Introduction of company taxation
Corporation tax was first imposed by the Finance Act 1965 and for the first time separated the tax liabilities of a company and its shareholders. Prior to 1985 there was no general distinction between a company and any other person in so much that all persons were subject to income tax.
The corporation tax system introduced in 1965 was a ‘classical system’. Under such a system tax is levied at the level of the business entity when profits are withdrawn from it, usually by deduction at source (withholding tax). Distributed profits are effectively taxed at a higher rate than retained profits to encourage the company to reinvest profits in the business.
Imputation system
Corporation tax was modified to the imputation system from 1 April 1973.
The salient features of the imputation system are that a company is charged to corporation tax on all its profits, distributed and undistributed, and income tax is not deducted at source from dividends paid to shareholders.
Prior to April 1999, when a company made a qualifying distribution, it had to account to the Revenue for advance corporation tax of an amount equal to a fraction of the distribution. This fraction may vary each year. The shareholder who receives a distribution also has imputed to him part of the tax payable by the company; this represented a tax credit in his favour to satisfy his liability to income tax at the lower rate or, before 1993–94, at the basic rate.
A company was able to set off its ACT payments, up to a certain limit, against its corporation tax bill and the resulting figure is payable by the company as an amount sometimes referred to as mainstream corporation tax (MCT).
Abolition of ACT
Advance corporation tax was abolished with effect for distributions made on or after 6 April 1999. A reduced imputation system remains with the continuation of a tax credit.
From 6 April 1999, the amount of the tax credit attaching to distributions is ten per cent (matching the rate of tax on dividend income up to the basic rate limit).
Under the current system, trading income remains chargeable on a current year basis under an imputation system.
Law: F(No. 2)A 1997, s. 19, 30–33, 35, Sch. 4 and 5
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 1985 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, as are thrift funds and holiday clubs formed annually.
There are three main types of incorporated company under the Companies Act 1985.
- A company formed so that a sole trader 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.
Law: ICTA 1988, s. 6
Source: ESC C3, Holiday clubs and thrift clubs
The charge to corporation tax
Corporation tax is an annual tax and is charged for each ‘financial year’.
A body is within the corporation tax charge if it has a source of income within the corporation tax charge. A source of income is within the corporation tax charge if that tax is chargeable on the income arising from it, or would be were there any such income. However, a non-resident company is only within the corporation tax charge if it trades in the UK through a branch or agency.
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
- being non-resident ceases trading in the UK through a branch or agency.
Law: ICTA 1988, s. 832(1)
Arrangements with respect to payment of corporation tax
Under its ‘care and management’ powers, the Board may enter into arrangements with a group of companies to allow one member to discharge the corporation tax liabilities of the group (effective from 31 July 1998). The arrangements aim to ease the transition to quarterly payments. ‘Group’ for these purposes is a company and all of its 51 per cent subsidiaries, any 51 per cent subsidiaries of those subsidiaries and so on. Any such payment will not have to be broken down between the respective group members at the time of payment (as they would at present), but will be allocated to them as their tax liabilities arise under self-assessment.
Such arrangements may include provision for, inter alia:
- (a) companies joining or leaving a group;
- (b) payment of interest and penalties on corporation tax;
- (c) amounts treated as corporation tax (i.e. liabilities under the provisions for loans to participators);
- (d) ending the arrangements; and
- (e) any other necessary or expedient provision.
Arrangements entered into will not impact on the actual liability, or the duty to pay corporation tax of any company covered by the arrangements, or any other tax liabilities. Therefore, if a subsidiary’s corporation tax is not paid under a group arrangement, that subsidiary is still liable to pay that tax and any collection, interest, etc. provisions of the legislation will continue to apply.
HMRC have published details of the way payment arrangements will operate for groups of companies liable to pay their corporation tax by quarterly instalments. The arrangements apply for accounting periods ending on or after 31 December 1998. They will allow groups of companies that wish to do so to account for corporation tax (including quarterly instalment payments) on a group basis, instead of by individual company. Companies which undertake to pay tax under the arrangements must make such payments by electronic funds transfer. Once in place, the arrangements will generally apply automatically to subsequent accounting periods, but there are procedures which cover changes in the members of the group or if it transpires that the conditions for the arrangements have been breached.
In addition to the points already made above it should be noted that:
- companies whose tax affairs are in arrears cannot apply,
- generally, the accounting period must be that of all the participating companies, but there will be adaptations for a company or companies joining a group and aligning their accounting period with that of the group,
- not all companies in the group need be UK resident, but the company nominated to pay on behalf of the companies covered by the arrangement must be resident,
- not all members of the group need be covered by the group payment arrangements, and
- there may be more than one arrangement for different sub-groups.
For further details and if groups wish to take advantage of these arrangements, companies should register their interest by contacting the group payment team at the HMRC Accounts Office to which their CT payments are normally made.
Law: FA 1998, s. 36
