Computation of the Payable Corporation Tax in Company Setup UK

22 Oct

This blog will emphasizes on the calculation of corporation tax that is payable on the total profits liable to tax. Also, the effect of short accounting periods and the associated companies on the rate of the payable corporation tax.

Charge to the Corporation Tax

Profits of Augmented Type

The augmented profits constitute of the total profits liable to tax, with additional franked investment income, also said to be FII.

By augmented profits, we mean the total profits liable to tax, and also the grossed-up amount of dividends acquired from both the companies working inside UK and offshore company formation UK. An exception exists in the case of the dividends that are received from a subsidiary of 51 percent of the recipient company or from a company in which the recipient company and the paying company are 51 percent subsidiaries of a third company, at times referred to as ‘group income’ or ‘group dividends’, such companies are not taken into account.

The grossed up amount of the dividends of UK and non-UK type is the dividend that is acquired multiplied by 100/90. This is due to the fact that the dividends are considered as the paid net of a 10 percent credit of tax. The amount of dividend acquired is referred to as the franked investment income, or the FII.

Years of Finance

The rates of tax are set for the financial years. The rates or charges of the corporation tax are fixed for the years of finance.

The duration of a financial year is from April 1 to the following March 31 and is recognized by the calendar year in which it starts. As an example, consider that the year terminated March 31, 2014 is the financial year 2013. Then this must not be confused with the year of tax, that is operational from April 6 to the following April 5.

Taxation at the Main Rate

The companies are subject to tax at either the main rate, the rate of small profits or acquire marginal relief that depends on their augmented profits.

The main rate of tax of corporation is an amount equivalent to 23 percent for the financial year 2013, 24 percent for the financial year 2012 and 26 percent for the financial year 2011, is applicable to the total profits liable to tax for the companies residing in the UK whose augmented profits are less than an amount of 3,00,000 pounds.

The Marginal Relief

The marginal relief is applicable in the case where the augmented profits of an accounting period of a company residing in UK are more than 300,000 pounds but less than 1,500,000 pounds. First, the calculation of the corporation tax at the main is performed and then we subtract the following fraction:

(Upper limit – Augmented Profits) * Taxable Profits/Augmented Profits *Standard fraction

Where the standard fraction is 3/400 for the financial year 2013, 1/100 for financial year 2012 and 3/200 for the financial year 2011.

The marginal rate of the corporation tax between the upper and lower limits is 23.75 percent. The marginal rate of tax is considered to be an effective rate and is never actually utilized in working out the corporation tax.

It should be noted that in spite of the fact that there is an effective charge corporation tax of 23.75 percent on total profits liable to tax, this rate of tax is never used in the actual computation of the corporation tax. The rate is simply an effective marginal rate that one must be familiar to. It is specifically important when we consider the loss relief and the group relief.

The effective marginal rate of tax in the financial year 2012 was 25 percent and 27.5 percent in the financial year 2011.

Can an accounting period fall in more than one financial year?

The answer is yes. An accounting period can fall in financial year more than one. If the limits and rates for the corporation tax are similar in both the years of finance, then the computation of tax can be done for the accounting period considering that it fell within one year of finance.

However, if the limits and/ or rates for the corporation tax are distinct in the financial years, the total profits liable to tax and augmented profits are divided in time between the years of finance. This will be the scenario where a register ltd UK has an accounting period in parts in the financial year 2012 and in parts in FY 2013, unless the company makes payment of the tax at the rate of the small profits.

Associated Companies and Small Period of Accounting

The upper and lower limits that are utilized in order to define the rates of tax are apportioned by the number of the associated register ltd UK and may also require to be pro-rated on the basis of time if an accounting period does not exceed the duration of 12 months.

The expression of associated companies in the terms of tax is not connected to the financial accounting. For the purposes of tax, a company is associated with another company if one of the two companies or both of them are controlled by the same person or persons, that are the individuals, companies or the partners. Whether this company is establish company in UK or not, is not relevant even when the companies not placed in UK cannot take advantage from the rates of small profit or from the marginal relief. Control is provided by keeping a hold of over the 50 percent of the share capital or the power to vote or having an entitlement to more than 50 percent of the income that can be distributed or of the total assets in case of a wind up.

In case of the company having more than one associated companies, then the limits of profit for the aim of rate of small profits are apportioned by the number or the count of the associated companies, and adding 1 to it, that is the count of the company itself.

Establish company in UK that may have only an association for part of an accounting period are supposed to be associated for the entire period for the aim of making the determination of the limits of profit.

An associated company is not considered or ignored for these purposes if it is dormant, that is, it has not continued any business or trade at any instant of the accounting period, or the portion of the period during which it got an association. A holding company is counted as not being a carrier of any trade or business as long as:

  • It only has the entitlement to subtract any charges in the form of outgoings or expenses of the management
  • The only assets that it possesses are those of the shares in the subsidiaries
  • Its only profits are the dividends from subsidiaries, that are divided in their whole to its shareholders

The reduction of the limits of profit is performed in a proportionate way in case of the accounting period lasting for a period less than 12 months.

Returns of Corporation Tax in Company Setup UK

Company’s Notification to the HMRC

A company should give a notification to the HMRC within three months once the trade starts.

The notification by the company to the HMRC must be given at the start of its first accounting period, that is, in usual, when it starts trading, and the start of any subsequent period that does not instantly follow the termination of a preceding accounting period. The notice must be given in a prescribed form and should be submitted within three months of the relevant date.

A company that is chargeable to the tax for an accounting period and has not acquired a notice to make filing of the tax return should give notice of chargeability within 12 months of the termination of the accounting period. The normal penalty regime for failing to make a notification is applicable.


The returns of the corporation tax should usually be filed within twelve months of the termination of an accounting period.

The tax return of a company must be filed in an electronic format and should include a self-assessment of any tax that remains payable. The limited companies are also supposed to file a copy of their accounts in an electronic format. The filing of accounts must be performed in Ixbrl, that is, inline extensible business reporting language.

To get the job of reporting business information in an electronic format, Ixbrl is a standard tool that makes use of tags that are readable by the computers. HMRC provides the software that can be used by the small companies that have simple accounts. This software produces automatically, the computations of the accounts and tax in the right and appropriate format. The other companies can make use of a service of tagging that will apply the correct tags to computations and accounts, or some other software that automatically produces Ixbrl computations and accounts or a software that allows the correct and fitting tags to be added to computations and accounts.

The tags that are utilized are kept in the dictionaries that are known as the taxonomies, having different taxonomies for different aims. The tagging for the computations of tax is on the basis of the computational taxonomy of the corporation tax that involves more than 1200 relevant tags in number.

The necessity or obligation to file a return occurs in the case when the company acquires a notice needing a return. A return is needed for each accounting period that terminates during or at the end of the period mentioned in the notice that needs a return. A company also has to file a return for some other specific periods that are not considered to be the accounting periods, for example for a period for which the company is not active.

A company that is not provided with the notice needing a return should, if it is chargeable to tax, give a notification to the HMRC within the duration of 12 months of the termination of the accounting period. The inability of being able to do so results in a maximum penalty equivalent to the tax that is not paid twelve months after the termination of the accounting period. The tax to fulfill this purpose consists of the corporation tax and the national tax on loans to the participators of the close companies.

Some other information may also need to be fed in order to provide a notice to file a return that includes reports and accounts. In case of a company that resides in the United Kingdom, the normal requirements to make the delivery of the accounts is extended only to the accounts that are needed under the companies’ act.

The due date for the return is the filing date or before that. This can be the later of:

  • 12 months after the termination of the period to which the return is related
  • If the relevant period of account is more than 18 months, 30 months from the beginning of the period of account
  • If the relevant period of account is less than the duration of 18 months, 12 months from the termination of the period of account
  • Three months from the date on which the notice needing the return was given.

The relevant period of account is taken as to be that one in which the accounting period to which the return is related terminates or ends. A penalty of 100 pounds exists in not being able to make the submission if the return on time, incrementing to 200 pounds if the delay is extended from the period of three months. These penalties are shifted to 500 pounds and 1000 pounds respectively in the case if the return was late or never got submitted.

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