge #see 7ther charges further

down% companies were allowed to defer their 1==B first year capital allowance claims

for $== into $==+.

Oter $ar"es

29. -n addition to 0>T and corporation tax, other charges on North Sea oil and gasproduction are as follows:

1 >oyalties: administered by the 4epartment of Trade and -ndustry and, broadly,levied at 1$. per cent of the value of production, less the cost of initialtransportation and treatment, for fields approved before 1 'pril 1;$. >oyaltiespayable are deductible against profits chargeable to 0>T and corporation tax,>oyalties were abolished from 1 January $==*)

2 /as Fevy: administered by the 4epartment of Trade and -ndustry and levied,since 1;$9;*, at

T exempt deliveries from fieldsunder contracts dating before 1!. -t was paid by "ritish /as #now &entrica% asa consumer and was deductible against profits for corporation tax purposes. Thegas levy was cut to Aero in 'pril 1;)

3Supplementary 0etroleum 4uty: was charged in 1;1 and 1;$ at $= per cent onoil and gas revenues #less an allowance of the value of =. million tonnes perfield in each + month period%. -t was treated as an expense for the purpose of


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computing 0>T)


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1 'dvance 0etroleum >evenue Tax: was charged from 1;* to 1;+ on oil and gas

revenues #less an allowance of the value of =. million tonnes per field in each +month period%. >ates of charge decreased from $= per cent to per cent over the

4 years. &redit for it was given against any liability for petroleum revenue tax. 'ny

amount not credited was repaid after years or earlier in some circumstances)

2 >ing 3ence &harge: from 1! 'pril $==$ companies that operate in the North Seahave been sub?ect to a supplementary charge on their profits in respect of ringfence trades, at a rate of 1= per cent. 's announced in $== 0re9"udget >eportthe rate of supplementary charge was raised to $=B on profits earned on or after

1 January $==+. The supplementary charge is assessed on the basis of ring

fence profits as computed for corporation tax, but without any deduction for

financing costs. 'ny royalties or 0>T payable are allowed as a deduction against

chargeable profits as they are for corporation tax.

5. ENUIRIE) AND &URT/ER IN&OR+ATION

30. 8n5uiries about statistics on corporate taxes should be addressed to the appropriate

statistician listed below at 2'- #4irect "usiness Taxes%, G( >evenue and &ustoms, 1==

0arliament Street, Fondon. SC1' $"D. Tel =$= !1

&orporation Tax receipts 'lexander &hislett 8xt. *=*'ssessments 4ere Gull 8xt. $


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