Corporation tax is a corporate tax levied in the United Kingdom on the profits made by companies and on the profits of permanent establishments of non-UK resident companies and associations that trade in the European Union. Prior to the tax’s enactment on 1 April 1965, companies and individuals paid the same income tax, with an additional profits tax levied on companies. The Finance Act 1965 replaced this structure for companies and associations with a single corporate tax, which borrowed its basic structure and rules from the income tax system. Since 1997, the UK’s Tax Law Rewrite Project has been modernising 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 (as amended).
Originally introduced as a classical tax system, in which companies were subject to tax on their profits and companies’ shareholders were also liable to income tax on the dividends that they received, the first major amendment to corporation tax saw it move to an imputation system in 1973, under which an individual receiving a dividend became entitled to an income tax credit representing the corporation tax already paid by the company paying the dividend. The classical system was reintroduced in 1999, with the abolition of advance corporation tax and of repayable dividend tax credits. Another change saw the single main rate of tax split into three. Tax competition between jurisdictions reduced the main rate from 28% in 2008-2010, down to a flat rate of 20% as of April 2015.