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 utilitie whic wa introduce i th Jul "ud privatised s h s d n e y 1 ! get #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 and trade 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 taxation are 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 12 companies 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 for dividends paid on or after + 'pril 1 as were 3oreign -ncome 4ividends which allowed companies to pay dividends without tax credits. ' system of 5uarterly instalment payments of corporation tax was introduced for large companies for accounting periods ending on or after 1 July 1 . T e partial imputation s!stem 6. 1ntil '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 '&T was to finance the tax credit which the 8xche5uer made available to the shareholder receiving the dividend. The tax credit could be set against the shareholder.s income tax 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 ;<% to reduce tax liability in earlier accounting periods, or it could be carried forward without time limit. -n any accounting period the amount of '&T set against tax on profits was limited to the amount which, with the distribution to which it related, absorbed the whole of the profits of the accounting period. 3or example, a company with profits of 1== would have had an '&T limit of $= #assuming an '&T rate of a 5uarter%, because a distribution of ;= and '&T of $= would have absorbed all the profits of 1==.

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 to capital allowances. The rate of '&T changed in line with the basic rate of income tax until 1 $9 *. 3rom then until its abolition the rate was lin:ed to the lower rate of income tax of $= per cent with a transitional rate for '&T #e5uivalent to $$., per cent% in 1 *9 <.

9.

Since 1 !*, there has been a lower rate of corporation tax for companies with small profits. The rate applies when the profits are below a lower limit of profits #as given in Table T'.+%. "etween that limit and an upper limit, a higher marginal rate is applied to produce a smooth progression in the average tax rate from the lower rate to the main rate which applies above the upper limit. The profit limits are restricted for companies associated with one or more other companies according to the number of associated companies to prevent abuse by a company fragmenting into smaller ones. -n 'pril $=== a new starter rate of 1= per cent was introduced on profits up to @1=,=== but the benefit is withdrawn for more profitable companies by a higher marginal rate on profits in the band @1=,=== to @,=,===. -n his 'pril $==$ "udget the &hancellor reduced the starting to Aero and the small companies. rate of corporation tax to 1 B. -n 'pril $==<, the &hancellor introduced a 1 per cent minimum rate of corporation tax on distributed profits, commonly referred to as the Non &orporate 4istributed >ate #N&4>%. -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<th day of the month following the end of the 5uarter in which the distribution was made and mainstream corporation tax was payable months after the end of the accounting period. "efore 1 =9 1, payment rules allowed a longer period before mainstream tax was paid. Some companies paid mainstream tax up to $1 months after the end of their accounting periods.

11. ' further change was made for all accounting periods ending on or after 1 7ctober
1 * when &orporation Tax 0ay and 3ile was introduced. 1nder this administrative system, after nine months a company was re5uired to pay its own estimate of its mainstream corporation tax liability, rather than an estimate produced by the tax inspector. 'fter twelve months it submitted a standard return giving the basis of the liability. 3urther payments and repayments could be made when a final assessment of tax was agreed. This system also introduced some changes to accounting methods which increased the recorded levels of both payments and repayments, but had no effect on net receipts. 3or accounting periods ending on or after 1 July 1 companies are re5uired to assess their liabilities on broadly the same self assessment principles that underly the collection of income tax under self assessment.

12. Cith the abolition of '&T in 1

, a system of 5uarterly instalment payments was introduced for large companies starting with accounting periods ending on or after 1 July 1 . The first instalment became due in month ! of the accounting period with further instalments due in months 1=, 1*, and 1+ with any balance to be paid months after the end of the period. Transitional arrangements phase in the change over four years. Duarterly payments were first made in January 1 and the first large amounts were paid in July 1 . gains. -ncome 9 whether from trading or investments 9 is calculated in the same way as for income tax purposes including capital allowances where appropriate. /ains are calculated in the same way as for capital gains tax #see the capital gains tax chapter%

13. 3or corporation tax purposes, a company.s profits comprise its income and capital

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

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 for research and development and some other types of expenditure. 3or some types of expenditure non taxpayers can receive a payable tax credit.

15. ' company which ma:es a trading loss may carry that loss bac: for 1 year #* years
from 1 1 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 company.s total profits for any charges #interest and
other payments% it pays and, in the case of an investment company, its management expenses. 3rom 'pril 1 +, new 6loan relationship6 rules have been in force for the treatment of interest and similar payments. ' deduction against the tax liability is allowed 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 it ma:es%. 4ouble taxation relief for foreign tax is allowed as a deduction against the tax charged on profits. Compan! "roups 17. &ertain special rules and reliefs apply to companies which operate as a group. ' company which ma:es 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 a chargeable gain at the time of transfer. "efore the abolition of '&T a subsidiary could pay a dividend to its parent company without paying '&T and a parent could surrender '&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 1nited 2ingdom #12%. Such dividend income if received with the tax credit is called 6fran:ed investment income6. Chen the company itself pays a dividend it ma:es a 6fran:ed payment6. ' company only had to pay '&T on the excess of its fran:ed payments over its fran:ed investment income.

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

TAXPetroleum re%enue tax 19. &ompanies which earn profits from the extraction under licence of oil and gas from the 12 and its continental shelf #mainly from the North Sea% are liable to petroleum revenue 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 approved after that date are only sub?ect to corporation tax on their profits.

20. 1nli:e corporation tax, 0>T is not assessed on each company.s profits for a 1$
month accounting period. -nstead, it is assessed every six months on each company.s share of the cash flow from each separate oil field. 3ields are determined on 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

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

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 arm.s length value #with special
rules applying where the sale is not at arm.s 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 carried forward or bac:ward indefinitely) 2 1plift: a supplement of *, per cent is given on past capital expenditure being carried forward to the pay9bac: period to compensate for interest and other finance costs being non9deductible against 0>T. The pay9bac: period covers the time when the cumulative field income exceeds the cumulative costs #allowable expenditure, including uplift, royalty, and any advance petroleum revenue tax%) 3 7il 'llowance: for fields approved for development up to *1 (arch 1 ;$, an oil allowance e5ual to the profits of the field up to the value of =.$, million tonnes of oil is given for each + month chargeable period, sub?ect to a total of , million tonnes per field. 3or fields given development consent after *1 (arch 1 ;$ and before 1+ (arch 1 *, a double allowance #=., million tonnes per chargeable period up to a total of 1= million tonnes per field% is given for offshore fields outside the Southern "asin of the North Sea) Southern "asin fields approved between those dates receive an allowance of =.1$, million tonnes up to a total of $., million tonnes) 4 Tariff >eceipts 'llowance: this excludes from charge tariff income from each .satellite. field approved for development before 1+ (arch 1 * up to a limit of the income from processing =.$, million tonnes in a + month chargeable period) 5 8xploration and 'ppraisal >elief: offshore expenditure on exploration and appraisal, li:e other spending can, if necessary, be carried forward to be set against revenues in the same field. Gowever expenditure occurring between 1+ (arch 1 ;* and 1, (arch 1 * could obtain immediate 0>T relief by being set against any profits in a developed field of the same company. This relief was phased out in the period to 1, (arch 1 ,) 6 1nrelievable 3ield Foss: when a field is abandoned with a net loss for 0>T purposes, this can be transferred to a productive field) 7 &ross 3ield 'llowance: companies cannot in general defer tax on profits in one field by offsetting costs in another. Gowever, the cross field allowance has allowed 1= per cent of development expenditure in offshore fields outside the Southern "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 !; 1 ! 1 ;= to 1 ;$ <, per cent += per cent != per cent

1 ;* to June 1 from July 1 *

!, per cent ,= per cent

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, before corporation tax, to less than 1, per cent of the cumulative 6upliftable6 expenditure measured 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 upliftable expenditure.

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 of each 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 companies self assessment of its liability for the period. This payment coincides with the first instalment payment for the next chargeable period. 'ssessments are issued by tax -nspectors three months after they have received companies. self assessments. 'ny repayments 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 are however special rules which prevent profits from oil and gas production being reduced by losses transferred from other activities) North Sea profits are .ring fenced. for corporation tax purposes. Similarly '&T accounted for on dividends paid by associated 12 resident companies outside the ring fence could not be set off against the tax liability of companies within the ring fence. &ompanies have been able to claim a 1== per cent first year allowance for most North Sea capital expenditure incurred on or after 1! 'pril $==$. Since "udget $==, North Sea companies have been re5uired to ma:e three instalment payments rather than the usual four, initially with the 'pril $==+ instalment payment being brought forward to January $==+, but with 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 $==+. Ot er $ ar"es 29. -n addition to 0>T and corporation tax, other charges on North Sea oil and gas production are as follows: 1 >oyalties: administered by the 4epartment of Trade and -ndustry and, broadly, levied at 1$., per cent of the value of production, less the cost of initial transportation and treatment, for fields approved before 1 'pril 1 ;$. >oyalties payable 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 ;$9;*, at <p per therm on certain 0>T exempt deliveries from fields under contracts dating before 1 !,. -t was paid by "ritish /as #now &entrica% as a consumer and was deductible against profits for corporation tax purposes. The gas levy was cut to Aero in 'pril 1 ;) 3 Supplementary 0etroleum 4uty: was charged in 1 ;1 and 1 ;$ at $= per cent on oil and gas revenues #less an allowance of the value of =., million tonnes per field in each + month period%. -t was treated as an expense for the purpose of

computing 0>T)

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) >ing 3ence &harge: from 1! 'pril $==$ companies that operate in the North Sea have been sub?ect to a supplementary charge on their profits in respect of ring fence trades, at a rate of 1= per cent. 's announced in $==, 0re9"udget >eport the 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. EN.UIRIE) 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<! #8xtension%. &orporation Tax receipts 'ssessments &apital 'llowances North Sea taxes and by email: 'lexander &hislett 8xt. *=*, 4ere: Gull 8xt. $ <= 4ylan 1nderhill 8xt. =1$* 'lexander &hislett 8xt. *=*, &hislett, 'lexander 4ere: Gull 1nderhill, 4ylan &hislett, 'lexander

1pdated (ay $=1=

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