Skip to main content

Current issues in corporation tax planning

Corporation tax can seem complicated, but it’s important for CEOs, board members and top level managers to understand the issues at stake so that they can plan effectively for the future.

Why? Because careful tax planning can have a significant impact on the amount of tax that your company is liable for, and hence affect its overall profitability.

Current corporation tax rates

All UK limited companies must pay corporation tax, as must foreign companies operating in the UK and a variety of other organisations. At present, in 2011, the main rate of corporation tax in the UK stands at 26%. However, this is set to fall to 25% in the next financial year, and to 24% by 2014. Conservative Chancellor George Osborne has said that he plans to make doing business in the UK more competitive by bringing corporation tax down to “the lowest this country has ever known”.

Smaller businesses, with profits under £300,000, general qualify for the Small Profits Rate of corporation tax (formerly Small Companies’ Rate), which currently stands at 20%, itself a 1% reduction on 2010.

Slightly larger companies, with profits between £300,000 and £1.5 million, can also qualify for the Marginal Relief at the Standard Fraction rate of 3/200 in 2011. This means that if your profits are within this band you can receive tax credits, based on the difference between your profits and the upper margin.

Reducing your corporation tax liabilities

Tax avoidance is not a dirty word. Tax evasion is, but that refers to evading tax by illegal methods. Tax avoidance means that your business can avoid paying some of the tax that would otherwise be due, through legal means. There are a variety of legitimate avoidance schemes and tax planning approaches that your business can utilise to reduce significantly the amount of tax it has to pay.

Tax planning and avoidance is all about understanding the taxation system and then doing what you can to make it work for you. As tax is a complex subject, many businesses enlist the help of dedicated tax experts to help them reduce their corporation tax bill.

Tax avoidance schemes include inheritance tax trusts, employee benefit trusts and partnership schemes, but there are many others. Setting up an offshore holding company in an overseas tax haven is another way of protecting your money.

Lastly, under the ‘profits of foreign permanent establishments’ section of the Finance Act 2011 (http://www.legislation.gov.uk/ukpga/2011/11/pdfs/ukpga_20110011_en.pdf, page 206, 18A), which came into force after gaining royal assent in July of this year, profits entering the UK from overseas branches of a UK-based corporation are no longer liable to tax. Companies that opt in to the exemption scheme will be able to reduce their tax liabilities even further (more info at http://www.hmrc.gov.uk/budget2011/tiin6420.pdf).

This is a radical change to the tax regime for foreign branches. Formerly, when a company was taxed at a lower rate overseas, it would then be taxed again on the difference between the foreign rate and the UK rate. The changes mean that taxes no longer have to be paid in the UK on these overseas transfers. Businesses will, however, be able to use the business expenses of foreign operations to offset their UK taxes.

By:

Terry Irwin, CEO and Head of UK Office, TCii Strategic and Management Consultants. Terry has consulted for a wide range of businesses, from multinationals to start-ups and growing organisations. He has a “hands on” approach and stays involved with client projects through to the achievement of agreed results.

Growth Company Investor: free trial