Reduction of the UK Corporation Tax Rate
Before we head straight to reduction matter of corporation tax let us make ourselves clear what corporation tax actually is. Corporation tax is charged on the profit from all around the world of UK-resident companies, public cooperation and unincorporated businesses.
Companies based in foreign countries only pay corporation tax on UK profits. Any income companies make such as trading income, investment income and capital gains are charged under corporation tax unlike individual tax calculations. The corporation tax for the tax year 2015/16 the only rate applicable for corporation tax is 20%.
Ex-Chancellor of Exchequer Mr George Osborne announced his intention to cut down corporate tax rates to 15% or less to come within the competition with several other country's markets like Ireland which has 12.5% to exhibit to the world the UK's willingness to encourage more businesses to set up base in the UK.
Before this announcement the Ex-Chancellor set the target of slashing the corporation tax from 20% to 17% by 2020, which is 1% less than the target he set during the budget from 1st April 2015. Furthermore to corporation tax rate reduction Mr Osborne also announced about the changes in the carried forward trading losses for the companies (to be discussed in a later blog - watch this space).
Implication of reduction on the UK Corporation Tax Rate
The reduction to be made on the UK Corporation Tax to 17 % by 2020 is a good news for all the companies with the change in trade losses carried forward to be relieved against total general profit for the year rather than profit from the same trade and also can be relieved with group companies.
This actually gives businesses in the UK the greater chance to grow and invest with confidence and pay less taxes rafting alongside with the UK tax avoidance rules.
For the companies and corporate groups only running in the UK any reduction would be a good news especially owner-managed business (OMB) and small and medium enterprise (SME). Because they will simply pay less corporation tax in the coming years.
Corporation tax reduction will also encourage UK tax resident individuals to work through a limited company or to incorporate their business for the trading purposes. As working the way tax payers save paying tax and NI from band 1 20+9%, band 2 40+9% and band 3 45+2% to simply 20%.
Although the new dividend rule introduced in the current tax year has increased the income tax liability for many shareholders receiving dividends from the company, reduction in corporate tax to the level of 17% would constitute an immense bait and compensation tactic for shareholders in certain ways who are particularly affected.
But with the UK's new Chancellor of Exchequer, Rt Hon. Phill Hammond, things might be different as we still have to see if he is of the same insight as Mr Osborne. Certain restrictions on the carried forward trading loss relief of trading loss carried forward can only be relieved for the 50% of the total profit for the year for the large companies with earnings more than £5 million might incentivise multinational companies to relocate their headquarter to some different countries compromising the tax rate.
There is a possibility for these companies to claim loss relief and not pay any taxes for the year to help with their cash reserves to help them with their cash flow. But these multinational companies, some of which already exist in the UK, will have to consider these incentives if they seek to run operations in the UK.
In conclusion it is good news for companies based in the UK, such as OMB and SMEs. And for UK tax residents who are still self employed this is the time to set up a limited company and trade throigh this and save tax. At Tax Affinity Accountants we can help you register a tax efficient limited company and help you take advantage of all the tax saving benefits and allowances available.
By Mizon Maharjan and Anni Khan at Tax Affinity Accountants
Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames they are considered in the Industry to be expert accountants and tax advisors for small businesses. Helping and supporting business throughout the UK, they regularly help clients grow their business providing tailored advice.
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