September 2006
77.4 Corporation tax generally
Corporation tax is charged on the profits of UK resident companies and of unincorporated bodies that are not partnerships, such as members' clubs [note 1]. The term "profits" includes all sources of income (other than dividends received from a UK company) and also capital gains.
Corporation tax is charged on the worldwide profits of UK resident companies. Non UK resident companies carrying on a trade, profession or vocation in the UK through a branch or agency are charged only on the income arising from the branch or agency and on capital gains on the disposal of assets in the UK used for the purposes of the trade, profession or vocation or otherwise for the branch or agency. Residence for an individual is usually established by their physical presence in a country (see paragraph 77.20). For a company its residence depends on where it was incorporated and where it is managed and controlled. Under UK tax law, any company that is incorporated in the UK is treated as being UK resident no matter where it is managed and controlled. Companies incorporated abroad are regarded as UK resident if they are managed and controlled in the UK.
Most private limited companies in the UK are close companies [note 2]. A close company is a UK resident company under the control of;
A participator is defined as anyone who possesses or is entitled to acquire share capital or voting rights in the company.
As well as being subject to the normal corporation tax rules, close companies are subject to additional requirements covering dealings with participators (such as loans - see also paragraph 77.6.)
If the company is a close investment holding company [note 3], tax is charged at the full rate of corporation tax, rather than at the lower small companies rate, whatever the level of the company’s profits. A close investment holding company is defined negatively as a company which does not comply with specific conditions. A company is not a close investment holding company if it exists wholly or mainly for the purpose of [note 3];
77.6 Participators loan accounts
Where a close company makes a loan or advance to a participator or the associate of a participator, unless the loan or advance was made in the ordinary course of the company's business, the close company is due to pay tax on the loan or advance [note 4]. A loan or advance occurs most often where a participator incurs a debt to the company by overdrawing on a current or loan account with the company. The current rate of tax payable on such a loan is 25%. In practice this type of loan is usually made to a director, but these provisions apply equally to a shareholder. The company has to notify HMRC not later than 12 months after the end of the accounting period in which the loan is made. The due date for payment of the tax is 9 months after the end of the accounting period in which the loan is made (i.e. the same date due date for the corporation tax for that period).
Where a company has become insolvent with such a loan outstanding, the loan should be recovered in the same way as any other outstanding loan made by the company. Any tax paid or payable would be repaid or discharged on repayment of the loan.
Registered charities are exempt from tax on most forms of income and capital gains if they are applied to charitable purposes. A charity is exempt from tax on the profits of;
Trading by the charity not within the exemption is often carried out by a separate limited company. Companies owned by charities are are liable to pay tax on trading profits, but they will often donate their whole profits to the charity, and so get tax relief. Under the Gift Aid scheme, the profits of this company can be donated to the charity without first deducting tax on the donation, subject to the condition that sufficient capital must be left with the trading company to allow it to continue its trading.
The profits of members clubs’ are chargeable to corporation tax (except clubs that are registered as community sports clubs.)General subscriptions or contributions from individual members are not treated as part of the club's taxable income. Income from investment of club's funds, trading profits and income from property lettings are included in taxable income. Where separate charges are made on members for private use of club facilities (e.g. for a private party) those receipts are treated as taxable income.
A company may choose its own accounting period, and taxable profits are calculated based on that accounting period, however short it is [note 5]. This is normally the period for which the company's accounts are made up. However, if a company makes up accounts for a period of more than twelve months, it is split into two or more chargeable accounting periods of twelve months plus a chargeable accounting period of covering the remaining period of the prepared accounts.
A company must give written notice to HMRC when it comes within the charge to corporation tax. The notice must be given no later than three months after the beginning of the accounting period.
Companies are required to self assess their liability for corporation tax, and must pay the tax due within 9 months and one day after the end of their accounting period. Companies with profits of more than the upper limit for the small companies rate (reduced pro rata for chargeable periods of less than twelve months or where there are associated companies) must pay by equal quarterly installments.
Companies not required to pay by installments are however required to account quarterly for any income tax they have deducted from interest payments, royalties etc paid out.
HMRC send out a Notice to companies to deliver its Company Tax Return usually between 3 - 7 weeks after the end of a company's accounting period. The return must be returned no later than the statutory filing date. This date is normally the later of:
The return must contain details of the company's self assessment and details of any trade and losses, e.g. capital losses. Any accounts prepared should be attached to the return.
The self assessment becomes final when accepted by HMRC unless further enquiries are needed or the company wishes to amend it within an allowed time period.
77.11 Rates of corporation tax
Corporation tax rates are fixed for financial years ending 31 March. Financial years are identified by the calendar year in which they begin, so financial year 2005 is the year ending on 31 March 2006.Where the tax rate changes during a company's chargeable accounting period, the total profits are apportioned on a time basis (in days) and charged at the respective rates in order to calculate the corporation tax payable for the accounting period.
The main rate of corporation tax is fixed a year in advance as companies with profits over a certain limit are required to pay corporation tax by installments in advance.
A lower small companies tax rate applies where profits are below a certain threshold. There is a marginal relief calculation for companies with profits that fall between the small companies rate lower and upper thresholds.
There has previously been a starting rate of corporation tax for companies with profits of £10,000 or less. There was also a marginal relief calculation for companies with profits between £10,000 and £50,000 as for the small companies rate, and the formula for calculating it is the same as for the small companies rate.
Details of the rates of corporation tax for current years can be found on the HMRC website at http://www.hmrc.gov.uk/rates/corp.htm. Archived historic rates can be found at http://www.hmrc.gov.uk/rates/archive.htm
77.12 Information available to the official receiver from HMRC (amended September 2012)
Generally, HMRC will release any information that would have been released to the company, or that the company would ordinarily have been aware of, to the liquidator. This might include, for example, copies of correspondence, details of payments made and notes of interviews with company officers. Internal HMRC documentation which the company would not ordinarily have been aware of and information about the directors personal affairs will not be disclosed to the official receiver in his/her capacity as liquidator.
The official receiver's first enquiries should be made to the local tax office (where the local tax office is known), using the standard letter templates, Annex A, Annex B, or Annex C (see paragraph 77.81 for further details). Where the local tax office is not known, or where the local tax office fails to reply, enquiries should be sent to the Enforcement and Insolvency Service, Worthing address, via secure email to eisw.insolvency@hmrc.gsi.gov.uk (using party ID 100258267), see paragraph 77.88 for further details.
See Part 10 for more details on making enquires.
Where a company has incurred a trading loss, it may set that loss against any other profits made in that accounting period. If a loss balance remains, the company may carry it back and set it against the total profits made in the last twelve months.Any balance of loss remaining (or the whole loss if the company does not wish to claim the current set off and carry back) is carried forward to set against later profits of the trade.
Where the loss has been incurred in the last twelve months of trading, the carry back period is extended to three years.
A trading loss may also be transferred between companies in a group of companies (i.e. a holding company and its 75% owned subsidiaries.) A trading loss incurred by a company in liquidation that is part of a group of companies may be an asset in the liquidation, as any company with taxable profits that the loss may be transferred to will gain a tax benefit on the transfer.
77.14 Post liquidation taxation
A company resident in the UK for tax purposes continues to be subject to corporation tax on profits arising in its winding up. On the commencement of the winding up the company's corporation tax period ends and a new one begins. A winding up is taken as commencing when the company passes a resolution for its winding up or on the date that the petition is presented to court (if no such resolution has previously been passed) and a winding up order is subsequently made on that petition. Each accounting period ends on 12 months from the commencement or on the completion of the winding up.
Where a provisional liquidator has been appointed the rule can cause problems as the actual winding up order can be deferred for some time. The accounting periods and priorities cannot be decided until the outcome of the petition has been decided and it will be necessary in such instances to consult HMRC to reach a solution.
Trading and other income in a liquidation are generally calculated and taxable under the ordinary rules. The income of receivers and mortgagees in possession will also be regarded as income of the company to which they have been appointed for tax purposes. A liquidator's expenses are allowable in computing profits for tax purposes where they would be deductable under the normal taxation principles.
The liquidator of the company is its "proper officer" within the Taxes Management Act 1970 section 108(1) . However, this provision does not impose any personal liability on him/her. The liquidator’s obligations are confined to fulfilling the formal obligations of the company such as filing returns. A liquidator must, however, take care to retain funds to discharge any tax liabilities or obtain an indemnity, as if he/she underestimates them and makes a distribution, the amount distributed may be irrecoverable as money paid under a mistake of law (Taylor v Wilson’s Trustees CS 1975, [1979] SLT 105) (this is a decision of the second division Scottish court and as such is not a binding authority, but it may be regarded as persuasive) and the liquidator may then have to pay HMRC using his/her remuneration monies.
77.15 Order of priority of tax in liquidation expenses
Corporation tax is payable as an expense in the liquidation as follows:
In the case of Re: Toshoku Finance UK PLC [2002] B.C.C 110 (House of Lords), it was held that post liquidation corporation tax chargeable on interest accrued in respect of a loan between connected companies is to be treated as an expense under rule 4.218(m). In this case, the tax arose as a result of "income" that had not been (and never would be) received by the company. A subsequent amendment to tax law [note 8] now allows for bad debt relief to be claimed by a company in liquidation in respect of loan relationships with a connected company if the connected company is itself subject to insolvency proceedings.
77.16 Taxation in a provisional liquidation
If a company continues to trade after the appointment of a provisional liquidator, tax liabilities may be incurred. It is not clear how the tax due should be dealt with, either as an unsecured claim in the liquidation, a pre preferential expense or a non provable unsecured claim. Where the official receiver is appointed provisional liquidator and he/she believes that tax liabilities may arise after his/her appointment, it is prudent to ask the court for directions either on the correct treatment of tax liabilities as they arise during the provisional liquidation, or for the court's view of the classification of such debts when the winding up order is made.
77.17 Taxation in an administration
For administrations where the petition was presented after 15 September 2003, administrators, like liquidators, are required to account for corporation tax on gains and profits as expenses of the administration [note 9].
77.18 Taxation in an administrative receivership
As a general rule an administrative receiver appointed over assets of a UK resident company is not personally liable for corporation or income tax on income received or gains made by the company after his/her appointment or as a result of his/her actions. The company itself retains responsibility for tax payable.
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