What is corporation tax?
Prior to 1965, companies paid tax at the same rates and subject to the same rules as individual income tax. In 1965 corporation tax was introduced, under which the profits which a company had made in a fiscal year were calculated and then these profits were taxed at a lower rate.
Corporation tax rates
Corporation tax is currently charged at two different rates. The main rate of Corporation tax currently stands at 28% and this is charged on profits over £300,000 although marginal relief can be claimed between £300,000 and £1,500,000 resulting in a lower rate of tax being paid on these profits.
In order to try and encourage start up business and to bolster economic growth, the government has set a lower rate of corporation tax for small companies which turn small profits and this currently stands at 21% on profits up to £300,000. Between £300,000 and £1,500,000
Corporation tax reform
The coalition government has recently announced a five year plan to reform corporation tax, and this includes a year-on-year reduction in the main rate of corporation tax by one percentage point per year until 2014, when the rate will stand at 24%. In addition, the lower rate of tax will be decreased to 20%.
What about combining profits and losses from different companies?
In many foreign jurisdictions, the principle of "Tax Consolidation" allows companies which belong to the same group to be treated as a single economic entity for the purposes of calculating and collecting tax. This means that any losses incurred by companies in the group are automatically offset against profits generated by other companies in the group.
In the United Kingdom tax consolidation is not allowed, but similar effects can be achieved through two types of tax relief - "group relief" and "dubai corporate tax consultants".
Group Relief
Any company in a group which makes a loss may surrender these losses to any other company in the group, which can then offset these losses against the profit which it has generated. In order to qualify for this relief, both of the companies must be members of the same "75% group" - this means that they must have a common ultimate parent company, and at least 75% of shares in each company in the group must be held by other companies in the group.
Consortium Relief
This applies where one subsidiary company is owned by a consortium of parent companies in which each parent company owns at least 5% of the subsidiary and together the parent companies own 75% of the subsidiary. This might be the case where rival companies wish to co-operate to buy out a company which provides the same essential services to all of them (for example, where rival Internet Service Providers co-operate to buy out the company which owns the telephone lines which they all make use of). If the subsidiary makes a loss, it can surrender this loss to the parent companies in proportion to their shareholdings and the parent companies can offset this loss against their own profits.