Corporation Tax Introduction to Taxation, ch. 10 Business Law, chs. 15 and 16
Company Tax • Corporation tax • Directors salaries and fees • Dividends • Comparison
Corporation tax • Companies do not pay • Income tax • Capital gains tax • Inheritance tax • Companies pay corporation tax on their • Income profits, and • Capital gains
Income profits • Assessed by reference to the categories of income tax • Trading income (business profits) • Savings income (interest/dividends) • Property income (rent) • Capital gains assessed by CGT rules • use same process to calculate gain
Differences • No personal allowances - No equivalent of IT personal allowance - No CGT allowance • Capital Gains - Indexation not frozen in 1998 - Tapering relief not available to companies • Different basis of assessment - CT assessed on the company’s accounting reference period - payable 9 months later • Different tax rates
Corporation tax rates Profit up to £300,000 all at 20 % Eg profit £70,000 – tax is 20% of £70,000 = £14,000 Profits between £300,000 and £1,500,000 • 20% on first £300,000 • 32.5% above that Profit over £1,500,000 all at 30% Eg profit £1.6m – tax is 30% of £1.6m = £480,000
Example of the marginal rate • Profits = £950,000 • First 300,000 taxed at 20% = 60,000 • Next 650,000 taxed at 32.5% • 650,000 x 32.5% = 211,250 • Total tax = 271,250
Corporation tax – rates cont’d • Important issue is to ascertain which band the taxable profit falls within ie is it: • - up to £300,000 or • - between £300,000 and £1.5m or • - over £1.5m • This then determines the applicable rate
Losses • Trading losses • can be set off against other income or capital gains in the same accounting period, • or carried back one year • or carried forward • Capital losses • cannot set against income • can be set against capital gains in future periods (indefinitely)
Groups of companies • Many companies are groups of companies • Typically, a holding company owns the shares in the other companies in the group • Tax planning issues about whether to create a group like that or just have separate companies • Generally, the losses of one company in the group can be set against the profits of other companies
Close companies • One controlled by five or fewer ‘participators’ or by participators who are directors • ‘Participator’ is widely defined, but includes shareholders and others who share profits • ‘Associates’ are treated as one participator (eg close family, partners and trustees of family settlements) • In practice, most smaller private companies are close companies
Special rules • Company lends over £15,000 to participator • Company liable to tax of 25% of loan value (repayable when loan paid off) • Company gives benefits in kind to participator or associate • Treated as a distribution (dividend) • Taxable as investment income • Company makes gift to participator • Can be treated as gift by other participators to the recipient - inheritance tax implications
Taking money out of the company • 1. Pay fees and salaries to directors • 2. Pay dividends to shareholders
Directors’ salaries • An expense for the company • Director has to pay income tax under ITEPA 2003 (employment income) • Company deducts tax under the P.A.Y.E. system • National insurance contributions payable by both the company and the director
Dividends • Not an expense for the company • No tax effect on the company • Investment income for the shareholder • Taxed at special rates: • 10% standard rate (tax credit !) • 32.5% higher rate
Compare partnership & company • Partners pay tax at IT rates • Higher rate (40%) on income over £39,825 • Paid on all profits (including retained) • Companies pay much lower rates, higher rate is 30% and that is re profits over £1.5m • Dividends have tax advantage (especially when recipient is not higher rate tax payer)
Example • Business with three individuals • Total profits = £120,000 • Take out £32,000 each • Compare partnership tax and company tax
As a partnership • Profits per partner = £40,000 (NB all taxable even if some (£8k) left in business) • Less personal allowance 5,225 • Taxable 34,775 • 10% on 2,230 223 • 22% on 32,370 7,121 • 40% on 175 70 • Total tax per partner 7,414 (Total retained funds is 3 x £8k = £24,000)
As a company • Company pays corporation tax • Pays small salaries to directors • e.g. £6,000 • Directors are also shareholders so rest paid to them as dividends - ie £26,000
Company’s corporation tax • Company’s profits 120,000 (after all other expenses) • Less salaries (3 x 6,000) 18,000 • Taxable profits 102,000 • Tax at 20% 20,400 • Distributable profits 81,600 • Dividends (3 x 26,000) 78,000 • Retained profit 3,600
Each individual gets £32,000 • Director’s salary 6,000 • Less personal allowance 5,225 • Taxable income 775 • Taxed at 10% starting rate £77.50 • Rest (26,000) is taken as dividend • Still less than 34,600 basic rate so 10% • But covered by tax credit 0 • Total tax paid by indv = £77.50
Comparison • As partners, each pays 7,414 • Total tax (x3) 22,242 • Company pays 20,400 • Each director pays 77 (x3) 231 • Total 20,631 • Total saving re whole business 1,611
Cont’d • BUT Total saving for individuals £7,414 – £77 = £7,337 (There would also be NI contributions as well, which would work out more for the partners) • Note also the difference in retained profits: Partnership - £24,000 Company - £3,600
