Corporation Tax, Income Taxes, and Capital Gains Tax at the United Kingdom - Essay Example

4 pages, 5 sources Corporation Tax According to Wikipedia, "Corporation tax is a tax levied in the United Kingdom on the profits made by companies and associations that are resident for tax purposes, and on the profits of permanent establishments of non-UK resident companies and associations that trade in the UK" (2007). The tax went into effect on April 1, 1965 and is roughly based on the income tax system, following the same fundamental structure, guidelines, and rules. Also according to Wikipedia, "Since 1997, the UK's Tax Law Rewrite Project has been modernizing the UK's tax legislation, starting with income tax, while the legislation imposing corporation tax has itself been amended; the rules governing income tax and corporation tax have thus diverged. Corporation tax is governed by the Income and Corporation Taxes Act 1988" (2007). A limited amount of companies must pay corporation tax. The self-employed do not. However, in almost all circumstances, cooperatives, housing associations, members' clubs, and trade associations must pay corporation tax (Wikipedia, 2007). Companies that are obligated to pay corporation taxes on their profits are required to perform certain activities. First of all, they are required to notify HM Revenue and Customs that they indeed are in operation at that they are among those required to pay corporation taxes. Then, the company must file a self-assessment Company Tax Return without being assessed by the HMRC, similar to individuals who are required to file their own income taxes without first being assessed by the IRS. Lastly, this requires that accurate records of all financial dealings that contribute to the information submitted to the HMRC be kept at all times. In order for corporations that must pay corporation tax to avoid fines, they must know their statutory filing date and their normal due date. The following table covers corporation tax rates: Profits Rate applied Rate payable on profits earned from 1 April 2007 Up to 300,000 Small companies' rate 20per cent 300,001 - 1,500,000 Marginal relief from main rate Between 20 per cent and 30 per cent Over 1,500,000 Main rate 30 per cent (Business Link, 2007) Each company must hold full responsibility for calculating its own corporation taxes and paying the amount due before the deadline. If a company fails to do so, they will owe a penalty. According to Business Link, "A company can send in its Company Tax Return at any time after the end of its accounting period but must do so no later than the statutory filing date. This is the later of: (a) 12 months after the end of your company's accounting period [or] (b) three months after your company receives a "notice to deliver a Company Tax Return form CT600" from HM Revenue & Customs (HMRC)" (2007). Companies who do not send their returns on time receive penalties. Companies who regularly submit their returns late enjoy increasingly higher penalties. Penalties can also be assessed for returns that are incorrect or for companies who fail to tell HMRC that they are liable to pay corporation taxes. Business Link claims that, "Payment of the corporation tax itself is due exactly nine months and one day after what is called your normal due date. For most companies, the normal due date is the last day of the accounting period. So if a company's tax return covers the accounting period 1 January 2004 to 31 December2004, then the corporation tax should be paid no later than 1 October 2005" (2007). Relief for Losses Seabream Limited may choose to obtain relief for the losses that it has incurred as of 31 March 2007 due to falling profits and strong competition. They can choose to seek relief for their total trading losses of (42.000) during the 5th accounting period listed. The rules regarding corporation tax loss relief in the United Kingdom are extremely complicated. According to Wikipedia, "A company may elect to set the Case I losses arising in an accounting period against other taxable profits arising in the period3. If there are still unutilised Case I losses that arose in that period, a company may elect to carry these back against its taxable profits of the last 12 months3. Where a trade ceases, the company may elect to carry back its Case I losses arising in the last 12 months of the trade against its taxable profits arising in the preceding 36 months" (2007). Income Taxes Income taxes in the United Kingdom are not quite as complex as corporation taxes. There are certain expenses that are allowed by Her Majesty's Revenue and Customs in the UK to be deductible. These fall under the category of those expenses which were deemed necessary in order for the completion of work from which income arose from. Examples of these types of expenses include mileage or related expenses, professional subscriptions, a portion of home expenses in the case of a home being used for work purposes when a portion of that home is used only for work. As far as the information that was provided for an example, the CT 61 income tax return requires the following to all be listed: Patent Royalty Paid, Debenture Interest Received, Debenture Interest Paid, and Patent Royalty Received. Patent Royalties are estimated to be 22% of income taxes (Business Link, 2007). Capital Gains Tax According to Wikipedia, "A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations" (2007). The rules regarding capital gains taxes necessarily vary from region to region and jurisdiction to jurisdiction. As such, the United Kingdom has a unique set of guidelines covering capital gains taxes. According to Wikipedia, "All individuals are exempt from CGT up to a specified amount of capital gains per year. For the 2006/7 tax year this "annual exemption" is 8,800" (2007). Almost all residents of the UK, or those who are normally residents, must pay capital gains taxes. According to Wikipedia, "Every individual has an annual capital gains tax allowance: gains below the allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation. Individuals pay capital gains tax at their highest marginal rate of income tax (0%, 10%, 20% or 40% in the tax year 2004/5) but since 6 April 1998 have been able to claim a taper relief which reduces the amount of a gain that is subject to capital gains tax (reducing the effective rate of tax), depending on whether the asset is a "business asset" or a "non-business asset" and the length of the period of ownership. Taper relief replaces indexation allowance for individuals, which can still be claimed for assets held prior to 6 April 1998 from the date of purchase until that date" (2007). References "Capital Gains Tax." Wikipedia. [online] Available at http://en.wikipedia.org/wiki/Capital_gains_tax "Corporation Tax: The Basics." Business Link. [online] Available at http://www.businesslink.gov.uk/bdotg/action/layertopicId=1073859200 "United Kingdom Corporation Tax." Wikipedia. [online] Available at http://en.wikipedia.org/wiki/United_Kingdom_corporation_tax "United Kingdom Corporation Tax Loss Relief." Wikipedia. [online] Available at http://en.wikipedia.org/wiki/United_Kingdom_corporation_tax_loss_relief "Tax Deduction." Wikipedia. [online] Available at http://en.wikipedia.org/wiki/Tax_deduction Read More