The Impact Of Corporation Tax Liabilities Of Individual Companies And Groups Of Companies

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Task 2
The impact of corporation tax liabilities of individual companies and groups of companies.
Corporation tax (CT) is tax paid by limited companies, most corporate bodies and other unincorporated associations on their profits, adjusted for tax purposes (Jones, 2010). For United Kingdom (UK) resident companies, “corporation tax is assessed on [their] worldwide income and chargeable gains arising in a chargeable accounting period (CAP)” (ACCA, 2013, p. 576).
Corporation tax liability is calculated by multiplying total taxable profits (TTP) by the appropriate corporation tax rate (Tax donut, 2015a). See Appendix 1 and 2 for details.
Impact on company growth and investment
The amount of corporation tax charged to a company can affect
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[Positively affecting] both domestic… and foreign direct investment” (p.11).
If investment increases, demand in the economy will increase, resulting in increased demand for labour, raise in wages, and more disposal income (HMRC & HM Treasury, 2013). Therefore, low tax liability has a positive impact on both the company and economy’s Gross Domestic Product (GDP).
To encourage companies, grow the UK economy and create jobs, the UK government has reduced the main tax rate from 28% in 2010 to 21% in 2014 (HM Treasury, 2013, 2014). It is argued that reduction in tax rates will ease tax burden for businesses and reduce employment costs therefore, stimulating investment (HM Treasury & Osborne, 2014). See (Appendix 3) for CT rates and effect on CT liability.
Another example, in 2014, Wood reported that Boots Alliance had benefited from the series of tax cuts to CT rate. Their profits increased by 16%, easing the tax burden by eliminating more than £100m off CT liability.
However, reduction in corporation tax rates may mean less revenue collected by government from CT. In 2014, Houlder reported that businesses will pay approximately £8bn less CT a year by 2016-17. Indicating, corporation tax cuts are costing the UK government more than £5bn a year causing other public funds to be cut. Reduction in CT liability may negatively affect “highly leveraged companies because…after-tax cost
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