Module 4: Business Taxation,

Corporation Tax
In this module you will learn more about business and
corporate taxation. We will begin with a brief overview of
businesses and taxes that apply, and the UK’s plan for the
next several years. We will give you some of the basic terms,
dates and deadlines you should know with regards to corporate
and business tax.

In this module you will learn:

How business taxation works in the UK
The Business Tax Road Map and HMRC’s views of the future
Company Tax Return and how to submit one
Capital Tax Gains and Rates
Tax Reliefs
Overview of corporation tax
Corporation tax allowances and reliefs

4.1 Overview of Business Taxation

It is widely known that the United Kingdom
is one of the most attractive countries in
which to locate an international business.

With an undisputed first-class infrastructure and high calibre

skilled workforce, the United Kingdom is furthermore committed
to establishing one of the most comprehensive tax regime
systems in Europe.
Since 2010 the UK Government has undertaken a series of
changes to the UK tax system, by making policies simpler and
better matching the needs of the globalised trading world.

The UK tax system now features a full exemption for various

types of foreign-source dividends, moving from a system of
worldwide taxation to a territorial system where the focus is
on taxing profits in the UK.

4.2 The Business Tax Road Map

Since 2010, the Government has published the
Corporate Tax Road Map that sets out the
UK’s strategic approach to tax reform.

The road map outlines the fundamental principles of the reform

in order to give international businesses the certainty they
need to invest in the UK and expand internationally.

This includes a low corporation tax rate, maintaining a stable

tax system, tax policies which are aligned with modern
business practice, minimisation of the complexity of tax
legislation as well as transparent and consistent approach to
the creation of new policies by working with taxpayers to
provide a convenient approach.

The government has made notable progress since 2010, reducing

the deficit from 10.3% of GDP in 2009-10 to 2.6% in 2016/17
and continuing this downward trend since. The Government has
stressed the importance of supporting small and medium-sized
business as they employ over 15 million people and create a
combined turnover of £1.9 trillion.
4.3 Accounting periods for
Corporation Tax
The ‘accounting period’ for Corporation Tax
is the time covered by your company tax
return that directly affects your deadlines
for paying Corporation Tax and sending out a
Company Tax Return form to HMRC.

N.B. Once you have registered your company for Corporation Tax
you will receive a letter from HMRC stating your accounting
period.

4.4 Company Tax Return

A Company Tax Return form is an online (or
paper) document in which you report details
about your taxable income, capital gains,
and claim tax allowances and reliefs.

You will need to submit a company tax return if you:

Are self employed

Are a company director
Have income from renting your premises
Have other untaxed income

In case you receive a “notice to deliver a Company Tax Return”

from HM Revenue and Customs you will need to prepare and send
a return even if you have no profits or Corporation Tax to
pay. To fill in your Company Tax Return you will need to
calculate your profit and loss for Corporation Tax, which you
will use to sum up your corporation bill. We provide more
guidance on how to prepare the statements needed for your
company return in Module 9.

If you have submitted your Company Tax Return, but believe

that there is an error or simply would like to make certain
changes, you are allowed to file those within 12 months of the
filing deadline.

Important: It Is highly important to note that the deadline

for filing your tax return is 12 months (a year) after the end
of the accounting period it covers, and penalties apply if you
miss the deadline.
Note: You can file your Company Tax Return online. Make sure
that you have registered for an HMRC online account and have
your Companies House password and authentication code ready.

4.5 Capital Tax Gains

A capital gains tax is a tax that businesses
incur when they make a ‘profit’ when all or
part of a business asset is sold.

Business Assets may include land and buildings, fixtures and

fittings, plant and machinery, shares from the business,
registered trademarks and your business’ reputation.

N.B. You do not pay tax on gifts to your wife, husband, civil
partner or a charity/fund.

How do I work out my gain?

The ‘profit’ you have gained from selling an asset is the
difference between what you paid for this asset against the
value that it was sold for.

You are allowed to use the market value of the asset in the
following cases:

1. You have given it away for free

2. You have intentionally sold it for less than you have
bought it for as solidarity to the buyer
3. You have inherited it and have no information about its
cost
4. You have owned it since before April 1982

Cost reduction
You might be entitled to a deduction if you have incurred
costs of buying, selling or improving your asset during the
time you have owned it. Such costs include valuations or
advertisement cost used during the reselling process, Stamp
Duty Land Tax and VAT.

You are not entitled to a deduction on costs as the ones you

can claim as business expenses or interest on a loan to buy
your asset.

N.B. You might be entitled to reduce or delay the amount of

Capital Gains Tax if you are eligible for tax relief.

Tax Rates
Tax rates for 2017/2018 and 2018/19 dependent on Income Tax
Band.

Income Tax
2018/2019 Tax Year 2017/2018 Tax Year
Band
28% (gains from 28% (gains from
residential residential
If you pay
property) property)
Higher Rate
20% (gains from 20% (gains from
Income Tax
other chargeable other chargeable
assets) assets)
 10% or 20% 10% or 20%
If you pay
(18% or 28% on (18% or 28% on
Basic Rate
residential residential
Income Tax
property) property)

Tax Relief
You might be eligible for a tax relief that you can use to
reduce or delay the amount of Capital Gains Tax owed.

Entrepreneur’s Relief – If you are a sole trader, a business

partner or a shareholder in a ‘personal company’ you are
entitled to pay 10% Capital Gains Tax if you decide to sell
all or part of your business.

Business Asset Rollover Relief – If you are looking to replace

an ‘old’ asset with a ‘new’ version of it (i.e. machinery) you
can delay paying Capital Gains Tax when you sell or ‘dispose’
during the resale process.

Incorporation Relief – If you are planning to transfer all

your business (including its assets) in return for shares in
the company, you can delay paying Capital Gains Tax when you
transfer your business to a company.

Gift Hold-Over Relief – You will pay no Capital Gains Tax if

you give away a business asset for trading as a sole trader or
a partner.

Private Residence Relief – You do not pay Capital Gains Tax if

you sell your main home. However, if you have used a part of
your home for a commercial use (i.e. as an office) you will
have to pay Capital Gains Tax on that part.

Activity #1:
Estimated time 25-30 minutes

Create 10 different types of imaginary business scenarios

based on the different tax rates as per the table above, and
for each one fix hypothetical income per year and value of
property they have to pay tax on.

Proceed to calculate the total tax due for each of the

hypothetical companies based on the examples we have provided.

4.6 Corporation Tax

Corporation Tax is a tax levied on the
taxable profits of (1) limited companies,
(2) any foreign company that operates a
branch in the UK and (3) any club, co-
operation, and unincorporated organisations.

Companies based in the UK must pay corporation tax on all

taxable profits no matter if they come from outside or inside
the UK. If an international company decides to expand in the
UK (open up a branch) then it will only need to pay
corporation tax on profits that arise in the UK.

Example:
If you run a local community club and your organisation makes
a profit you will be entitled to pay a Corporation Tax.

Taxable profit
Is the profit (or loss) upon which taxes are payable. Taxable
profits for Corporation Tax include the money your company
makes from doing day-to-day business (trading), investments
acquired from another entity, or when selling business assets.

To make sure that your company is paying corporation tax you

can register it along with your incorporation in the Companies
House, or within three months of beginning to trade (i.e. make
purchases and sales). Once you have registered with the
Companies House you should receive a letter from HMRC
containing your 10-digit Unique Taxpayer Reference (UTR). In
case you did not receive one contact HMRC’s helpline.

Unique Taxpayer Reference (UTR)

This is a 10-digit number that is unique to either you or your
company, which HMRC use to identify you for your tax
obligations.

Important: Once you have received your UTR make sure to

register for Corporation Tax online.
Your Responsibilities

1. You must keep all records about the company itself,

including financial and accounting records
2. Prepare your Company Tax Return to work out how much
Corporation Tax you owe.
3. Pay your Corporation Tax, by your deadline
4. File your Company Tax Return by your deadline

4.7 Corporation Tax rates

You must pay Corporation Tax at the rates
that HMRC have set in your accounting period
for Corporation Tax.

From 1st From 1st From 1st From 1st

Rate April April April April
2018 2017 2016 2015
Small profits
rate (companies
with profits 19% 19% 20% 20%
less than
£300,000
 Main rate
(companies with
19% 19% 20% 20%
profits over
£300,000)
Main rate (all
profits except
19% 19% 20% 20%
ring-fence
profits)

Ring Fence Corporation Tax (RFCT) only applies to companies

involved in the exploration for, and production of, oil and
gas.

4.8 Corporation Tax allowances and

reliefs

Overview of capital allowances

Often during the operation of your business, you may need to
buy assets that you will use for your business.

These are called plant and machinery assets, and can include:

1. Equipment
2. Machinery
3. Costs of demolishing plant and machinery
4. ‘Integral features’ of a building such as electrical
system, lift, lighting system, cold water system, etc.
5. Vehicles you use for business purposes
 6. Fixtures such as installation of CCTV, bathroom suites
and fitted kitchens in a building

Important: You cannot claim capital allowances on things you

lease, buildings, land and structures or any items used for
business entertainment.
Other business costs you can claim that are not considered a
‘business asset’ but are an essential expense to a business
include:

Your business’ day-to-day operating costs

Interest payments or finance costs when purchasing an
asset from someone
Renovations of business premises in disadvantaged areas
of the UK
Research and development
Patent rights and Intellectual property
Dredging
Cemeteries and crematoria
Extracting minerals

Note: If you are a sole trader or partner with an annual

income of £85,000 or less, you might be eligible to use cash
basis accounting . More information on cash basis accounting
will be provided in Module 8.

Annual Investment allowance

The annual investment allowance is a way to claim tax relief
on assets that your business will buy over the accounting
period. If your business buys an asset that is considered
‘plant and machinery’ it qualifies for the annual investment
allowance (AIA) and you can deduct this expense from your
business’ profit before calculating how much tax is due. You
cannot claim annual investment allowance on cars, items you
owned before you started using them in your business or items
given to you or your business.

AIA: HMRC sets the amount of annual investment allowance a

business can claim a year, and as of 1 January 2016 the AIA
amount is £200,000 for sole traders, partners and limited
companies.
There are some items that you can also use outside your
business such as laptops and computers. You cannot claim the
full value of the item, however if you use the laptop half of
the time for your business and the other half is for personal
use you can claim 50% capital allowances on the value of the
laptop.

First year allowances

Certain assets that improve the efficacy of energy and water
equipment qualify for first year allowances, or ‘enhanced
capital allowances’ and you can deduct the full amount of this
expense from your profits before paying tax.

Some of these assets include:

Cars and vehicles that have low or zero CO2 emissions

Energy and water saving equipment
Plant and machinery, e.g. pumps, storage tanks
Energy refuelling equipment

Business cars
Assets such as business cars do not qualify for annual
investments allowance, however, you can claim them as writing
down allowances.

Writing down allowances: A type of capital allowance where you

deduct a specified percentage of the total value of the item
from your profits.
To learn more about business cars and different percentage
rate click here.

How do I claim Capital Allowances?

You must keep records of the accounting period you bought the
item if you would like to claim deductions. Once you have
worked out your capital allowances you can claim through:
 Organisation/ Company Claim through
Sole Trader Self-Assessment Tax Return
Partners Partnership Tax Agreement
Limited companies Company Tax Return

Activity #2:
Estimated time: 25-30 minutes

Create 10 different business entities in different industries

based on the corporation tax rates provided above, and for
each one fix hypothetical profits per year.

Proceed to calculate the total tax due for each of the

hypothetical companies based on the examples we have provided.

Taking into account the hypothetical scenarios, are there any

allowances and reliefs that may be applicable?

Take a Quick Recap Test

4.9 Other reliefs you can claim

Research and Development (R&D) Relief

A company can only claim for R&D relief if an R&D project
signifies a potential in advancing the overall knowledge or
capability in a field of science and technology through the
resolution of scientific or technological uncertainty – not
just the knowledge of the company undertaking the R&D project.

Advance in science and technology:

A collection of activities in a project that includes the

adaptation of knowledge from another field of science and
technology for the purposes of achieving an advance, provided
this adaptation is not readily deducible by a competent
professional.

In any Research and Development (R&D) project the existence of

technological uncertainty implies that there are unpredictable
factors in the investigation or experiment being carried.
Experimental work is defined to be a type of work that one
takes on to produce, create or improve new or existing
materials, devices, products or processes.

As part of applying for R&D relief you must describe the

methods that were used to overcome this uncertainty, not in a
great detail, but enough to show the complexity of what is set
to be achieved.

Costs that qualify for R&D tax relief

If your business and the project both meet the necessary
requirements, you can claim tax relief on expenditure on the
following areas:

Employee costs – expenditure on people and employees

that are directly engaged in carrying out the R&D
project.
Staff providers – if you have used middlemen to hire
subcontractors, whose knowledge and experience will be
used directly in the R&D project.
Materials – consumable and transformable materials that
are directly used in the R&D project. To learn more
about the different material costs, click here.
Clinical trials volunteers – Payments to volunteers to
 be a part of test trials.
Utilities – Power, water, fuel used directly in carrying
out the R&D project.
Software – computer software used in the R&D project.
Capital allowances – general day-to-day running costs
that are directly used for carrying out the R&D project.

How to claim R&D tax relief

You must claim any R&D expenses for a tax relief in your
Company Tax Return. If you are only claiming relief, it will
simply reduce your company’s profit chargeable to CT for the
relevant accounting period.

In terms of record keeping there are not any special

requirements for R&D tax relief claims. You are not expected
to create a new business to claim R&D tax relief claims,
however you must be able to access the required information
easily.

The Patent Box

The Patent Box is an effective reduction of the corporation
tax to 10% for any revenue made from patents. This is due to a
response from UK Government to all high-tech companies to
improve the competitiveness of the arena.

You can only benefit from ‘The Patent Box’ scheme if your
company is liable Corporation tax and makes a profit from
exploiting its patented inventions.

How to claim Patent Box relief

You can claim Patent Box relief in your Company Tax Return.
You will need to apply an appropriate percentage to the
profits that were earned through selling patented inventions

The percentages are as follows:

1 April 2015 to 31 March 2016: 80%

 1 April 2016 to 31 March 2017: 90%
From 1 April 2017: 100%

To learn more about how to calculate the relevant profits that

qualify for The Patent Box relief, click here.

Creative Industry Tax reliefs

In the UK you can get a tax relief if your company is in the
creative industry. These reliefs work on the basis of
increasing the amount of allowable expenditure, where if you
make a loss, you might be able to convert some or all into a
payable tax credit.

To qualify for a creative industry tax relief your company

must be directly involved in the production and development of
children’s television and animation programmes, video games or
any theatrical production.

You can claim for relief in your Company Tax Return once your
company has been approved for a creative tax relief.

To learn more about the Creative Tax Reliefs, click here.

Marginal relief of Corporation Tax

The marginal relief is a system that ensures that Corporation
Tax is paid accordingly to companies with small and bigger
profits. If your company is making a profit between £300,000
and £1.5 million you can claim a Marginal Tax relief.

HMRC has made an online portal for you to calculate your

marginal relief. You can then enter this calculation into your
company’s annual Corporation Tax return.

Assignment
Business Taxation, Corporation Tax

Time: 30+ minutes

Hopefully, you took in as much of the information in this

module as possible. To find out how well you have done,
complete the following worksheet.

Download the worksheet below and complete.

Download Worksheet (PDF)

Module Summary
Confidently moving forward in establishing itself as a
preferred business destination for corporations and small
businesses alike, the UK also champions in digitisation. As a
result of government efforts to reduce the paperwork and
streamline tax collection, submitting an annual return online
is becoming the de facto standard.

The UK supports small businesses by offering capital allowance

claims on any plant and machinery needed to start a business,
annual investment allowance to help out with any purchases
needed outside of the accounting period, first year allowance
to aid any purchases on energy or water efficiency systems, as
well as provisions for business cars.

It is also no wonder why the UK is leading the ratings in

innovation – the tax system supports both small companies in
specialised industries via Research & Development, Patent Box
and Creative Industry tax reliefs, as well as bigger companies
who make more than £300,000 a year with its Marginal relief on
Corporation tax.

It is safe to say that the amount of tax relief available to

businesses of all sizes in the UK and its support for
innovation in emerging industries is unparalleled in
comparison to any other European country.

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